CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:

  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score

For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator."


CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View - 05.23.16 chart

Long Bond Bears

“Our greatest glory is not in never failing, but in rising up every time we fall.”

-Long Bond Bears


Actually, Ralph Waldo Emerson wrote that. But for this morning’s note I thought I’d borrow it for the Long Bond Bears. They’ve failed since #TheCycle peaked in July of 2015. Despite the perceived glory in “calling the top”, shorting long-term Treasuries because they’re “expensive” has been a costly mistake.


As all long-term cycle investors know, “expensive” gets more expensive as GDP growth slows and asset allocators seek exposures that get them paid during the down-cycle. Put another way, there’s a premium valuation assigned to the return of capital when returns on capital are falling.


One of the most expensive major macro securities in world history (Japanese Government Bonds) hasn’t paid the bears for decades. Despite all the glory of living life as a central planner, their policy to “stimulate growth” with negative rates has failed too.


Long Bond Bears - negative interest rate cartoon 04.21.2016


Back to the Global Macro Grind


Taking a breather from the battle between #Reflation and #Deflation (in Dollars), last week’s biggest moves in macro were driven by what I think was another head-fake for rates rising:


  1. US Treasury 2YR Yield popped +13 basis points on the week to 0.88% (still down -17 basis points YTD)
  2. US Treasury 10YR Yield rose +15 basis points on the week to 1.85% (still down -42 basis points YTD)
  3. Utilities (XLU) corrected -2.2% on the week to +11.6% YTD
  4. REITS (MSCI) fell -2.7%  on the week to +2.8% YTD
  5. Consumer Staples (XLP) dropped -2.0% on the week to +3.3% YTD


From a US Equity Style Factor perspective, you can see the impact of Rates Rising last week as well:


  1. High Yield Stocks lost -0.2% on the week to +2.2% YTD
  2. Low Yield Stocks gained +1.3% on the week to +0.6% YTD

*Mean Performance of the Top Quartile vs. Bottom Quartile of SP500 companies


In other words, last week provided one of the few major 2016 buying opportunities in what we call a counter-TREND move in rate sensitive macro exposures.


And you thought I wasn’t bullish? I’m super bullish on #GrowthSlowing. There’s always a bull market somewhere!


Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:


  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score


For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator.


While it’s amazing to watch, I still can’t for the life of me believe that consensus is this complacent about US GDP #GrowthSlowing. If you thought GDP was going to be 2-2.5% in Q2, you’d probably chase US Equity Beta and short bonds.


If, however, you have our Wall Street low forecast of sub 1% US GDP for Q2, you’d:


A) Buy Long-term Bonds, Utilities, REITS, and Staples

B) Short High Beta, Small Caps, and Financials


So let’s do more of that this week ahead of #TheCycle growth slowing reports for both Durable Goods (Thursday) and GDP (Friday).


The other not so funny thing that happened on the way to the risk management forum last week was that the US Dollar Index had its 3rd straight up week, closing +0.8% on the US Dollar Index, holding comfortably above long-term TAIL support of 92-93.


As macro tourists were hyperventilating about the prospects of a “rate hike”, the consensus that “Global Demand has bottomed” met its maker in #StrongDollar terms:


  1. Emerging Market Stocks (MSCI) dropped back into the red for 2016, -1.8% to -1.5% YTD
  2. Chinese Stocks (Shanghai Comp) were down another -0.1% on the week to -20.1% YTD
  3. Dr. Copper deflated another -0.9% on the week to -4.3% YTD


Dollar Up, Rates Down? Yep.


That’s what happens when the rate of change of both growth and inflation are slowing. In our GIP (Growth, Inflation, Policy) model, we call it #Quad4. There may be no Old Wall glory in it, but it’s the ultra-bull case for Long Bond Bulls.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.87%

SPX 2029-2066
RUT 1089-1129
USD 93.70-95.65
Copper 2.02-2.10


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Long Bond Bears - 05.23.16 chart

Correlation Risk

Client Talking Points


Most things macro (last week) queued off of what we think was another head-fake in rate hike risk. The UST 10YR Yield being up +15 basis points week-over-week was a counter TREND move to 1.90% which has since pulled all the way back to 1.82% this morning, flattening the Yield Spread to yet another year-to-date low of +94 basis points wide (10s/2s), which is an explicitly bearish GDP growth signal.


It dislocated from the Correlation Trade last week (USD +0.8%, Gold -1.5%, WTI +3.5%), but is correcting -1.1% this morning (Iran Supply comments) back below $48 with an immediate-term risk range of $45.07-50.53.


Teetering on implosion (Equities) again as USD signals immediate-term TRADE overbought vs. Euro at $1.11-1.12; Italy’s stock market is a bloody mess, -1.5% (leading losers), taking its crash to -26% since this time last year; NIRP doesn’t work.


*Tune into The Macro Show with Darius Dale and Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

5/22/16 49% 6% 0% 10% 30% 5%
5/23/16 50% 6% 0% 8% 30% 6%

Asset Allocation as a % of Max Preferred Exposure

5/22/16 49% 18% 0% 30% 91% 15%
5/23/16 50% 18% 0% 24% 91% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.


McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.


Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.


In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.


If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road


REPLAY | "About Everything" w/ Demographer @HoweGeneration

#Millennials: Are We There Yet?



Thousands of candles can be lighted from a single candle, and the life of the candle will not be shortened. Happiness never decreases by being shared.



U.S. Credit card debt is set to hit $1.0 trillion this year, the highest level since 2008.

The Macro Show with Darius Dale Replay | May 23, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.


Takeaway: Please join us Today...Monday, May 23rd at 1PM ET for our Black Book on Best Idea Short HBI.

Please join us Monday, May 23rd at 1PM ET for a call reviewing our Black Book on Best Idea Short Hanesbrands (HBI). CLICK HERE to watch this presentation live.

HBI | BLACK BOOK - BEST IDEA SHORT (Today 1pm ET) - Slide1


Call Details:

Toll Free:


UK: 0

Confirmation Number: 13636869

Materials: CLICK HERE

Watch Live: CLICK HERE


We added HBI to our Best Ideas list as a short on May 2nd as recent acquisitions gave us higher conviction in our short positioning.  This goes beyond the whole ‘peak margins, low cotton cost, in a weak category’ argument. But rather, a management team that was aggressive, but is now behaving in a borderline reckless manner. Management is aggressively selling stock while it uses shareholder capital to accelerate acquisition activity at increasingly high (and potentially deceptive) multiples at the tail-end of an economic cycle, as its own factories operate near peak utilization. These deals are supporting earnings, while the Street looks right through the special charges. That makes timing on this short difficult, but we’ll provide a roadmap in our Black Book. Ultimately, we see 40% downside from here.



Below is our note from 5/2 outlining our thesis.


05/02/16 09:19 AM EDT

HBI | This Doesn’t End Well


Takeaway: We’re adding HBI to our ‘Best Ideas’ Short list. When a company behaves this badly, no one wins.


We’re adding HBI to our Best Ideas Short list. We initially put this short on in late March (see note below), but the company’s actions since then have given us greater confidence in the call. Here’s our basic thinking (we’ll have a Black Book out on the name shortly with a deep dive).


1. This is not a bad business…but it’s not a good one. On the plus side, it’s highly consolidated on the brand side – with Hanes and Fruit of the Loom accounting for 24% share. On the flip side, distribution is even more consolidated with Wal-Mart, Target, Kohl’s, Penny, and (yes) Amazon accounting for ~70%.  That might seem like a push, but we’d also argue that consumer trends are pushing towards the high end (Tommy John, Lululemon, UnderArmour, Nike). All in, the core is probably a 1% long term grower. Nothing to write home about. And unlike a CPG company, it is extremely volatile. A volatile 1%? Not where we want to be.


2. Margins are at peak. HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?

Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops. 

In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.   


3. The New ‘Jones’? No, we’re not talking about Hedgeye’s illustrious Daryl Jones, we’re talking about Jones Apparel Group – one of the worst companies in retail. Ever. And that says a lot. As its core rolled, Jones took capex down from 2-3% of sales to about 0.7%. That’s bad. It took shareholders’ capital and bought assets/brands – over 25 of them. Then it took special charges almost every quarter obfuscating the real earnings power of the company. It was a great trading stock until it ultimately went private at 30% of peak trading levels.  We’re not certain this is where HBI is headed, but the parallels are uncanny.


4. Management is investing away from the core. Maybe this is an exceptional idea. Maybe they’re doing what VFC did a decade ago when grew away from its stodgy old slow growing denim business, and sold off its underwear assets. But VFC bought things like Vans, Timberland, Lucy and Eagle Creek. HBI is diversifying into…you guessed it – underwear (and moderate priced sports apparel). Just in other parts of the world. We have no reason to think this category will grow any more outside the US than inside its borders.


5. These deals are getting more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?


6. Why didn’t HBI buy Pacific Brands a year ago at half the price? That’s kind of a rhetorical question. I have no idea what the answer is. But it’s a public company…it’s not like it ‘wasn’t for sale’, and it’s also not like ‘HBI wasn’t a buyer’.  Just strange to pay nearly $400mm more for the same asset. That could have otherwise paid down 18% of debt, or bought back 3% of the float.


7. 2 and 20 is Back! Did we mention that HBI announced two acquisitions in 20 days? One in Europe, and the Other in Australia? I’m sorry, but even if you’re the biggest bull on this name, you’ve gotta be scratching your head over this. Yes, I know, the stock was up on both deals, because people know that the company now has a cookie jar to dip into for a year or two. But we’ll bet against two international deals/20 days any day of the week when we’re at the tail end of an economic cycle.


The Bottom Line

We think it’s absurd for a stock like HBI to trade at an EBITDA multiple in the teens. An EARNINGS multiple? Sure. But not EBITDA. We understand, however, that this is the type of name where there will need to be a major event to make people completely revalue the company – the way it did so on the upside as it repaired its balance sheet over the past two years. But until then, will we see the multiple push to 14x, 15x? We have a hard time with that one – unless we’re grossly underestimating a) how much juice it can squeeze out of the lemon in Australia, or b) the sustainability of its positioning in the US market. If we’re right, we’re looking at 7-8x EBITDA, and we’d argue that’s even generous. That’s a stock in the mid-teens, or 50% downside.

UPDATE: CMS's Part B Drug Demo Sidelined 'til 2019

Takeaway: Obama Administration punts Part B Drug Demo to next administration who probably won't have any better luck.

Update: Late yesterday afternoon, one of the Capitol Hill newspapers, Inside Health Policy, reported basically what we did, reaching pretty much the same conclusion. Later yesterday afternoon, CMS issued a statement: “We have not announced a change in timing and we continue to review comments." CMS claims that the date of March 2019 was simply the latest date they could finalized the proposed rule without starting over. According to IHP, "A CMS official told IHP that 'Final Action' on the White House Office of Management and Budget's website in this case reflects the statutory deadline for a final rule, not the expected time to issue a final rule. IHP goes on to point out: "However, the statutory deadline and the final action dates listed in the agenda for many rules are not the same."


We share IHP's skepticism and think the proposal has problems - real problems not just political problems - with oncologists, rural providers, non-profit hospitals, patient advocates and others. Time will tell.


Drug prices have become a white hot political issue this year and for good reason. In October, 2015, a Kaiser Family Foundation tracking poll found that respondents felt affordability of prescription drugs was a top health care priority. In a March report from the Health and Human Services Office of the Assistant Secretary for Planning and Evaluation (ASPE), the research arm of the department, estimated that in 2015, Americans spent $328 billion on retail (drugs sold at outlets that serve patients like Walgreens and CVS) and $128 billion on non-retail (drugs dispensed through physicians offices). Drugs accounted for 16.7 percent of all health care spending in 2015.


The ASPE found that, after a period of slow growth from 2008 to 2013, retail and non-retail drug spending dramatically increased in 2014. Chart 1 illustrates recent drug spending and projections from the HHS Office of the Actuary.

UPDATE: CMS's Part B Drug Demo Sidelined 'til 2019  - Drug Spending

Source: ASPE


A driver of the increased spending appears - though there is some conflicting data - to be increased costs associated with the use of specialty drugs. ASPE estimated that 30 percent of the increase in drug spending in recent years is attributable to escalating prices. Other factors include an increase in prescriptions per person, general population growth and economy-wide inflation.


These facts took human form in late 2015 when the tone deaf Martin Shkreli, former CEO of Turing Pharmaceuticals, created a stir by raising the price of Daraprim, a drug for which Turing had recently acquired the manufacturing license, and earned him the title of "most hated man in America." The drug industry's standing in the court of public opinion was further eroded by the bad behavior of Valeant Pharmaceuticals (VRX) and a spate of tax inversion deals. The combination of a real and dramatic increase in drug costs and the convenient arrival of a boogie man, forced the issue onto the 2016 Presidential campaign platforms. In October 2015, Senator Bernie Sanders released his plan for combating the increase in drug costs and was quickly followed by Secretary Hilary Clinton. Donald Trump appears to also be considering ways that drug prices can be controlled.


The confluence of events and the predictable political response had quite a few people wondering if the time was right for federal intervention to control drug prices. Some of those people were at the Center for Medicare and Medicaid Innovation and the White House. In early March, the Obama Administration, out of the blue, proposed the Part B Drug Demonstration. The proposal had not previously appeared on the Obama administration's regulatory agenda suggesting that they were exploiing a political opportunity so in the waning years of their administration they could claim some credit for reform of drug prices.


We were not among those who saw federal intervention in the drug price issue as viable. The reimbursement system for drugs is too complicated and too connected to the payment systems for physicians and hospitals to be easily altered. Furthermore, the drug industry lobby's power and effectiveness in Washington is legendary. Our money was on Pharma and on Friday the Obama administration offered pretty compelling evidence that the Part B Drug Demo was not moving forward anytime soon. The Spring 2016 Unifed Agenda - a "honey-do" list of regulatory activities in the coming months - includes the Part B Drug Demo but with a finalization date of March 2019. Since the Demo cannot move forward until the rule is finalized, it would appear, assuming there has not been a clerical error, the project will be backburnered until the next Administration. The next President can proceed or abandon the whole thing.


What Are Part B Drugs?

Medicare pays for prescription drugs obtained from retail pharmacies through the privately administered Part D plans. Drugs administered in physicians’ offices and Hospital Outpatient Departments (HOPDs) (e.g. chemotherapy infusions) are reimbursed through direct payment to doctors and hospitals via Medicare Part B. Many of these Part B drugs are what the ASPE referred to as "non-retail" drugs. The Medicare payments to doctors and hospitals are comprised of both reimbursement for the drug itself and payment for the administration of the drug either through the physician fee schedule or the Hospital Outpatient Prospective Payment System (OPPS). It should be noted that reimbursement for services on the HOPD schedule is considerably higher – 20 to 30 percent in some cases- than the physicians fee schedule.


Medicare reimburses for Part B drugs by inflating the Average Sales Price from manufacturers to wholesalers by 6 percent. This formula takes into account all rebates and discounts offered by the manufacturer but not “prompt pay” discounts that are not typically passed on to the provider. Part B drug reimbursement has been subject to sequestration for the last several years and that is scheduled to continue until 2024. The impact of sequestration on reimbursement is -1.6 percent so that the effective reimbursement is ASP plus 4.4 percent.


The Part B Drug Demonstration

The Part B Drug Demonstration would be a five-year, mandatory program with two phases that would significantly upend Medicare Part B payments. Phase one of this experiment, as it is often called due to the inclusion of a control group, would have begun in Fall 2016. The current reimbursement system of Average Sales Price (ASP) of the drug plus 6 percent would be replaced by ASP plus 2.5 percent (0.9 percent after sequestration) plus a $16.80 flat fee. All physicians and Hospital Outpatient Departments (HOPD) would be required to participate. However, roughly half would be part of a control group.


Phase two of the Part B Drug Payment Model would have begun in early 2017 and layered on top of the phase one payment method a veritable smorgasbord of Value-based Purchasing (VBP) payment tools. CMS has provided relatively few details on phase two. They do propose that the VBP could include:

  • Reference Pricing – Payment for a drug would be based on the price of all therapeutically-similar drugs. A reference pricing scheme could be based on the average price of all drugs in the group or on the lowest drugs in the group. Because of a prior and quite negative experience, CMS has stipulated that any reference pricing scheme would not include increased beneficiary liability.
  • Indications-based Pricing – Under this approach, Medicare payment for the drug would be based on safety and cost-effectiveness of different indications. In other words, Medicare would pay a higher reimbursement for a drug meant to treat conditions for which research shows greater effectiveness and less when the drug is used on conditions where the drug is less effective.
  • Outcomes-based Risk Sharing Arrangements – CMS would enter into agreements with manufacturers to provide price adjustments when products do not meet specific targeted outcomes. Commercial insurers have been experimenting with this approach in recent months and it has been heralded as a private sector approach with promise.
  • Discounting or eliminating patient cost-sharing – Medicare would provide incentives to patients that use “high value” drugs by limiting cost-sharing.
  • Clinical Decision Support – CMS would provide online tools to provide education and literature to physicians and a feedback mechanism for prescribers to provide data on claims and utilization.

The Part B Drug Demonstration model would consist of four populations:

  • A control group paid using the existing Medicare reimbursement formula of ASP plus 6 percent
  • An experimental group using the existing payment formula of ASP plus 6 percent and the VBP tools
  • An experiment group using the new payment formula of ASP plus 2.5 percent plus the flat fee of $16.80 flat fee
  • An experiment group using the new payment formula of ASP plus 2.5 percent plus the flat fee of $16.80 and the VBP tools.

If the details of phase one seem a bit arbitrary and those of phase two rather vague, you are not alone. Aside from a MedPAC study last year where the 2.5 percent add-on was presented as merely an illustrative example, and chosen because it was higher than the 1-2 percent reportedly given to wholesalers, there does not seem to be much research to support its use.


Phase one also fails to even address the problem identified by CMS. In the studies released in conjunction with the Part B proposal, CMS characterizes the problem as one where providers have little incentive to prescribe lower cost, but equally or more effective drugs when they are available. As noted above, a big part of spending increases are attributable to specialty drugs. There is not yet an agreed upon definition of a specialty drug but most people agree they usually are manufactured or produced by a single company implying there are no alternatives. Yet the phase one proposal makes no distinction between reimbursement for drugs with comparably effective alternatives and those without. Given the history of Medicare, where reimbursement cuts are inevitably met with margin protection through higher utilization, the phase one proposal could actually create incentives for increased prescriptions for drugs without alternatives.


Phase two of the proposal is significantly more nuanced but treading dangerously close to charging Medicare with a role in determining cost effectiveness of drugs – a dog whistle for patient advocates and often used as code for rationing of care. This phase does include opportunity to tailor incentives for providers. However for things like indications-based reimbursement, CMS would need to rely on some scientific knowledge-base that is undisputed. There is a significant lack of detail and specifics on how exactly, CMS would measure things like effectiveness and outcomes making phase two look unready for prime time.


In short, phase one appears to be more complete than phase two but arbitrary and an oversimplified response to an extraordinarily complex problem. Phase two is less defined but equally inadequate in addressing the multi-faceted and complex nature of Medicare Part B drug spending.


The Drugs.

The Part B Drug model is budget neutral – meaning CMS anticipates paying the same amount of money, in aggregate, to physicians and HOPDs as they would had the program not been implemented. As such, some practice areas will see an increase in payments for Part B drugs, while others will see a decline. Anesthesiologists, for example, will see an increase in Part B drug reimbursement while oncologists will see a decrease. This result is not a surprise since drugs administered by oncologists, ophthalmologists and rheumatologists usually make the list of Top 25 drugs for Medicare spend.


Topping the list of most Medicare dollars spent is Roche's Rituxan to treat certain cancers and Lucentis to treat Macular degeneration.


UPDATE: CMS's Part B Drug Demo Sidelined 'til 2019  - Drug List


CMS claims - and we have no reason to dispute it - that there are many oncologists for whom half their income is derived from the drugs the prescribe. The finding appears to be their sole justification for structuring the program in such a way as to alter provider compensation.


The Implications. The near term implications for physicians and patients was significant and the source of much of the opposition to the program. While the Obama Administration was able to keep its party on the reservation for a hearing last week on the Demo, members of both parties raised objections. Opinions ranged from Republican calls for a complete withdrawal to requests from Democrats to downsize the project. In these days of a divided Washington, it is tough to find such consensus.


Driving the debate was the Pharma who understood this Demo for what it was: a political response to a very complicated and difficult problem. Political reactions call for more politics not less. Pharma put together a coalition of physicians, hospitals and patients to be the face of the opposition who effectively pointed out the many flaws of the program. After a week of floating trial balloons suggesting a much smaller Demo was in the offing, the Obama Administration released the Spring 2016 regulatory agenda. Finalization of the Part B Drug Demo is now scheduled for March of 2019.


The delay is good news for Pharma who apparently still has what it takes to protect their interests. Because of that, efforts by the next President to "do something about drug prices" will not be easy. Pharma's success in beating back this threat however, did rest solely on their lobbying prowess. The fact is that federal drug reimbursement policy has created a web of interests that are tough to unwind. Part B drug reimbursement is an element of physician compensation and not simply a cost recovery system. Non-profit hospitals that increasingly derive significant portions of their annual revenue from the 340b drug discount program want to avoid any disruption of the current system of reimbursement. Had Pharma failed at blocking the Part B Drug Demo, interests favoring drug price regulation would have had the toehold they needed for additional intervention. In political terms, the Pharma lobby would have suffered a loss that would have called into question their ability to defend the industry, a weakness that would have been exploited by supporters of price controls.


Any changes to how the federal government reimburses and controls drug prices will be a hard fought fight and it doesn't look like anyone is spoiling for that just yet.





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