Politics. Aided and abetted by the Affordable Care Act, President Barack Obama famously rejected material reforms to the American health care system in favor of driving the jobs numbers up. It was a political calculation that paid off handsomely. U.S. health care gained 1.5 million jobs between March 2020 and Dec. 2015, frequently accounted for 20-30% of all monthly gains.
To assuage reformists, the explanation was that more people went to work in health care to accommodate the demand created by those newly insured under the ACA. To buy that argument you would need to ignore the continued job growth in healthcare up until March 2020, well after supply and demand should have adjust to the post-ACA era.
At least since the ACA, the expansion of the health care work force has depending mostly on ever increasing prices. For example, the American hospital capacity is remarkably stable. About 9,300 discharges occur each quarter. That large but fixed capacity suggests that the 6-7% annual increases in personal consumption expenditures on hospital services are due largely to price increases.
The pharmaceutical industry’s unique brand of inflation has fueled hospital consolidation, expansion and yes, uncompensated care, through the 340(b) program. Similarly, price increases on drugs frequently dispensed to Medicare beneficiaries have underwritten Part D plans to such an extent that most carriers offer zero premium options.
As the White House nervously watches the jobs numbers, any hope they have that health care will once again ride to the rescue seems dim. Medicare’s prospective payment system has yet to recognize wage inflation. One of the chief funders of state Medicaid programs, nursing facilities, appear to be in generational decline. Employers are eyeing the precipitous drop in their SG&A line during COVID and wondering how that might successfully endure. Most extraordinarily, drug CPI has experienced negative growth every month this year.
President Biden will have to look elsewhere for employment growth and that could take more time than politics generally allows.
Policy. A declining drug cost curve, if it persists, comes at a difficult time for the rebate-dependent Medicare Advantage plans. While the Medicare Office of the Actuary appears prepared to recognize higher FFS cost trends of about 6-7% in 2022, spending appears, at least in these early days of recovery, to be closer to 10-15%,
If trends continue, Medicare Advantage plans, especially weaker operators like CLOV, will find themselves squeezed by higher costs and status quo reimbursement for 2022. Drug rebates don’t appear poised to offer much in the way of succor with prices flat to declining.
Meanwhile, Medicare Advantage-focused payers like HUM are facing, for the first time ever, viable competition in certain markets from direct contracting entities like JWS’s Cano and OSH. As we noted in our presentation on Thursday, it is early days for direct contracting but it the set-up to compete against the traditional behemoths is compelling.
Power. A deceleration in drug prices is evident in more than the BLS data. The drug industry, long known for their ability to pick their battles and armed with the knowledge that, unlike much of the sector, they can raise their prices twice a year, has become unusually combative.
Despite the threat of bad press, SNY and LLY have begun limiting sales through 340(B) contract pharmacies. HHS responded with the threat of fines which prompted LLY to pen a particularly salty brief in their ongoing litigation on the issue.
We hear anecdotally that the pharmaceutical industry is getting much more aggressive in their negotiations with Pharmacy Benefit Managers. Some companies like JNJ are publishing data on rebates suggesting, finally, that their history of opacity no longer serves their interest.
It was inevitable. When drug prices stop rising, the pressure on everyone feeding on the drug supply chain felt the heat, from hospitals dependent on the 340(B) program to Part D plans. Now that price increases are in negative territory for what looks like a durable period, the long knives are out.
Get the popcorn.
Emily Evans
Managing Director – Health Policy
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