Our country is, undoubtedly, still settling in after last week’s surprise presidential election results. What is certain is that a Republican-controlled Presidency, Senate, and House of Representatives have in combination, the power to repeal large parts of the Affordable Care Act, which will certainly impact the future of the healthcare industry and healthcare investing.
As a healthcare VC, the Affordable Care Act is a key lens through which my team and I assess investment opportunities. Startups that align themselves in the direction of prevailing legislation will find wind in their sails, whereas those on the wrong side of reimbursement changes will consume a lot more energy and capital paddling upstream.
Early indications are that the ACA will not be repealed outright, nor gutted beyond recognition. In his first week as President-elect, Trump met with President Obama and indicated a willingness to keep parts of the ACA intact, as reported by The Wall Street Journal. At the same time, the New York Times captured the fog of uncertainty hanging across the healthcare value chain, felt acutely by insurers who have spent years preparing to compete in the public exchanges.
What parts of the ACA will go?
Our view is that key elements of the ACA will be subject to examination and repeal. In 2015, both the Senate and the House of Representatives passed a bill named the “Restoring Americans’ Healthcare Freedom Reconciliation Act” (H.R. 3762), which was vetoed by President Obama. This bill tried to roll back many provisions of the ACA, including expansion of ACA coverage for Americans near the poverty line, subsidies for middle-income families on the public exchanges, “individual mandate” tax penalties for the uninsured, and new fees and taxes on employers, biopharma, and medical device companies.
Under the current political regime, it is likely that a version of H.R. 3762 will pass without a presidential veto. Similarly, the “public option,” a government-sponsored health plan alternative to drive much-needed volume to the exchanges and reduce premium inflation, looks to be permanently shelved.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Which parts of the ACA will stay?
On the other hand, President-elect Trump has made some conciliatory gestures, expressing openness to maintain the status quo on coverage for existing conditions and for adults under the age of 26 to stay on their parents’ insurance. As a practical matter, these parts of the ACA require a 60-vote supermajority in the Senate to repeal, which the Republicans do not have. This is also the reason that key parts of Medicare reform, such as free preventive screening and closing the “donut hole” on prescription drugs will likely remain intact. Other areas are murkier. The jury is still out on fundamental reimbursement shifts, such as rules around insurance profitability (e.g., 85 percent Medical Loss Ratios) and the fate of Accountable Care Organizations, bundled payments and broader fee-for- value incentives. While these were not directly addressed in H.R. 3762, they may also go out the door, as part of a broader effort to rein in the ACA.
Make no mistake, there will be winners and losers.
In the face of all this uncertainty, it is surprising that healthcare companies have outperformed the stock market as presented in a recent WSJ article. However, a deeper look reveals that this is not uniformly the case. We conducted our own event study analyzing first-week trading activity pre- and post-election. At a macro level, the Dow Jones U.S. Healthcare index and the NASDAQ Healthcare index gained 2.9 percent and 7.1 percent between close of trading on Tuesday, November 8 and the close of trading on Friday, November 11, 2016, respectively. Pharma and digital health companies outperformed slightly, medical device companies underperformed slightly, but insurance companies reflected the most interesting market realities.
Aetna, UnitedHealthcare and Anthem gained 5.3 percent and 12.8 percent respectively, while Molina and Centene closed down between 11.8 percent and 18.4 percent respectively. It appears that the market is pricing in a challenging future for the health exchanges. UHC and Aetna’s defections earlier this year reflect the challenges of competing in these markets, especially for insurers with a heritage in commercial group health. Molina and Centene on the other hand, have been among the most successful insurers in recruiting Medicaid enrollees through the exchanges and in finding new opportunities in broader coordinated care. They may see bumpier roads ahead.
Implications for digital health investments
Prediction 1: The ACA will persist in some form, even if parts of it are rewritten or repealed. Companies that look ahead, invest and make strategic moves based on expectations of which elements of the ACA will stay vs. go will be better placed to win in the next phase of healthcare reform.
Prediction 2: The exchanges will go through some upheaval; let them settle down. Long before this past week and despite substantial subsidies to drive volume, the public exchanges have been under pressure from adverse selection and premium inflation. Individual mandate tax penalties for the uninsured are finally kicking in (with real teeth) at $695 per individual, but it may be too little, too late. Furthermore, it is possible that these carrots and sticks may be stalled or rolled back in 2017.
Prediction 3: Fee-for- service is not going away anytime soon. Most of us believe or want to believe in the movement to value-based care, which is a core tenet of the ACA. However, fee-for- service remains the prevalent business model in large parts of the healthcare industry, particularly in life sciences. It may also remain so in health services, if the foundations underpinning ACOs and bundled payments are weakened due to legislative action.
Prediction 4: Focus on the core practice of healthcare vs. business model innovation. The ACA has largely been about realigning provider and payer incentives via reimbursement changes. Given the uncertainty around where and how the incentives will be redrawn, we’re going to spend our time looking at companies that advance the core practice of medicine vs. those that attempt to extract value through business model innovation. At the end of the day, under any reimbursement regime, startups that improve access to high-quality care at the lowest cost while capturing market share and volume, will build lasting enterprise value.
