The November 2020 election of US President Biden and a Democrat-led Congress rekindled many health care investors’ fears of sweeping drug-price reform that could be an albatross around the neck of the pharmaceutical industry. So far in 2021, there has been some legislative movement by Congressional Democrats to address drug pricing, but little more than lip service in terms of support from the Biden administration. For now anyway, it seems that other pressing matters — battling the COVID-19 pandemic, supporting the US economy, and improving the nation’s infrastructure — have kept the administration from pushing for drug-cost legislation.
Of course, that could change going forward. Or perhaps not. In the meantime, the market does not like the ongoing uncertainty around the fate of US drug prices, which has recently pressured many pharmaceutical stocks and may continue to do so (not unlike the struggles of HMO and health care services stocks when Obamacare was in progress). Here’s my latest take on the risk facing the industry in the form of three possible scenarios to consider, including the likelihood I’m attaching to each as of this writing.
1. Positive scenario (30% odds)
This would essentially be a relatively modest adjustment to current policy, with the pharmaceutical industry agreeing to make concessions (i.e., paying) to remove the overhang of uncertainty around drug prices. Similar to a Senate Finance Committee bill put forth by Senators Grassley and Wyden in 2020, it would likely involve some restructuring of Medicare Part D and “capping” future drug-price increases under both Part D and Part B — changes that I believe the industry would be inclined to accept. The nonpartisan Congressional Budget Office (CBO) has estimated the cost of this scenario to be less than US$100 billion over 10 years.
2. Negative scenario (10% odds)
Under this unlikely outcome, championed by Senator Sanders and other Congressional liberals, the House bill dubbed H.R.3 (also known as the Lower Drug Costs Now Act) or some version thereof would be passed into law. Among other provisions, the existing bill includes mechanisms to reduce patients’ out-of-pocket costs through lower drug prices and to allow the US Department of Health to directly negotiate how much the Medicare program pays for drugs every year. The bill would also apply the “negotiated” drug prices to nongovernmental insurance programs. The CBO has put a price tag of around US$450 billion over 10 years on this scenario, which would be a devastating blow to pharmaceutical innovation. Accordingly, the industry lobby is fiercely opposing it.
3. “Nothing will happen” scenario (50%+ odds)
This is the most likely scenario, in my view, at least for 2021. Beyond the two aforementioned scenarios, I just do not see much happening on the drug-pricing front this year given today’s sharply divided political landscape, Democrats’ razor-thin majorities in both chambers of Congress, and the Biden administration’s focus on other priorities (as noted above). At this juncture, it does not look like drug-cost reform will make its way into Biden’s pending infrastructure bill or into his proposed American Families Plan legislation, which prioritizes education, childcare, and paid family leave over health care.
If in fact “nothing happens,” as I expect, I wonder how long the cloud overhanging the pharmaceutical industry (and its stocks) can persist. Could this be a buying opportunity for health care investors? Time will tell.