The 2020 elections are gaining momentum fast and the latest drug pricing revamps are already making headlines. House Speaker Nancy Pelosi is making waves now, introducing a new Democratic plan to empower the Department of Health and Human Services to negotiate drug prices directly with manufacturers. Like most government plans, the goal is to lower costs for consumers, but judging from the skeletal outline of the plan, it is more likely to cause drug shortages while significantly damaging pharmacy benefit managers and health insurance companies.
Pelosi’s plan doesn’t have the congressional support it needs to pass through both the House and the Senate – not to mention a potential veto - but if enough seats change in the 2020 elections, including in the White House itself, the proposal could become a priority for any upcoming Democratic administration. Stocks like United Health (UNH, Financial), CVS Health (CVS, Financial) and Cigna (CI, Financial) would be on the front lines if the plan eventually becomes law, and it could severely disrupt these companies’ business models.
The plan isn’t so much to allow HHS to negotiate drug prices rather than to give them the power to dictate prices outright. According to details published in the Huffington Post, citing Capitol Hill sources, the HHS secretary would be empowered to “negotiate” lower prices with pharmaceutical companies, with the backstop that if the two parties failed to reach an agreement on any drug, the government would simply set a final price “close” to that of other countries. Ironically, the article describes this approach as “go(ing) easy” on big pharma.
What happens under such a scenario? Knowing that the price of drugs can simply be dictated in the event negotiations don’t progress, pharma companies will have an incentive to settle at a price slightly above the prices offered internationally. It is effectively price control by another name.
The reason pharmacy benefit managers would be on the front lines in such a scenario is that their profits come from rebates offered by manufacturers. If HHS has the power to dictate these discounts outright, then there is no need for these middlemen, at least for this specific function of negotiating rebates off list prices. In the event the plan passes, United Health would probably suffer the most since its stock has been rising over 1,000% since 2009 on higher and higher premiums. UnitedHealth shares have stalled their advance since last November, but remain within 13% of all-time highs.
That pharmacy benefit managers will be negatively affected seems straightforward. The bigger question is, how will pharma stocks respond if the plan becomes law? A big example that stands out is insulin prices, which are known to be significantly cheaper internationally than in the United States. If HHS negotiates drug prices directly with diabetes companies, will they lose the U.S. premium on insulin prices?
Perhaps somewhat, but the damage to drug manufacturers probably will not be as significant as damage to the middlemen. Manufacturers could simply cut out rebates or lower them to mitigate the damage, placing most of the onus on the pharmacy benefit management sector directly. Alternatively, pharmaceutical companies could pursue a different strategy of raising prices internationally, shrinking the price differential between the U.S. and other countries for key drugs and preserving some of the revenue that would otherwise be lost. Lawmakers in Europe surely wouldn’t be too happy about this, but it’s at least still an option open to manufacturers while pharmacy benefit managers wouldn’t have that opportunity at all.
Would consumers end up paying less for drugs? Perhaps slightly, but since the plan does not address drug development costs or the easing of regulatory burdens in getting new drugs to market, pushing costs significantly lower by strongarming could endanger profitability and cause shortages of new medicines. It wouldn’t require a big stretch of the imagination to envision the federal government subsidizing drugmakers in some way in order to prevent this from happening, similarly to how the Trump administration is subsidizing farmers hurt by retaliatory tariffs, with taxpayers paying for both sides.
Basically, while Pelosi’s plan could easily affect the pharmacy benefit management sector negatively and fundamentally, the drug manufacturers themselves would probably be less affected overall.
Disclosure: No positions.
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