Health bill will squeeze industry profits but holds promise for long-term gains

By Matthew Perrone, AP
Monday, March 22, 2010

Health overhaul promises pain, gain for businesses

WASHINGTON — When historians write the book on how President Barack Obama’s health care overhaul became law, they’ll need to leave space for some unlikely advocates: lobbyists for the drug, insurance and hospital industries.

Last summer, executives from those groups visited the White House and pledged to do their part to help pay for the health bill. By signing on to the effort early and agreeing to absorb some of the costs, they were able to help shape its final form.

Only time will tell how smart that trade-off was for the industries, but a quick look at the bill passed by the House late Sunday shows it was far from their worst-case scenario:

— A government-run health care plan that would compete against private insurers? Never made it out of the Senate.

— Price controls on Medicare’s prescription-drug program that would squeeze drug industry profits? Quietly dropped from consideration last fall.

— Cuts in payments to hospitals serving Medicare patients? Trimmed to modest levels and delayed until 2014.

To be sure, the shift in the nation’s health care landscape will challenge companies. But most experts believe the short-term profit squeeze ultimately will be outweighed by the business of millions of new patients entering the system.

Health care stocks have risen over the past year with the broader market, with insurers seeing the biggest gains. The Standard & Poor’s health care index has gained 30 percent since the market bottom last March and is just 12 percent from its 2007 peak.

Here is a breakdown of how various sectors fared in the overhaul effort.


No sector had more to gain or lose than the health insurance industry, which pulled in more than $275 billion last year.

America’s Health Insurance Plans, the group’s Washington lobby, led the effort to kill President Bill Clinton’s health care plan in the 1990s with its famous “Harry and Louise” TV ads showing a couple fretting over a new “billion-dollar bureaucracy.”

This time around, the industry’s early support for the overhaul was seen as proof that Democrats had the wind at their backs.

The insurance industry changed course last fall, running ads against the overhaul, after it decided the Democrats’ plan wouldn’t bring enough healthy new patients into the system to balance increased medical costs. But analysts say insurers’ rhetoric doesn’t match their actions.

“It doesn’t look like they’re in the fight of their lives,” said Les Funtleyder, an analyst with financial firm Miller Tabak. “If you remember the Clinton days, there was a ‘Harry and Louise’ ad on every couple of minutes. We’re not seeing that anymore.”

And stocks of insurance companies are way up over the past year — even beyond the gains in the broader market.

The bill headed for Obama’s desk offers insurers both opportunities and challenges:

— Insurers will gain customers because the bill requires most Americans to carry health insurance. Roughly 32 million more Americans will be covered under Obama’s plan, either through buying private policies or an expansion of Medicaid. The poorest will get subsidies, and Americans who don’t comply with the insurance requirement will be fined. But with annual penalties totaling just $695 per person, insurers argue that many healthy people will pay the fine rather than buy coverage. Insurers need healthy people in their plans to balance out patients who require more care.

— The bill bans insurers from denying coverage to people with pre-existing conditions such as diabetes or cancer, limits how much premiums can go up based on age and allows people to stay on their parents’ health plan up to age 26.

— Payment rates will be immediately frozen for insurers who offer Medicare Advantage, the privately run arm of Medicare, meaning they will bring in $200 billion less over 10 years.

— Starting in 2014, the bill imposes fees on insurers totaling $74 billion over 10 years. Most experts say companies will raise prices to accommodate increased taxes, fees and regulations once the new system is in place. For all the talk of lowering Americans’ health care costs, experts say the bill doesn’t regulate premium increases or reform a medical system that focuses more on expensive diagnostics and treatment rather than prevention.

“You’ll continue to see premium rates go up because there are so many aspects of the system that are still increasing prices,” said Dan Mendelson, president of consultant Avalere Health.


Thanks to drugmakers’ early support and willingness to pay an estimated $90 billion in new taxes and fees, most analysts think the industry walks away with a good deal.

Drug prescriptions are expected to rise as more people get preventive care and insurance helps them pay for medicine.

On top of that, seniors are expected to use more medicine because the bill closes a gap in Medicare coverage.

“Patients will have improved purchasing power, and drugmakers will certainly see additional sales volume,” said John Sullivan, analyst with Leerink Swann.

The health care bill also hands the drug industry a victory in a years-long debate over generic versions of biotech drugs.

Biotech drugs, made using living cells instead of chemicals, are expensive to make but can be extremely lucrative. Unlike their chemical counterparts, there is no system in place in the U.S. to introduce cheaper generic equivalents of biotech drugs.

Obama’s plan gives new biotech drugs 12 years of competition-free sales — a victory for the biotech industry. Consumer groups and the generic-drug industry had been pushing for exclusivity of seven years or less, saying it would bring down costs.


Of all U.S. health care businesses, most experts say, hospitals stand to benefit the most from the health bill.

The economic downturn has only added to longstanding problems for hospitals. High unemployment drove the newly uninsured to emergency rooms for expensive treatment and left more patients unable to pay their bills.

Increased insurance coverage will go a long way toward easing hospitals’ financial pain.

With the expansion of Medicaid and a mandate to buy coverage, hospitals will erase most of their bad debt within five years, Mendelson said.

Like the drug industry, hospital executives cut a deal with the White House early on, volunteering to take a $155 billion hit in reduced Medicare reimbursements.

“What they wanted to do was put a fence around that number and say, ‘Don’t cut any more than that,’” said Kip Piper, a private health care consultant.

With analysts now expecting the Medicare cuts to be substantially less than $155 billion, it appears the strategy succeeded.


If hospitals are the big winners of health reform, most analysts agree that makers of medical devices — everything from artificial hearts to hospital beds — appear to be the losers.

Companies like Medtronic Inc. and Boston Scientific Corp. will face $20 billion in new taxes over the next 10 years, with little certainty they can make it up in new sales.

Analysts say hospitals may simply use medical scanners and other existing devices more often, without actually buying much more equipment.

Mendelson and others say the device industry was less politically savvy than the drugmakers and others who cut early deals on the health overhaul.

“This was a brand new game for them, and it wasn’t something they felt they needed to engage in,” Mendelson said.

AP Business Writer Damian Troise in New York contributed to this report.

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