Chart of the Week
Congress
Reconciliation. House and Senate Democrats agreed to an “historic” drug pricing deal this week that includes a little bit of negotiation on Part B and D but, most important, a redesign of Part D. As noted more times than we care to remember, President Biden’s “sweeping” social safety net would include a redesign to Part D, however things may turn out in the quest for “negotiation.” Summary of the deal 
%20Congress%20Reconciliation.%20House%20and%20Senate%20Democrats%20agreed%20to%20an%20“historic”%20drug%20pricing%20deal%20last%20week%20that%20includes%20a%20little%20bit%20of%20negotiation%20on%20Part%20B%20and%20D%20but,%20most%20important,%20a%20redesign%20of%20Part%20D.%20As%20noted%20more%20times%20than%20we%20care%20to%20remember,%20President%20Biden’s%20“sweeping”%20social%20safety%20net%20would%20include%20a%20redesign%20to%20Part%20D,%20however%20things%20may%20turn%20out%20in%20the%20quest%20for%20“negotiation.”%20Summary%20of%20the%20deal%20here.%20A%20lot%20could%20go%20wrong%20still,%20especially%20after%20the%20ballot%20box%20mood%20changer%20on%20Tuesday%20night,%20but%20the%20redesign%20of%20Part%20D%20is%20bipartisan%20and%20bicameral%20and%20should%20survive%20in%20some%20form.%20Insurers%20are%20concerned%20about%20premium%20increases%20and%20they%20have%20a%20right%20to%20be.%20Drug%20rebates%20reduce%20benefit%20costs%20and%20have%20paved%20the%20way%20for%20zero%20premium%20plans.%20%20The%20redesign%20would%20reduce%20incentives%20to%20place%20high%20priced%20brand%20drugs%20in%20preferred%20formulary%20position.%20In%20turn,%20there%20will%20be%20less%20rebate%20dollars%20to%20toss%20around%20for%20things%20like%20GDRX%20cash%20pay%20model,%20or%20UNH’s%20zero%20premium,%20low%20deductible%20plans.%20((-)%20GDRX,%20(-)%20UNH,%20ANTM,%20HUM%20CI).%20The%20political%20beauty%20of%20the%20redesign%20is%20it%20makes%20Part%20D%20drug%20costs%20more%20predictable,%20especially%20for%20those%20with%20high-cost%20chronic%20conditions.%20Congress%20will%20be%20able%20to%20claim%20they%20lowered%20drug%20costs%20if%20they%20do%20nothing%20else%20but%20revise%20the%20Part%20D%20statute.%20That%20is,%20if%20progressives%20and%20moderates%20can%20get%20things%20worked%20out.%20As%20of%20this%20afternoon,%20it%20isn’t%20looking%20so%20good.%20%20The%20White%20House.%20Medicare%20Rule-A-Rama.%20%20Finalized.%20CY%202022%20Hospital%20Outpatient%20PPS%20Policy%20Changes%20and%20Payment%20Rates%20and%20Ambulatory%20Surgical%20Center%20Payment%20System%20Policy%20Changes%20and%20Payment%20Rates%20(CMS-1753)%20Final%20Rule.%20In%20keeping%20with%20the%20Biden%20Administration’s%20gestalt,%20which%20appears%20to%20be%20“make%20things%20worse,”%20CMS%20finalized%20policies%20that%20would%20reverse%20Trump%20era%20deregulation%20of%20permitted%20procedures%20in%20Ambulatory%20Surgery%20Centers%20and%20Hospital%20Outpatient%20Departments.%20If%20you%20listened%20to%20earnings%20call%20from%20THC,%20JNJ,%20ISRG%20and%20SYK,%20you%20know%20that%20ASCs%20are%20taking%20the%20volume%20hospitals%20cannot%20accommodate.%20Bad%20news%20for%20the%20Medicare%20population.%20CY%202022%20Home%20Health%20Prospective%20Payment%20System%20Rate%20Update,%20Home%20Infusion%20Therapy%20Services,%20and%20Quality%20Reporting%20Requirements%20(CMS-1747)%20Final%20Rule.%20Pending.%20Durable%20Medical%20Equipment,%20Prosthetics,%20Orthotics%20and%20Supplies%20(DMEPOS)%20Policy%20Issues%20and%20Level%20II%20of%20the%20Healthcare%20Common%20Procedure%20Coding%20System%20(HCPCS)%20(CMS-1738)%20Medicare%20Coverage%20of%20Innovative%20Technology%20(MCIT)%20and%20Definition%20of%20"Reasonable%20and%20Necessary"%20(CMS-3372)%20Final%20Rule.%20This%20rule%20is%20expected%20to%20reverse%20a%20Trump-era%20effort%20to%20eliminate%20the%20“valley%20of%20death”%20where%20device%20makers%20often%20find%20themselves%20after%20FDA%20approval%20but%20before%20Medicare%20reimbursement.%20The%20Biden%20administration%20raised%20concerns%20that%20the%20rule%20would%20result%20in%20patient%20harm%20as%20products,%20like%20Grail’s%20liquid%20biopsy%20test,%20would%20be%20approved%20by%20the%20increasingly%20fast%20and%20loose%20FDA%20and%20immediately%20go%20to%20market%20with%20assurances%20of%20Medicare%20reimbursement.%20Hell%20of%20a%20thing%20to%20make%20policy%20because%20your%20regulatory%20agencies%20are%20not%20in%20sync.%20Other%20Rules.%20%20Vaccine%20Mandates.%20Health%20and%20Human%20Services%20and%20the%20Department%20of%20Labor%20have%20issued%20rules%20on%20vaccine%20mandates%20for%20worker.%20All%20health%20care%20workers%20must%20be%20vaccinated.%20Workers%20at%20a%20business%20with%20over%20100%20employees%20must%20turn%20in%20weekly%20negative%20tests%20or%20get%20vaccinated.%20Other%20Stuff%20Employment.%20Incentive%20matter.%20Average%20hourly%20earnings%20in%20hospitals%20continued%20their%20acceleration%207.9%%20YoY%20and%201.1%%20MoM%.%20No%20surprise%20then%20that%20overall%20health%20care%20employment%20turned%20back%20north%20in%20October%20after%20sliding%20sideways%20most%20of%20the%20summer.%20MoM%20%%20was%200.23%%20versus%20a%20modest%20decline%20in%20September.%20Don’t%20get%20too%20into%20the%20“it%20will%20all%20be%20over%20in%204Q”%20as%20hospitals%20still%20have%2087k%20missing%20employees.%20%20Reversing%20a%20multiyear%20slide,%20employment%20at%20both%20nursing%20facilities%20and%20home%20health%20improved.%20Home%20health%20employment%20improved%201.0%%20since%20last%20month,%20nursing%20facility%20employment%20increased%200.8%%20in%20the%20same%20period.%20Lots%20to%20look%20at.%20Link%20to%20chartbook%20here.%20Mortality.%20We%20special%20ordered%20a%20tinfoil%20hat%20a%20few%20months%20ago%20when%20it%20became%20clear,%20to%20us%20anyway,%20that%20supply%20chain%20problems%20were%20more%20than%20merebottle%20necks%20in%20California’s%20ports.%20As%20commodity%20prices%20for%20things%20like%20coffee%20and%20cotton%20skyrocketed,%20we%20began%20to%20wonder%20if%20it%20wasn’t%20a%20matter%20of%20shipping%20but%20really%20a%20planting%20or%20picking%20problem.%20All%20it%20takes%20is%20a%20look%20at%20mortality%20figures%20in%20commodity%20and%20manufacturing%20countries,%20especially%20those%20the%20western%20press%20has%20abandoned%20or%20from%20which%20it%20has%20been%20expelled,%20to%20see%20that%20there%20is%20something%20else%20at%20work.%2020k%20deaths%20per%20100k%20of%20population%20in%20Vietnam%20is%20simply%20impossible.%20This%20week%20The%20Economist%20released%20a%20study%20that%20estimates%20that%20about%2017%20million%20people%20have%20died.%20That%20is%20much%20closer%20to%20our%20estimate%20of%2020%20million%20at%20the%20low%20end%20and%2040%20million%20on%20the%20high%20end.%20%20I%20have%20returned%20the%20silver%20cap%20although%20it%20was%20rather%20dashing.%20%20%20%20Policy-related%20Earnings%20Commentary.%20Note:%20Health%20Care%20Sector%20Head,%20Tom%20Tobin%20and%20I%20will%20be%20in%20the%20studio%20covering%20the%20latest%20macro%20and%20policy%20trends%20evident%20in%203Q%20earnings%20commentary%20on%20Wednesday,%20Nov.%2017th%20@%2010am.%20(add%20to%20Outlook%20Calendar)%20Labor.%20There%20is%20a%20divergence%20of%20opinion%20on%20labor%20trends.%20On%20the%20one%20hand,%20there%20are%20realists%20who%20know%20that%20once%20a%20labor%20force%20is%20disrupted,%20it%20is%20difficult%20to%20restore%20without%20concerted,%20long-term%20action.%20On%20the%20other%20hand,%20there%20are%20the%20idealists%20who%20seem%20to%20believe%20all%20it%20takes%20is%20for%20AMN%20to%20stop%20paying%20nurses%20400-500%%20of%20their%20normal%20wage%20and%20the%20pre-COVID%20world%20will%20be%20restored.%20We%20are%20firmly%20in%20the%20former%20camp.%20DGX.%20Hard%20to%20argue%20with%20a%20bull%20thesis%20in%20the%20near%20term%20given%20how%20much%20money%20is%20sloshing%20around%20the%20U.S.%20to%20fund%20COVID-19%20testing.%20However,%20a%20return%20to%202019%20base%20level%20volumes%20in%202022%20seems%20a%20little%20unreasonable%20given%20the%20struggle%20to%20staff%20hospitals.%20Physicians’%20offices%20are%20mostly%20functioning%20near%20pre-COVID%20levels,%20leaving%20little%20incremental%20upside%20there.%20The%20return%20to%20life%20thesis%20seems%20challenged%20by%20the%20scale%20and%20speed%20rapid%20testing%20offers.%20HCA,%20THC%20&%20UHS.%20THC%20and%20HCA%20are%20the%20bad-asses%20of%20the%20post-COVID%20world.%20They%20are%20very%20clearly%20recognizing%20the%20challenges%20before%20them%20and%20taking%20steps%20to%20ameliorate%20them.%20It%20was%20local%20news%20here%20but%20much%20of%20the%20buy-side%20was%20unaware%20HCA%20purchased%20Galen%20School%20of%20Nursing%20a%20few%20years%20ago.%20(They%20are%20also%20building%20a%20PPE%20manufacturing%20facility%20in%20NC%20and%20opening%2011%20central%20labs%20this%20year%20and%20next.)%20Meanwhile%20THC%20can%20lean%20hard%20on%20their%20USPI%20asset%20to%20diversify%20their%20channels.%20ASCs%20require%20less%20intense%20staffing%20requirements%20and%20patients%20are%20discharged%20in%2023%20hours.%20They%20too%20are%20shopping%20for%20a%20nursing%20school%20UHS%20is%20lost%20in%20the%20wilderness%20of%20the%20myth%20that%20says%20labor%20shortages%20will%20be%20restored%20as%20soon%20as%20all%20those%20travel%20nurses%20come%20home,%20without%20considering%20the%20possibility%20some%20of%20them%20may%20have%20gone%20to%20work%20at%20AMZN.%20EHC.%20Listen%20for%20the%20granular%20and%20cogent%20breakdown%20of%20staffing%20challenges%20at%20IRFs%20and%20HHAs.%20Stay%20for%20the%20dust-up%20between%20management%20and%20a%20sell-side%20analyst%20questioning%20the%20timing%20of%20home%20health%20and%20hospice%20spin%20out.%20Our%20Thought%20Bubble:%20EHC,%20given%20its%20JVs%20with%20hospitals%20may%20be%20positioning%20itself%20to%20handle%20spillover%20demand%20from%20hospitals%20anxious%20to%20turn%20the%20beds%20that%20can%20staff.%20SYK.%20Like%20JNJ,%20SYK%20indicated%20growth%20in%20sales%20of%20its%20robotic%20system%20to%20ASCs%20which%20increase%20throughput%20and%20reduce%20patient%20“stay”%20time.%20ASCs%20have%20different%20staffing%20requirements,%20tend%20to%20be%20preferred%20worksites%20for%20RNs%20and%20offer%20economic%20incentives%20if%20the%20center%20is%20physician%20owned.%20%20We%20pointed%20out%20the%20softness%20in%20orthopedic%20procedures%20late%20this%20summer%20and%20SYK%20confirmed%20the%20problem%20remains%20due%20to%20difficulty%20staffing%20ORs%20Acuity.%20Health%20care%20is%20labor.%20As%20such,%20acuity%20is%20the%20offspring%20of%20labor%20shortages.%20THC%20and%20HCA%20report%20higher%20acuity%20with%20THC%20saying%20explicitly%20they%20would%20be%20optimizing%20operations%20to%20handle%20high%20acuity%20patients%20in%20their%20hospitals%20while%20pushing%20lower%20acuity%20into%20USPI%20setting.%20HCA%20is%20using%20data%20tools%20and%20time%20and%20motion%20studies%20to%20increase%20productivity%20of%20the%20workforce.%20%20EHC%20has%20lauded%20its%20performance%20with%20higher%20acuity%20patients%20during%20COVID%20and%20seems%20to%20be%20positioning%20itself%20to%20press%20that%20advantage%20at%20its%20IRFs.%20HUM%20is%20a%20mystery%20to%20me.%20They%20reported%20-1%%20non-COVID%20utilization%20versus%20and%20expected%20-2.5%%20and%20guided%20to%20a%204Q%20result%20where%20non-COVID%20utilization%20is%20offset%20by%20declines%20in%20COVID%20utilization.%20There%20was%20no%20mention%20of%20the%20increased%20acuity%20being%20reported%20by%20all%20the%20providers.%20The%20assumption%20appears%20to%20be%20that%20the%20higher%20acuity%20at%20hospitals%20is%20merely%20the%20result%20of%20less%20sick%20people%20being%20removed%20from%20the%20denominator.%20That%20could%20end%20up%20being%20true,%20but%20only%20if%20labor%20supply%20can%20be%20restored.%20Inflation.%20There%20are%20also%20two%20schools%20of%20thought%20on%20inflation.%20The%20Powell/Yellen/Lagarde%20school%20of%20thought%20is%20that%20it%20is%20transitory%20and%20will%20disappear%20once%20we%20get%20past%20a%20few%20bottlenecks.%20Everyone%20else%20is%20wary.%20We%20have%20moved%20past%20wary%20and%20are%20looking%20for%20ways%20in%20which%20the%20health%20care%20sector%20is%20getting%20ready%20for%20what%20is%20likely%20to%20be%20prolonged%20shortages%20that%20are%20necessarily%20accompanied%20by%20price%20increases.%20SYK%20and%20the%20hospitals%20all%20reported%20some%20shortages%20but%20health%20care%20is%20required%20to%20maintain%20stock%20piles%20or%20“safety%20supplies”%20so%20impacts,%20if%20any%20will%20be%20on%20a%20lag.%20Chips%20for%20devices%20are%20most%20of%20a%20concern.%20TDOC%20–%20WTF?%20Their%20earnings%20commentary%20appeared%20to%20ignore%20the%20accelerated%20trend%20toward%20B2B%20and%20B2B2C%20in%20telehealth.%20TDOC%20seems%20to%20be%20doubling%20down%20on%20serving%20employer%20sponsored%20plans%20and%20health%20systems.%20In%20fact,%20they%20also%20appear%20to%20be%20pivoting%20toward%20value-based%20primary%20care%20with%20an%20assumption%20of%20risk.%20Not%20a%20big%20surprise%20given%20the%20CEOs%20background%20but%20they%20may%20be%20a%20little%20behind%20the%20curve%20in%20the%20post-COVID%20reality.%20SPAC%20and%20S-1%20Corner.%20%20IPOs%20Samsara%20Vision%20Inc.%20“A%20specialty%20medical%20device%20company%20dedicated%20to%20bringing%20vision%20and%20freedom%20back%20to%20patients%20suffering%20from%20late-stage%20conditions%20of%20the%20retina.”%20SPACs.%20Access%20updated%20spreadsheet%20here.%20%20%20Hedgeye%20Health%20Policy%20Publication/Event%20Calendar.%20Click%20here%20for%20searchable%20calendar.%20Have%20a%20great%20weekend.%20Emily%20Evans%20Managing%20Director%20–%20Health%20Policy%20%20x%20271%20%%20Twitter%20LinkedIn%20" target="_blank">here.
A lot could go wrong still, especially after the ballot box mood changer on Tuesday night, but the redesign of Part D is bipartisan and bicameral and should survive in some form. Insurers are concerned about premium increases and they have a right to be. Drug rebates reduce benefit costs and have paved the way for zero premium plans.
The redesign would reduce incentives to place high priced brand drugs in preferred formulary position. In turn, there will be less rebate dollars to toss around for things like GDRX's cash pay model, or UNH’s zero premium, low deductible plans. ((-) GDRX, (-) UNH, ANTM, HUM CI).
The political beauty of the redesign is it makes Part D drug costs more predictable, especially for those with high-cost chronic conditions. Congress will be able to claim they lowered drug costs if they do nothing else but revise the Part D statute. That is, if progressives and moderates can get things worked out.
As of this afternoon, it isn’t looking good.
The White House.
Medicare Rule-A-Rama.
Finalized.
In keeping with the Biden Administration’s gestalt, which appears to be “make things worse,” CMS finalized policies that would reverse Trump era deregulation of permitted procedures in Ambulatory Surgery Centers and Hospital Outpatient Departments. If you listened to earnings call from THC, JNJ, ISRG and SYK, you know that ASCs are taking the volume hospitals cannot accommodate. Bad news for the Medicare population.
CY 2022 Payment Policies under the Physician Fee Schedule and Other Changes to Part B Payment Policies; Medicare Shared Savings Program Requirements; etc.
End-Stage Renal Disease Prospective Payment System, Payment for Renal Dialysis Services Furnished to Individuals with Acute Kidney Injury, End-Stage Renal Disease Quality Incentive Program, and End-Stage Renal Disease Treatment Choices Model
Pending.
Medicare Coverage of Innovative Technology (MCIT) and Definition of "Reasonable and Necessary" (CMS-3372) Final Rule.
This rule is expected to reverse a Trump-era effort to eliminate the “valley of death” where device makers often find themselves after FDA approval but before Medicare reimbursement. The Biden administration raised concerns that the rule would result in patient harm as products, like Grail’s liquid biopsy test, would be approved by the increasingly fast and loose FDA and immediately go to market with assurances of Medicare reimbursement.
Hell of a thing to make policy because your regulatory agencies are not in sync.
Other Rules
Vaccine Mandates. Health and Human Services and the Department of Labor have issued rules on vaccine mandates for worker. All health care workers must be vaccinated. Workers at a business with over 100 employees must turn in weekly negative tests or get vaccinated. There will be lawsuits so don't expect miracles. White House fact sheet here.
Other Stuff
Employment. Incentives matter. Average hourly earnings in hospitals continued their acceleration 7.9% YoY and 1.1% MoM%. No surprise then that overall health care employment turned back north in October after sliding sideways most of the summer. MoM % was 0.23% versus a modest decline in September. Don’t get too into the “it will all be over in 4Q” as hospitals still have 87k missing employees.
Reversing a multiyear slide, employment at both nursing facilities and home health improved. Home health employment improved 1.0% since last month, nursing facility employment increased 0.8% in the same period.
Lots to look at. Link to chartbook here.
Mortality. We special ordered a tinfoil hat a few months ago when it became clear, to us anyway, that supply chain problems were more than mere bottlenecks in California’s ports. As commodity prices for things like coffee and cotton skyrocketed, we began to wonder if it wasn’t a matter of shipping but a planting or picking problem.
All it takes is a look at mortality figures in commodity and manufacturing countries, especially those the western press has abandoned or from which it has been expelled, to see that there is something else at work. 20k deaths per 100k of population in Vietnam is simply impossible.
This week The Economist released a study that estimates that about 17 million people have died. That is much closer to our estimate of 20 million at the low end and 40 million on the high end.
I have returned the silver cap although it was rather dashing.
Policy-related Earnings Commentary.
Note: I will be in the studio covering the latest macro and policy trends evident in 3Q earnings commentary on Wednesday, Nov. 17th @ 10am. (add to Outlook Calendar)
Labor. There is a divergence of opinion on labor trends. On the one hand, there are realists who know that once a labor force is disrupted, it is difficult to restore it without concerted, long-term action. On the other hand, there are the idealists who seem to believe all it takes is for AMN to stop paying nurses 400-500% of their normal wage and the pre-COVID world will be restored.
We are firmly in the former camp.
DGX. Hard to argue with a bull thesis in the near term given how much money is sloshing around the U.S. to fund COVID-19 testing. However, a return to 2019 base level volumes in 2022 seems a little unreasonable given the struggle to staff hospitals. Physicians’ offices are mostly functioning near pre-COVID levels, leaving little incremental upside there. The return to life thesis seems challenged by the scale and speed rapid testing offers. That is just the policy view you probably have a different one.
HCA, THC & UHS. THC and HCA are the bad-asses of the post-COVID world. They are very clearly recognizing the challenges before them and taking steps to ameliorate them. It was local news here but much of the buy-side was unaware HCA purchased the Galen School of Nursing a few years ago. (They are also building a PPE manufacturing facility in NC and opening 11 central labs this year and next.)
Meanwhile THC can lean hard on their USPI asset to diversify their channels. ASCs require less intense staffing and patients are discharged in 23 hours. They too are shopping for a nursing school
UHS is lost in the wilderness of the myth that says labor shortages will be restored as soon as all those travel nurses come home, without considering the possibility some of them may have gone to work at AMZN.
EHC. Listen for the granular and cogent breakdown of staffing challenges at IRFs and HHAs. Stay for the dust-up between management and a sell-side analyst questioning the timing of a home health and hospice spin out. Our Thought Bubble: EHC, given its JVs with hospitals, may be positioning itself to handle spillover demand from hospitals anxious to turn the beds they can staff by discharging to a nearby IRF.
SYK. Like JNJ, SYK indicated growth in sales of its robotic systems to ASCs. These capital purchases, increase throughput and reduce patient “stay” time. ASCs have different staffing requirements, tend to be preferred worksites for RNs and offer economic incentives if the center is physician owned.
We pointed out the softness in orthopedic procedures late this summer and SYK confirmed the problem remains due to difficulty staffing ORs
Acuity. Health care is labor. As such, acuity is the offspring of labor shortages.
THC and HCA reported higher acuity with THC saying explicitly they would be optimizing operations to handle high acuity patients in their hospitals while pushing lower acuity into USPI setting. The context suggested it is going to be a long haul back to equilibrium. HCA is using data tools and time and motion studies to increase productivity of the workforce.
EHC has lauded its performance with higher acuity patients during COVID and seems to be positioning itself to press that advantage at its IRFs.
HUM is a mystery to me. They reported -1% non-COVID utilization versus and expected -2.5% and guided to a 4Q result where non-COVID utilization is offset by declines in COVID utilization. There was no mention of the increased acuity being reported by all the providers. The assumption appears to be that the higher acuity at hospitals is merely the result of less sick people being removed from the denominator. That could end up being true, but only if labor supply can be restored.
Inflation. There are also two schools of thought on inflation. The Powell/Yellen/LaGarde view is that it is transitory and will disappear once we get past a few bottlenecks. Everyone else is wary. We have moved past wary and are looking for ways in which the health care sector is getting ready for what is likely to be prolonged shortages that are necessarily accompanied by price increases.
SYK and the hospitals all reported some shortages but health care is required to maintain stock piles or “safety supplies” so impacts, if any will be on a lag. Chips for devices are most of a concern.
Other.
TDOC – WTF? Their earnings commentary appeared to ignore the accelerated trend toward B2B and B2B2C in telehealth. TDOC seems to be doubling down on serving employer sponsored plans and health systems. Additionally, they also appear to be pivoting toward value-based primary care with an assumption of risk. Not a big surprise given the CEOs background but they may be a little behind the curve in the post-COVID reality.
SPAC and S-1 Corner.
IPOs
Samsara Vision Inc. “A specialty medical device company dedicated to bringing vision and freedom back to patients suffering from late-stage conditions of the retina.”
SPACs. There is now $28B in SPAC deal that have closed or have filed and S-1 indicating a preference for a IBC in health care. That is a lot of money. What we know about money is that it usually gets spent, although not always wisely. Access updated spreadsheet here.
Hedgeye Health Policy Publication/Event Calendar. Click here for searchable calendar.
Have a great weekend.
Emily Evans
Managing Director – Health Policy
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