Take comfort from that hangover you might be feeling today after a late night of suspense, political analysis and maybe a few too many beers. The uncertainty hanging over the election is gone. And now we can make way for … more uncertainty, in the form of an impending deadline to avoid automatic budget cuts scheduled to take effect in January.
But there’s some reason for encouragement for entrepreneurs, for those who like the status quo and for those who like political battles. In a phone interview with Alex Morozov, director of global healthcare equity research with Morningstar, he talked about what’s to come.
1. Sequestration Unless Congress can compromise more constructively, it’s doubtful whether Congress could implement a plan to avoid sequestration. But it will be a hard pill to swallow as Morningstar’s recent report mapping out the post-election healthcare ecosystem shows:
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The automatic budget cuts that would take effect in January would be far reaching. It currently calls for a 2 percent cut to Medicare provider rates. The Office of Management and Budget forecasts a $318 million reduction to the FDA budget, $78 million in cuts to funds used for fighting fraud and abuse, $76 million in reductions to the prevention and public health fund, $66 million in cuts to the program distributing grants to help create state health insurance exchanges, and a $2.53 billion reduction to NIH funding.
Medicaid and Medicare benefits and Children’s Health Insurance Program would be spared. On the other hand, NIH funding cuts could impact life science companies and mean a potential freeze on grant awards. On the upside, academic institutions get about 30 percent of their research funding from non-government sources. And with university endowment assets rebounding towards pre-2007 levels, that means universities are better positioned to fund research internally.
“It’s a very blunt instrument and not in anybody’s interest for it to occur, but it’s a plausible scenario,” Morozov said.”It is a lame duck Congress, but a fairly status quo election. The budget folks are not going away. It’s in everyone’s best interest to get it [resolved].”
2. Doc Fix: don’t expect changes anytime soon. Medicare physician payments were one area not addressed in Obama’s budget but don’t expect politicians to fall over themselves to address it. If Congress does not override the reduction this year, physician Medicare payments would be estimated to fall by about 28 percent. Congress has blocked reducing these payments every year since 2003. Morozov expects Congress to continue kicking the can/political hot potato down the road. “It’s clearly looming and out there but no one is interested in handling it. No one wants to offend any party involved in that issue.” And yet, as long as a permanent solution to the Sustainable Growth Rate remains elusive, it will continue to be a recurring budgetary headache. The Congressional Budget Office estimates that not fixing the SGR adds nearly $270 billion to the deficit over the next 10 years, according to Morningstar.
3. Dual eligibles and the potential impact on biopharma Currently there are 9 million people that are eligible for Medicaid and Medicare — a group classified as “dual eligibles.” Congress is expected to decide whether reimbursement should continue to be set at Medicare levels or be shifted to Medicaid levels. The Center on Budget Policy and Priorities believes Medicare drug prices are 25 percent to 30 percent higher than Medicaid and the Congressional Budget Office has projected it could save $120 billion over 10 years. Suffice to say it’s a heated issue but there is a much greater chance it will be brought to a vote sometime next year, according to Morningstar. Less diversified companies with a U.S. focus and a high proportion of small molecule drugs are most vulnerable.
