By Meg Tirrell March 22 (Bloomberg) — Drugmakers and health insurers will gain millions of customers under legislation overhauling the U.S. medical system. The industry also will pay new fees to the government, and face stricter rules that may narrow profit margins and fuel mergers. The bill that the House passed on a 220-211 vote yesterday expands coverage to 32 million uninsured Americans, according to Congressional number crunchers. That means more sales for Pfizer Inc. , the world’s largest drugmaker; UnitedHealth Group Inc. , the largest health insurer; and a cluster of companies led by Amerigroup Corp. that specialize in managing services through Medicaid, a program that will grow in the remake. The revamp will cost $940 billion over 10 years, with industry fees and taxes helping defray the cost of adding to the ranks of customers who can afford to pay their doctors, drugstores and hospitals. Because the legislation creates pressure to curb medical costs, companies may merge as a way to lower expenses, said Paul H. Keckley , executive director of the Deloitte Center for Health Solutions, a Washington-based research firm. “You have some that are able to manage more efficiently and strategically and some that can’t,” Keckley said by telephone March 19. “You’ll see an acceleration of acquisitions .” Fees, Rebates Drugmakers, who took part early in negotiations with the Senate Finance Committee and the White House, may have the most to gain. More health-care coverage “makes a difference in demand for drug products,” said John L. Sullivan , an analyst at Leerink Swann & Co. in Boston. People won’t have to skip doses of medicines as frequently to save money, he said. And while the industry pays $28 billion in fees over nine years to help the elderly afford drugs, it avoided requirements to have complicated pricing agreements with the government in Medicare, the program for the elderly and disabled, said Ramsey Baghdadi , a researcher at the analysis firm Prevision Policy LLC in Washington who specializes in pharmaceutical and biotechnology policy. Pfizer, based in New York, gained 6 cents to 12.59 euros at 10:11 a.m. in German trading. The Bloomberg Europe Pharmaceutical Index , which tracks 18 European drugmakers, fell 0.6 percent to 167.80. Subsidy Cuts For health insurers, the potential increase in customers will be tempered by subsidy cuts for custom Medicare Advantage plans offered to the elderly, and the prospect of new regulations. The industry, through its trade group America’s Health Insurance Plans, argued as recently as March 18 that the legislation won’t control costs and that people will still wait until they’re sick to buy coverage. UnitedHealth rose 10 cents to 25.52 euros in German trading , while Amerigroup rose 85 cents, or 3.4 percent, to 22.87 euros. Biotechnology companies , a group led by Amgen Inc. , based in Thousand Oaks, California, won 12 years of protection from generic medicines derived from proteins. The generics industry, led by Mylan Inc. , based in Canonsburg, Pennsylvania, and Teva Pharmaceutical Industries Ltd. , based in Petah Tikva, Israel, won a reprieve from a proposed ban on legal settlements in which the drugmakers are paid by brand-name manufacturers to delay introduction of the cheaper copies. Teva rose 1.5 shekels to 236.90 shekels in Tel Aviv trading. Amgen fell 6 cents to 43.82 euros in German trading. Hospitals, Devices Hospitals, a group led by Community Health Systems Inc. , of Franklin, Tennessee, will have more paying customers and less bad debt as a result. Still, that won’t happen until 2014, Keckley said, meaning hospitals will look for mergers. Makers of medical devices, Medtronic Inc. of Minneapolis among them, are likely to benefit the least, said Sullivan at Leerink Swann. The industry will pay a 2.3 percent excise tax on certain devices starting in 2013, and may not gain the same revenue boost as pharmaceutical companies, insurers and hospitals, he said in a telephone interview March 19. “The hospital industry is a winner,” Sullivan said. “The drug industry is probably a bit better off. The device industry could be a bit worse off. The biotech industry is relatively unscathed. And for managed care I think it’s a function of what happens with the individual mandate and how easy or hard it is to keep healthy people in the insurance pool.” No Republicans The Standard & Poor’s index of 51 health-care stocks has risen 5.1 percent from this year’s low on Feb. 8, the day President Barack Obama announced he was inviting Democratic and Republican lawmakers to the White House to discuss ways to get the overhaul through Congress. No Republicans voted for the measure yesterday. The measure is a modified form of legislation passed in December by the Senate, which takes up the revised bill as soon as this week under a procedure that keeps Republicans from mounting a filibuster. The 10-year bill would set in motion the biggest change in health care since the 1965 creation of Medicare. The legislation requires Americans to get insurance, offering government aid and new purchasing exchanges to help. Insurers such as Minnetonka, Minnesota-based UnitedHealth would get millions of new policyholders, while being required to accept all customers, even with pre-existing conditions. Pfizer and smaller drugmakers will benefit because broader access to insurance means more people can afford to keep taking their medicines, Sullivan said. ‘Doughnut Hole’ The bill also closes a coverage gap in Medicare payments known as the “doughnut hole,” which caused some patients to skip doses of medicines or switch to generics from brand-name products to cut costs, said Baghdadi at Prevision Policy. “The method of payment for closing the doughnut hole is a big win for pharma,” Baghdadi said in a March 18 research note. Drugmakers will pay about $3 billion a year for nine years to close the coverage gap rather than participate in a “rebate scheme on Medicare drugs,” he said. A rebate program exists in Medicaid, the state-federal program for the poor. “The industry did not want to sign on to that type of approach again,” Baghdadi said. He said it may be easier for the industry to fight expansions of fees “than try to unwind a rebate program.” Insurers may start to merge as well as they’re required to take on sicker patients in addition to healthy ones, Keckley at the Deloitte Center said. Risks Ahead To pay for the higher-cost patients with more medical needs, managed-care providers need large numbers of young, healthy people in their pool “to help spread the costs more effectively,” he said. For that reason, “consolidation in the insurance industry looks very inevitable,” he said. It won’t be easy sailing for the insurance industry, said Matthew Borsch , an analyst with Goldman Sachs Group Inc. in New York, in a research note March 18. The legislation “entails significant risks,” and the companies that sell Medicare Advantage policies face subsidy cuts. America’s Health Insurance Plans, the Washington-based trade group, says $200 billion will be carved from those plans. He recommends companies that will sell more insurance through exchanges or operate through Medicaid. That would include Amerigroup , based in Virginia Beach, Virginia. Also, the 2014 date for the insurance exchanges to start “leaves 3 ½ years to work through, and potentially modify, provisions that might undermine successful coverage expansion,” Borsch said. Carl McDonald at Oppenheimer & Co. in New York sees that period fraught with risk. “Much of what is included in the health reform bill is what is referred to as enabling legislation,” meaning the Health and Human Services secretary works out the details, he said in a note dated March 17. That is Kathleen Sebelius , who has “spent much of the past month trying to prove that managed care CEOs would deny a claim from their own mothers in order to improve their quarterly financial performance.” To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net .
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Overhaul Gives Drugmakers, Insurers Millions of Customers, Stricter Rules
