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Saturday, September 26, 2009 8:33:58 PM
Drug Makers in the Healthcare Reform Catbird Seat.
by: Rick Newman September 25, 2009 | about: BAX / BSX / MDT
As Congress gets closer to final healthcare-reform legislation, the central question remains murky: Who will foot the bill?
Figures contained in the $856 billion proposal by Democratic Sen. Max Baucus of Montana — which has emerged as the basis for a final compromise between the House and Senate — suggest that key parts of the healthcare industry are getting off easy. The Baucus bill would pay for itself in a number of ways, including taxes on some high-cost insurance plans, Medicare cost reductions, and cuts in federal benefits. It would also raise about $13 billion a year from fees paid by three industries: pharmaceuticals, health insurance, and medical devices.
Within each industry, the fees would be split among all companies according to their market share, so companies with the most business would pay the highest share of the industry fee, and vice versa. But the fees borne by each of the three industries follow a different logic. The pharmaceutical industry, for instance, would be required to pay a relatively low annual fee of $2.3 billion, even though it represents one of the biggest components—and the most profitable segment by far — within the overall healthcare industry. The medical device industry would pay a higher fee than Pharma, even though it's a smaller industry. And hospitals and other healthcare providers wouldn't pay any annual fee at all, even though that sector represents the biggest chunk of the overall healthcare industry, with more than twice the revenue of all pharmaceutical firms combined.
To see how the fees apportioned by the Baucus plan compare to the relative size and profitability of each industry, I analyzed data provided by research firm Capital IQ, a division of Standard & Poor's. Capital IQ determined the total revenue and net income for three groups of companies that approximate the three industries that would pay an annual fee, as the Baucus plan describes them. Then it aggregated the figures to determine each industry's size as a portion of all three combined. Here's how those breakdowns compare with the burden placed on each industry by the Baucus plan:
The data suggest that the pharmaceutical companies would be underpaying relative to their size, while device manufacturers would be overpaying. The $6.7 billion fee paid by health insurers would be comparable to the size of that industry, as measured by revenue. There are different ways to measure the size of each industry — since some companies are conglomerates that don't fall squarely into a single category — but Capital IQ's numbers are similar to other estimates.
The deal looks even better for pharmaceutical companies when the fees are measured as a portion of profits. Drugmakers had a combined net income of about $44 billion over the past 12 months, according to Capital IQ, so a $2.3 billion annual fee would represent about 5.2 percent of industry profits. The medical device industry earned about $5.1 billion over the past 12 months, which means a $4 billion annual fee would represent a whopping 78 percent of profits. Health insurers earned $11.3 billion, so $6.7 billion in fees would equate to 59 percent of profits.
There's more to the numbers. A Baucus spokesperson explains that other provisions of the bill would add to the amount various industries would contribute. Pharmaceutical companies, for example, have agreed to offer 50% discounts on name-brand drugs for Medicare recipients who have exhausted their drug coverage and must pay out of pocket. Combined with the annual fee, that adds up to an $8 billion contribution from drugmakers, or 18% of profits. Healthcare providers aren't assessed an annual fee in the bill, but other concessions add up to about $15.5 billion a year. With an annual net profit of $18.7 billion for hospitals and other healthcare providers, that would add up to 83% of net income. Concessions by the insurance industry would further reduce profits there, too, but the numbers are hard to quantify. There are no additional concessions by device manufacturers.
If the Baucus plan or something similar becomes law, more Americans will end up with health coverage, effectively enlarging the market and creating new business for most healthcare companies. So new fees that cut into profits could be offset by new revenue. Hospitals could reach their targets partly by cutting costs—a key goal of the bill — rather than paying fees. The numbers could also change as the bill gets modified and lobbyists work their black magic.
Still, the nature of the pain-sharing reflects the hardball tactics adopted by all sides in this bare-knuckles battle. When President Obama began pushing for healthcare reform after taking office in January, the pharmaceutical industry made early concessions and agreed to back the effort in exchange for a set annual contribution and a say in the crafting of the legislation. Other industries were less cooperative—and may now be paying the price.
Of course, the characters running all these industries are shrewd businesspeople, and their stance on reform is influenced by the degree to which they can pass on new costs to consumers or other customers throughout the supply chain. Prescription drugs are closely monitored by watchdog groups, the insurers that pay for them, and the consumers who use them and there's relentless pressure to lower prices. The pharmaceutical industry already has one of the highest profit margins in all of capitalism, so industry leaders may have decided they can afford a relatively minor across-the-board cut in profitability in exchange for reforms that ease the long-term pressure to slash prices—and add new customers.
Manufacturers of medical devices, on the other hand — which include companies like Baxter International (BAX), Medtronic (MDT), and Boston Scientific (BSX) — seem teed up to take a big hit. The industry's trade group, AdvaMed, has said it supports reform. But unlike the trade groups that represent health insurers and drug companies, AdvaMed has strongly protested the annual fee its industry would pay under the Baucus plan. Medical devices typically get sold deeper in the supply chain, further from the eyes of consumers and regulators. So instead of cooperating with reformers, industry leaders may be rolling the dice and hoping they'll be able to pass along new fees to their customers — or just gambling that healthcare reform will never happen at all. Intense opposition is certainly coming from somewhere.
http://seekingalpha.com/article/163475-drug-makers-in-the-healthcare-reform-catbird-seat?
by: Rick Newman September 25, 2009 | about: BAX / BSX / MDT
As Congress gets closer to final healthcare-reform legislation, the central question remains murky: Who will foot the bill?
Figures contained in the $856 billion proposal by Democratic Sen. Max Baucus of Montana — which has emerged as the basis for a final compromise between the House and Senate — suggest that key parts of the healthcare industry are getting off easy. The Baucus bill would pay for itself in a number of ways, including taxes on some high-cost insurance plans, Medicare cost reductions, and cuts in federal benefits. It would also raise about $13 billion a year from fees paid by three industries: pharmaceuticals, health insurance, and medical devices.
Within each industry, the fees would be split among all companies according to their market share, so companies with the most business would pay the highest share of the industry fee, and vice versa. But the fees borne by each of the three industries follow a different logic. The pharmaceutical industry, for instance, would be required to pay a relatively low annual fee of $2.3 billion, even though it represents one of the biggest components—and the most profitable segment by far — within the overall healthcare industry. The medical device industry would pay a higher fee than Pharma, even though it's a smaller industry. And hospitals and other healthcare providers wouldn't pay any annual fee at all, even though that sector represents the biggest chunk of the overall healthcare industry, with more than twice the revenue of all pharmaceutical firms combined.
To see how the fees apportioned by the Baucus plan compare to the relative size and profitability of each industry, I analyzed data provided by research firm Capital IQ, a division of Standard & Poor's. Capital IQ determined the total revenue and net income for three groups of companies that approximate the three industries that would pay an annual fee, as the Baucus plan describes them. Then it aggregated the figures to determine each industry's size as a portion of all three combined. Here's how those breakdowns compare with the burden placed on each industry by the Baucus plan:
The data suggest that the pharmaceutical companies would be underpaying relative to their size, while device manufacturers would be overpaying. The $6.7 billion fee paid by health insurers would be comparable to the size of that industry, as measured by revenue. There are different ways to measure the size of each industry — since some companies are conglomerates that don't fall squarely into a single category — but Capital IQ's numbers are similar to other estimates.
The deal looks even better for pharmaceutical companies when the fees are measured as a portion of profits. Drugmakers had a combined net income of about $44 billion over the past 12 months, according to Capital IQ, so a $2.3 billion annual fee would represent about 5.2 percent of industry profits. The medical device industry earned about $5.1 billion over the past 12 months, which means a $4 billion annual fee would represent a whopping 78 percent of profits. Health insurers earned $11.3 billion, so $6.7 billion in fees would equate to 59 percent of profits.
There's more to the numbers. A Baucus spokesperson explains that other provisions of the bill would add to the amount various industries would contribute. Pharmaceutical companies, for example, have agreed to offer 50% discounts on name-brand drugs for Medicare recipients who have exhausted their drug coverage and must pay out of pocket. Combined with the annual fee, that adds up to an $8 billion contribution from drugmakers, or 18% of profits. Healthcare providers aren't assessed an annual fee in the bill, but other concessions add up to about $15.5 billion a year. With an annual net profit of $18.7 billion for hospitals and other healthcare providers, that would add up to 83% of net income. Concessions by the insurance industry would further reduce profits there, too, but the numbers are hard to quantify. There are no additional concessions by device manufacturers.
If the Baucus plan or something similar becomes law, more Americans will end up with health coverage, effectively enlarging the market and creating new business for most healthcare companies. So new fees that cut into profits could be offset by new revenue. Hospitals could reach their targets partly by cutting costs—a key goal of the bill — rather than paying fees. The numbers could also change as the bill gets modified and lobbyists work their black magic.
Still, the nature of the pain-sharing reflects the hardball tactics adopted by all sides in this bare-knuckles battle. When President Obama began pushing for healthcare reform after taking office in January, the pharmaceutical industry made early concessions and agreed to back the effort in exchange for a set annual contribution and a say in the crafting of the legislation. Other industries were less cooperative—and may now be paying the price.
Of course, the characters running all these industries are shrewd businesspeople, and their stance on reform is influenced by the degree to which they can pass on new costs to consumers or other customers throughout the supply chain. Prescription drugs are closely monitored by watchdog groups, the insurers that pay for them, and the consumers who use them and there's relentless pressure to lower prices. The pharmaceutical industry already has one of the highest profit margins in all of capitalism, so industry leaders may have decided they can afford a relatively minor across-the-board cut in profitability in exchange for reforms that ease the long-term pressure to slash prices—and add new customers.
Manufacturers of medical devices, on the other hand — which include companies like Baxter International (BAX), Medtronic (MDT), and Boston Scientific (BSX) — seem teed up to take a big hit. The industry's trade group, AdvaMed, has said it supports reform. But unlike the trade groups that represent health insurers and drug companies, AdvaMed has strongly protested the annual fee its industry would pay under the Baucus plan. Medical devices typically get sold deeper in the supply chain, further from the eyes of consumers and regulators. So instead of cooperating with reformers, industry leaders may be rolling the dice and hoping they'll be able to pass along new fees to their customers — or just gambling that healthcare reform will never happen at all. Intense opposition is certainly coming from somewhere.
http://seekingalpha.com/article/163475-drug-makers-in-the-healthcare-reform-catbird-seat?
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