There are several U.S. Department of Health and Human Services proposals as well as possible congressional legislation that could affect the creditworthiness of companies within the health care sector. Overall, we think it is challenging to pass any major health care regulation in the current political environment (Democrat-controlled House versus the Republican-controlled Senate). However, there are some proposals (e.g., surprise billing and various drug pricing reform initiatives) that have gathered bipartisan support that we view as likely candidates to move forward. Some of the smaller bills could be included in the omnibus appropriation bills in September.
As usual, the devil is in the details. We would need to see the details of proposed regulation or legislation to quantify financial impacts or even identify winners and losers. We believe some subsectors could be negatively affected under each proposal:
- Surprise billing: We believe bills targeting surprise billing have the greatest potential to be passed before the 2020 election and that a number of physician staffing and emergency transportation companies’ earnings could potentially be negatively affected.
- Pharmaceutical industry: We expect the overall impact of drug pricing reform-related initiatives will generally be negative for branded pharmaceutical companies and lead to a moderate reduction in their profit margins over the coming years. That said, we do not expect these initiatives to necessarily result in rating changes.
- Rebate removal: We view the proposal to eliminate rebates to pharmacy benefit managers in the government market by Jan. 1, 2020, as plausible, but very aggressive from a timing perspective. We believe the potential threat to upend rebates in the commercial market would take more time if it occurs at all. We believe an extension of that to commercial markets would put rating pressure on middle-market PBMs.
- ACA repeal and Medicare for All: While both phrases make great talking points for the 2020 election cycle, we see these proposals as the least likely to be implemented in the next few years.
Surprise Billing: Consensus Building To Reform
Surprise medical bills occur when patients are treated by out-of-network providers under circumstances that cannot reasonably be avoided such as emergency care or during elective care involving ancillary physicians (e.g., anesthesiologists) who patients don’t actively choose and are not in the insurer’s provider network.
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There is bipartisan support for curbing surprise billing, and we believe some form of legislation could be passed in the next 12 months. President Trump also vowed to end this practice during a roundtable in January 2019. Senator Lamar Alexander (R-Tenn.), who chairs the influential Health, Education, Labor, and Pensions Committee, recently told reporters that he expects to see surprise billing legislation “in the next several months.” Senator Alexander and Senator Patty Murray, a Democrat, have sent several possible solutions to the Congressional Budget Office for scoring. There are multiple bills being discussed in the U.S. Congress, with various ideas ranging from bundling physician fees with hospital’s facility fees to pegging out-of-network charge to a regional average (e.g., a percentage of Medicare rates) to using arbitration to determine the appropriate provider payment rate.
Outsourced physician staffing companies such as Envision Healthcare Corp. (B+/Negative/–), Team Health Holdings Inc. (B/Negative/–), U.S. Anesthesia Partners Holdings Inc. (B/Stable/–), Sound Inpatient Physicians Holdings LLC (B/Negative/–), and The Schumacher Group of Delaware Inc. (B/Stable/–), as well as emergency air and ground medical service providers such as Global Medical Response Inc. (B/Stable/–) and Air Methods Corp. (B-/Stable/–), could be hurt by such legislation. The exact impact on individual companies’ ratings is unclear now and depends on the details of the final legislation.
Various House Bills To Improve Drug Competition: Smaller Reforms Likely, Sweeping Reforms, Less So
In April 2019, the House Energy and Commerce Committee’s Health Subcommittee advanced six bills (mostly bipartisan) targeting drug pricing to the full House of Representatives. These bills largely focus on fostering more generic/biosimilar competition by removing anti-competitive mechanisms in the current system, such as pay-for-delay patent settlements and limiting generic competitors’ access to product samples.
We believe these six drug bills could address some of the low hanging fruit in the system. Sen. Chuck Grassley (R-Iowa), the chairman of the influential Senate Finance Committee, expressed his three top priorities on drug pricing as follows:
- A bill to ban “pay for delay” patent settlements between brand and generic drug manufacturers (one of the six aforementioned bills);
- The CREATES Act, one of the six aforementioned drug bills, which would give generics easier access to branded product samples; and
- A bill to let Americans import cheaper drugs from Canada.
In our view, the first two of these proposals have a greater likelihood of eventually becoming law than several others (including proposals to allow re-importation or for Medicare to negotiate drug prices, which we believe would be quite disruptive to the pharmaceutical industry and could therefore undermine prospects for future research and development investment).
We view these proposals as likely to collectively have a modestly negative impact on the profitability of branded pharmaceutical companies and credit quality. There could also be instances where pressure is more acute, for example banning “pay for delay” would exacerbate downside risk for a pharma company with key products facing a paragraph IV patent challenge.
Rebate Reform (Government And Commercial Market): 2020 Still Possible, But Timeline Is Aggressive
In February 2019, the HHS proposed a new rule that seeks to remove the current safe harbor protections for rebates in the government market. It also proposed two new safe harbors: one that allows discounts for prescription drugs to be passed on to patients at the point of sale and a second one that protects certain fixed-fee service arrangements between manufacturers and PBMs. In addition, in March 2019, Senator Mike Braun (R-Ind.) introduced a bill that seeks to eliminate rebates in the commercial market.
The current HHS proposal indicates an implementation date of Jan. 1, 2020. The public comment period ended on April 8, 2019, and HHS could issue the final rule as early as May 8, 2019. We view this time table as plausible, albeit very aggressive, because the 2020 Medicare Part D bids are due in June 2019. A March POLITICO article suggested that Speaker of the House Nancy Pelosi is pushing for a delay in HHS proposal implementation while holding “early-stage” conversations with the White House about drug-pricing legislation that could provide each side with a domestic policy victory.
If the implementation were delayed beyond Jan. 1, 2020, we think it could be delayed until 2022 given that 2020 is an election year. That said, over the next three to five years, we believe it is highly likely rebates in the government market will be eliminated because we see bipartisan support for lowering out-of-pocket expenses.
PBM. The scope of the HHS proposal is limited to the government-pay market. A potential termination of rebates in this market should not have a material effect on PBM economics because most PBMs pass on nearly 100% of their rebates to their plan sponsors in government programs. We believe the potential threat to rebates in the commercial market would take more time if it occurs at all. We believe an extension of that to commercial markets would put rating pressure on pure-play middle-market PBMs such as WD Wolverine Holdings, LLC (B/Stable) and MedImpact Holdings Inc. (B+/Stable). For more details, see “Pharmacy Benefit Managers Are Fighting A Multi-Front Battle Amid The Evolving Industry Landscape,” published Feb. 5, 2019.
Pharma. We think pharmaceutical companies would benefit from the proposed termination of rebates in terms of increased volume, but think the overall impact will be negative because price transparency is likely to increase price-based competition. We also believe this could have an adverse near-term impact on companies that have significant rebate liabilities because they would have to pay out liabilities in the near term. It could also harm companies that use rebates to enhance their competitive position and stave off new entrants. For more details, see “Which Pharma Company Ratings Could Be At Risk If U.S. Drug Pricing Reforms Become Law?“, published Oct. 31, 2018.
Patient-Driven Groupings Model: Potentially Problematic For Home Health
In October 2018, the Centers for Medicaid and Medicare Services (CMS) issued a final rule to revamp the home health reimbursement structure starting in 2020. The proposal calls for a budget-neutral transition to 30-day episodes (from 60-day currently) and case mix adjustments to remove incentives to over-utilize therapies. The most controversial aspect of the proposal is a prospective “behavioral adjustment” that constitutes a base rate cut of 6.4%. The key rationale for this behavioral adjustment is that CMS assumes that home health providers will alter their documentation and coding practices to maximize reimbursement.
While PDGM is scheduled to take effect on Jan. 1, 2020, the industry has opportunities to pursue relief until October/November 2019, when CMS issues the calendar year 2020 home health final rule. The industry is focusing most of its lobbying efforts on the 6.4% prospective behavioral adjustment. In February 2019, a bipartisan bill was introduced in the Senate attempting to prohibit CMS from making rate adjustments based on assumed behavioral changes and allow only for adjustments based on observed evidence.
While the proposed implementation is budget-neutral, providers with a more therapy-dependent patient mix could see their reimbursement decline as a result of the transition. PDGM, in its current form, represents a key credit risk factor for home health companies that we cover, including Gentiva Health Services Inc. (B/Stable), BW Homecare Holdings LLC (B-/Stable), and Encompass Health Corp. (BB-/Stable). Beyond the topline rate cut, PDGM could also change certain operational aspects of home health agencies, such as the staffing model (fewer therapists) and the referral mix (more from institutional settings, less from areas such as orthopedics). Also, unless PDGM is somehow altered, we expect some industry disruption because some providers could see significant rate cuts in 2020, which could present acquisition opportunities for larger players.
Part B Reform: International Pricing Index (IPI) And Payment Change: Big Headlines, Unlikely to Pass
In October 2018, the CMS released a request for comments about reforming Medicare Part B. There are three components of the proposal:
- Link the price the U.S. government pays for drugs under Medicare Part B to prices paid by a group of other countries;
- Change the reimbursement to doctors for drug delivery services under the Part B program, which is currently set at 104.3% of average selling price, to a flat fee; and
- Bring “private vendors” into the equation to purchase and distribute Part B drugs and potentially extract further discounts from manufacturers.
The public comment period ended on Dec. 31, 2018. CMS intends to issue a proposed rule in spring 2019 on the potential IPI model and that model would start in spring 2020 and be phased in over a five-year period. However, as a practical matter, we don’t expect reference pricing to be implemented in the face of particularly fierce opposition from the pharmaceutical industry and physician/patient advocacy groups. We see a reasonable probability of the other two elements being part of drug reform.
Pharma We believe the first two parts of the proposed changes could negatively affect some rated companies, including the biotech companies, if implemented. For example, Amgen Inc. (A/Stable/A-1), Biogen Inc. (A-/Stable), Bristol-Myers Squibb Company (A+/Watch Neg/A-1+), and Roche Holding AG (AA/Stable/A-1+) are rated companies with substantial exposure among the top 20 products. That said, given the relatively narrow scope (only applies to 50% of the country), the gradual implementation (over the course of five years), and reimbursement that is still reasonable (26% above the peer group), we expect companies with this exposure to manage this headwind. We therefore expect companies to be able to retain the current ratings, providing they remain committed to their current financial policy. For more details, see “Which Pharma Company Ratings Could Be At Risk If U.S. Drug Pricing Reforms Become Law?“, published Oct. 31, 2018.
Drug distributors In our view, this is likely a negative for the distributors, though we think the impact is not large enough to cause an impact on their ratings. Currently, we estimate that the distributors earn about 5% of their revenue from distributing Part B drugs. The drug distributors could play the role of the private vendors that would negotiate with the manufactures and take title to the drugs. However, it is unclear whether this would be very profitable for the distributors and fully replace what they currently earn for the distribution of specialty drugs. Also, other participants could play this role, such as specialty pharmacies and PBMs.
Part D Reform: Targeting Six Protected Classes; Impact Limited For Rated Players
In November 2018, CMS proposed allowing Medicare Part D to use previous authorizations and step-therapy and allowing plans to exclude “new formulation of an existing drug” and “drugs whose prices have increased beyond a certain threshold” on the their formulary, in six “protected classes”, to help negotiate lower drug prices and reduce out-of-pocket spending. In contrast, Part D currently requires that formularies include all drugs for the following six protected classes: antidepressants; antipsychotics; anticonvulsants; immunosuppressants for treatment of transplant rejection; antiretrovirals; and antineoplastics, except in limited circumstances. Part D spends about $30 billion a year on these drugs today.
The public comment period ended on Jan. 25, 2019. There has been industry resistance to this proposal with arguments being made that it may increase the spending on emergency room visits, hospitalizations, and incarcerations (among antipsychotic users) and weaken patient access and adherence (when more convenient dosing options are priced at a premium). In 2014, the Obama administration attempted to reform these “protected classes” but had to withdraw the whole proposal shortly afterwards because the lobbying effort was so strong. We also believe many of the drugs in this category have no direct replacement or alternative and therefore it could be difficult for PBMs to negotiate prices down.
We think Gilead Sciences Inc. (A/Stable/–), which has a leading market share (about 80%) in HIV (antiretrovirals), may be the most exposed among rated issuers, but there is substantial downside cushion in that rating.
We expect the impact of this initiative to be relatively modest for most pharma companies, as plan sponsors under Medicare part D (which relates to conventional drug benefits) are already allowed to use differing tiers in plan formularies as a tool to negotiate price and have been successful in promoting adoption of generics (at about 90% utilization) broadly in line with generic adoption in other drug classes.
Even though the six classes represent as much as $30 billion of total Medicare Part D spending (part D spending was about $100 billion in 2017), CMS estimates that this would only save the government $1.85 billion and enrollees about $700 million (over a decade), which is relatively modest portion of Medicare Part D drug spending.
ACA Repeal From Republicans (And Strengthening From Democrats): Likely At A Stalemate
In December 2018, a District Court judge in Texas ruled the entirety of the ACA unconstitutional. The suit (Texas v. United States) was brought by the Texas attorney general, along with 20 other Republican state attorneys general and governors, who successfully argued that absent the individual mandate penalty, which was stripped by the revised U.S. Corporate Tax Code in 2017, the balance of the law is unconstitutional.
In addition, Democrats proposed six bills in March 2019 seeking to strengthen the weakened ACA, with goals including improving ACA exchange benefits, outreach, and costs.
The Court of Appeals for the Fifth Circuit will hear oral arguments in July 2019. Whichever way it rules, the case is most likely to get heard in the Supreme Court in 2020. The Supreme Court already upheld the ACA on two separate occasions (2012 and 2015). While some justices have changed, the five that supported the ACA all remain. In addition, in early April, the Trump administration also announced that it would not try to replace the ACA until after the 2020 election.
With regard to the six Democratic bills to improve the ACA, we see virtually zero chance of any of them passing the Republican-controlled Senate.
We think ACA repeal is unlikely. However, if it were, the credit quality of many health care providers and insurers could be hurt. The ruling would affect over 20 million Americans: 11 million now insured through public exchanges and 12 million insured through the Medicaid expansion. For-profit hospital systems would also experience increased uninsured volume and therefore higher uncompensated care and margin pressure, though not as much as tax-exempt hospitals would because for-profit hospitals typically operate in markets that tend to have a more commercially focused payor mix. Longer term, this ruling, if upheld, also has the potential to change the direction of the current efforts to reform the U.S. health care delivery system fundamentally. For more details, see “Health Care Providers’ Credit Quality To Suffer If ACA Lawsuit Ruling Is Not Overturned“, published Dec. 17, 2018.
Medicare For All: Big Headlines, Limited Risk
Many Democratic presidential candidates are running on some form of “Medicare For All,” but different proposals have vastly different definitions of the term. Some prominent ideas include a true single-payor system with no private insurers, Medicaid buy-in for all, Medicare buy-in for age 50 and up, a Medicare-like plan for the Exchanges, and a Medicare-like plan for employees with insurance.
We expect the “Medicare for all” rhetoric to heat up heading into the 2020 election cycle. However, we see almost no chance that these proposals will be implemented over the near term as there is little agreement among sponsors as to what form universal coverage should take, and significant political opposition.
Under the most extreme case, in which the U.S. moved to a true government single-payor system, private insurers would cease to exist. Health care providers would most likely see some margin pressure because the resultant rate paid to providers would likely be somewhere between the lower-paying government plans and higher-paying commercial plans, but likely at a level below a truly blended rate. The pharmaceutical and the pharmaceutical supply chain could also be negatively affected if the government started negotiating drug prices.
Date: May 01, 2019
Source: S&P Global Ratings