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Poll of the Day: Are Negative Interest Rates Coming to America?

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Poll of the Day: Are Negative Interest Rates Coming to America? - z silly




340B Drug Purchasing Program "Mega-Guidance" Goes to White House for Approval - Pos: Pharma

Takeaway: The administration is taking baby steps to rein in this obscure but important discount drug program at US nonprofit hospitals

Last August, the Obama Administration released proposed new "mega-guidance" on the 340B Drug Purchasing Program - an obscure but very significant source of income for about half of America's hospitals. Hospitals purchase drugs from drug companies at a discount of 25-50% then turn around and charge full price to Medicare or the negotiated price to commercial insurers, pocketing the spread. Great work if you can get it. While the 340B program has enhanced the income statements of many nonprofit hospitals including virtually all of the teaching and research facilities, it has been a thorn in the side of the pharmaceutical industry which has watched the program grow dramatically in recent years. For a year, the proposal has simmered on the back burner of the Obama Administration until Thursday, last week, when a final proposal was sent to the White House for approval. The proposal will limit the number of people that qualify as a "patient" for the purposes of a 340B drug discount and that is sure to be a negative for nonprofit hospitals that have come to depend on the program and their contract pharmacies including WBA, WMT, RAD, KR and CVS.


For background on the 340B Drug Purchasing Program, click here

For a list of nonprofit hospitals currently participating in the 340B Drug Purchasing Program, click here.


As a refresher, the mega-guidance currently pending updates long-standing and often vague guidance on the following areas, among others:

  •  Entity eligibility
  •  Patient eligibility
  •  Contract pharmacy arrangements
  •  Program integrity efforts

Entity Eligibility: The proposed guidance makes no substantive changes to the current "Covered Entity" or CE eligibility criteria, much to the chagrin of the pharmaceutical industry and members of Congress like Senator Charles Grassley. For years, hospitals could meet the CE eligibility criteria by simply providing certification to HHS. In 2013, the agency at HHS responsible for the program, HRSA issued clarification to strengthen oversight of CEs, including specific certification and requiring signatures of submitting officials. Those efforts did little to quel concerns of the critics.


Broader complaints about the eligibility criteria in the recent past have targeted the use of DSH as an accurate mechanism for identifying hospitals serving needy patients since DSH does not actually capture the degree to which hospitals serve uninsured patients and/or provide charity care. Because DSH measures the proportion of inpatient care provided to low-income Medicare and Medicaid patients, critics have prognosticated that the number of eligible DSH hospitals will likely increase as more people get health insurance under the ACA because of the law’s Medicaid expansions. The fact that HRSA remained mum on the issue is no surprise. The DSH eligibility criteria is in statute and therefore beyond the authority of HRSA to change. This issue may, however, be ripe for Congressional intervention in the not-too-distant future.


Other complaints – including some by the GAO – have targeted the lack of clarity around the criteria related to governmental powers and contracts to provide health services to uninsured individuals. In the case of the former, there are no explicit requirements for what constitutes a governmental power, and in the case of the latter, guidance lacks any standards for the contracts – that is, how broad or how much volume must a contract encompass to meet the criteria? Instead, hospitals with any contract with a State or local government to provide any care at all - no matter how insignificant would meet the threshold. HHS has proposed no new clarifications or requirements in this area.


Based on the proposed guidance, we wouldn’t expect any dramatic reductions to the number of eligible DSH hospitals, and we might, in fact, expect the number to increase consistent with the theory above about DSH calculations and Medicaid expansions.


Patient Eligibility: While HHS makes no waves in the CE eligibility area, it sure does make a splash in its proposed changes to patient eligibility. 


The patient definition states exactly who is considered a patient of an eligible hospital for the purpose of dispensing discounted drugs purchased under the 340B program. Because eligible hospitals can dispense discounted 340B drugs to all different kinds of patients and subsequently bill insurance for those drugs, hospitals prefer the widest net possible to capture the windfall between the discounted price they paid and what a private insurer or Medicare reimburses for that drug.


The definition of patient currently in effect subjects 340B hospitals to a broad two-pronged test under which an individual must have their health care records maintained by the CE and receive care from a provider either employed by or with some "arrangement" with the CE. Over the years, this guidance proved unclear and hospitals were taking significant liberties with their interpretation.


The latest proposal attempts to pull the patient and the care associated with the 340B-discounted prescription closer to the CE. Under the proposal, a 340B drug should be linked to a specific prescription associated with a specific outpatient service provided by a provider that can bill on the CE’s behalf, and the CE must maintain auditable health records that demonstrate that the CE has a provider-to-patient relationship (vs. case management or administrative) associated with each 340B-discounted prescription. Not only would the proposed definition potentially significantly reduce the number of patients for which eligible hospitals can dispense the discounted drugs (and therefore capture 340B-enabled windfalls), it could also significantly increase the administrative burden associated with dispensing 340B-discounted drugs.


Contract Pharmacy Arrangements: Put quite simply, HHS’s proposed guidance doesn’t do much to tighten the reins on contract pharmacy usage or oversight. It goes nowhere near the issue of limiting the number of the contract pharmacy arrangements, includes some very small clarifications and ‘improvements,’ and makes a whole lot of nods to problems and broad policy statements, but in the end, the proposed guidance lacks teeth.


Some of the small improvements include:

  • To be listed in the 340B Database, contracts must be in place and registered with HRSA by the CE.
  • Contracts should include all locations of a single pharmacy company.
  • A CE may contract with a pharmacy only on its own behalf and not via a group or network of CEs.
  • Manufacturers and wholesalers are required to ship only to the authorized shipping address for a CE.
  • Contract pharmacies may only provide 340B drugs to CE patients after the contract start date displayed on the Database.


As for the program integrity concerns cited by the OIG just last year, HHS reiterates that CEs should be ensuring that all drug distribution arrangements – including the use of contract pharmacies – comply with program requirements, but makes clear that CEs retain “complete responsibility” for compliance by contract pharmacies. HHS reiterates its recommendation that CEs do annual independent audits of their contract pharmacies and cites the benefits for doing so. HHS also recommends that CEs compare their 340B prescribing records with the contract pharmacies’ dispensing records. But in all cases, HHS doesn’t actually require that CEs do any of these things. Instead, HHS will indirectly police contract pharmacies through its audits of CEs, which would be no more stringent than what HHS is carrying out today.


In terms of broad policy statements that lack any enforcement mechanism, the two statements below suggest that HHS is aware that contract pharmacies are making money, perhaps feels a little iffy about it, but doesn’t really know what it can do:


“Congress intended the benefits of the 340B Program to accrue to participating covered entities. Each covered entity should carefully evaluate its relationships with contract pharmacies (i.e., cost/benefit analysis) to make certain that the relationship benefits the covered entity and is in line with the intent of the Program.”


“A covered entity contracting with a pharmacy to dispense 340B drugs should be aware of the Federal anti-kickback statute and how such provisions could apply to arrangements with contract pharmacies.”


Even though there is no significant change to the contract pharmacy arrangements, the reduction in the number of eligible patients should reduce the 340B volume at pharmacy companies like WBA, WMT, RAD and KR.


Program Integrity Efforts: 

HHS's oversight of the 340B has been under fire for years. The ACA enacted several new programs integrity efforts aimed at giving HHS explicit authority to improve compliance with the program requirements by both drug manufacturers and CEs.  In 2011, the GAO issued a report concluding that HHS primarily relies on self-policing by both manufacturers and CEs to ensure compliance and that existing guidance is too broad and vague to even provide clear direction for this self-policing. As a result, HHS had no way of knowing the extent of noncompliance or of assessing program risk. In the wake of the GAO report, HHS launched a more concerted and systemic audit effort – conducting over 300 audits over the last four years. In many cases, HRSA has found instances of drug diversion (that is, dispensing 340B drugs to ineligible patients) and duplicate discounts, requiring audited CEs to repay manufacturers.


The proposed guidance includes provisions to further these efforts, including:

  •  Requirement that CEs and manufacturers maintain auditable records for at least five years;
  •  Explicit parameters for HRSA’s audits of CEs and manufacturers (e.g. HRSA will ensure that only one 340B program audit of a CE is conducted at any time.);
  •  Details of a notice and hearing process under which CEs and manufacturers would have the opportunity to respond to adverse audit findings or proposed loss of program eligibility; and
  •  Parameters for manufacturers’ audits of CEs.

We wouldn’t expect HHS to increase its number of audits from current efforts without additional funding to bolster staff, which would require Congressional action. The proposed guidance appears to solidify the practices that HHS has been undertaking over the last four years, so instead of adding new regulation, we would expect that the proposed guidance would be viewed positively as it adds more clarity and stability to HRSA’s expectations for both manufacturers and CEs.


We should note the House Energy & Commerce Committee has circulated a discussion draft on changes to the 340B Program that mimic and extend much of what is in HHS's proposed guidance. However, the time to pass something is limited. With the 340B mega-guidance expected to be finalized by the end of the year, we would anticipate that Congress does not address the issue until it can see the effects of the current proposal.



18 (Excellent) Book Recommendations From Hedgeye

18 (Excellent) Book Recommendations From Hedgeye - books

We receive a lot of book recommendation requests from our subscribers. Here's a list of some of the more thoughtful ones we've read recently here at Hedgeye (along with the person making the recommendation).

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

September 6, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.62 1.52 1.60
S&P 500
2,165 2,187 2,179
Russell 2000
1,231 1,253 1,251
NASDAQ Composite
5,190 5,261 5,249
SPDR S&P Oil & Gas Explore
35.01 37.84 37.35
1,211 1,245 1,233
Nikkei 225 Index
16,339 17,091 16,925
German DAX Composite
10,480 10,726 10,672
Volatility Index
11.21 14.32 11.98
U.S. Dollar Index
94.39 96.50 95.84
1.11 1.13 1.11
Japanese Yen
99.95 104.58 103.41
Light Crude Oil Spot Price
42.99 46.18 44.44
Natural Gas Spot Price
2.59 2.90 2.79
Gold Spot Price
1,303 1,349 1,326
Copper Spot Price
2.04 2.12 2.07
Apple Inc.
105.41 109.40 107.73
Amazon.com Inc.
750 780 772
J.P. Morgan Chase & Co.
65.34 67.99 67.49
Intel Corp.
34.80 36.29 36.08
Costco Wholesale
154 160 157
Las Vegas Sands Corp.
50.96 54.47 53.93

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

CHART OF THE DAY: Those Fickle Fed Fund Futures

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. 


...Yellen’s Fed is much shorter-term than that. If she does what the market is telling her to do right now (Fed Fund Futures dropped to 32% on a SEP hike), this will be her 6th pivot (hawkish-dovish-hawkish-dovish-hawkish-dovish), in 9 months.


CHART OF THE DAY: Those Fickle Fed Fund Futures  - cod 09.06.16 chart

Old New Data

“The old in the new is what claims the attention.”

-William James


You see, I don’t have a confirmation bias. Once in a while, Harvard grads have come up with some good ideas too. William James died in 1910 but is rightly revered as one of the most important psychologists and thought leaders in American history.


I wonder how he’d psycho-analyze Janet Yellen…


Oh, you didn’t hear? She’s “data dependent.” Lol. On the heels of a recessionary ISM report last week, the latest US jobs report was yet another new confirmation of what’s becoming an older TREND. Since peaking in 2015, the US labor market continues to slow.


Back to the Global Macro Grind


Slow. You know – in rate of change terms. While the Fed continues to cling to old “indicators” (like the Phillips Curve), my generation of economists and strategists have evolved the predicting process to just letting the old cycle data instruct the new.


That’s right. Most long-cycle macro data is glacial in terms of how it trends. Peaks and troughs are processes. They take time to manifest. But when something big and super #LateCycle like the rate of change in Non-farm Payrolls (NFP) puts in a cycle-peak, it slows to flat (year-over-year), then negative (year-over-year), 100% of the time.


Yellen’s Fed is much shorter-term than that. If she does what the market is telling her to do right now (Fed Fund Futures dropped to 32% on a SEP hike), this will be her 6th pivot (hawkish-dovish-hawkish-dovish-hawkish-dovish), in 9 months.



Old New Data - Yellen cartoon 09.17.2014NEW


But, Keith, Keith – “what if she still hikes?”… what if she makes her 2nd policy mistake in 9 months and just does it anyway? A: she can do whatever she wants and the precedent of going against both the market and the data is established.


*See DEC rate hike for details


On a very short-term basis (2 week duration), there isn’t anything big in the USD Correlation Risk matrix that would like a Dollar Up, Rates Up surprise in September from Yellen:


  1. USD vs. SP500 inverse correlation -0.46
  2. USD vs. Oil inverse correlation -0.70
  3. USD vs. CRB Index inverse correlation -0.90


And being a steadfast Gold Bond Bull, I most certainly wouldn’t enjoy it either (Gold’s 2-week inverse correlation with USD is -0.78). So how about from a positioning and sentiment perspective? Who’d be up for a rate hike (CFTC futures & options data)?


  1. SP500 (Index + Emini) net LONG position ramped another +22,325 contracts last week to +227,291
  2. Russell 2000 (mini) net LONG position built to a YTD high of +22,075 (that’s 2.89x on a 1yr z-score!)
  3. 10YR Treasury net LONG position doubled by +61,722 contracts (week-over-week) to +120,196
  4. Crude Oil net LONG position came down -10,612 week-over-week to +373,618
  5. Gold net LONG position came in -26,802 week-over-week to +238,152 (that’s +1.07x on a 1yr z-score)


In other words, Janet, from a net positioning perspective everyone is NET LONG everything!


I get that. Ex some Financials shorts (gotta ex-out when I don’t like being wrong, eh?), that’s why I was positioned as long as I’ve been all year (net and absolute) in our Real-Time Alerts and Asset Allocation products last week.


But also understand that if we move back to the top-end of my immediate-term risk ranges in some of these asset classes, I’m a seller, not a buyer of green. Lots of macro market signals are currently implying range bound markets so buy/cover red, sell/short green.


Financials (XLF) were +1.9% last week to +3.1% YTD, I assume, because more than a few of you are thinking there’s still a better than 32% chance that she raises rates. I hear you. Same old song on “it’s only 25 beeps.” Nothing new vs. what I heard in DEC there.


That’s probably why the 2yr and 10yr US Treasury Yields were only down -3 and -6 basis points, respectively, week-over-week. Pre the August ISM print of 49.4 the 2yr Yield tapped 0.85%. Now it’s back down to 0.79%. The 10s/2s Yield Spread remains at +81bps.


But Utilities (XLU) and REITS (MSCI Index) were +1.0% and +1.5% week-over-week to +14.7% and +12.0% YTD, respectively, too. So what is it – hike or no hike?


Maybe there’s nothing new to see here at all as the 1-year old #GrowthSlowing TREND @Hedgeye remains firmly intact.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.52-1.62%

SPX 2165-2187

VIX 11.21-14.32
USD 94.39-96.50
Oil (WTI) 42.99-46.18

Gold 1


Best of luck out there this week,



Old New Data - cod 09.06.16 chart

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