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The 2020 election has the potential to affect various sectors, but possibly none as much as Health Care. Former Vice President Joe Biden’s proposals on health care are in stark contrast to those of President Donald Trump’s, so the outcome of the 2020 election could have a far-reaching impact on the health-care system and nearly every American, as well as on most stocks in health-care sector.
Compounding the complexities, the fate of Affordable Care Act (ACA) may be determined when the Supreme Court of the U.S. (SCOTUS) decides Texas v United States. This case, which justices will hear in mid-November, argues that the ACA’s individual mandate—a provision that requires most Americans to have health insurance—is unconstitutional, and that the rest of the ACA cannot be separated from the individual mandate, so the entire law should be struck down, including its coverage protections for pre-existing conditions. ACA’s Medicaid expansion and federal subsidies also are at risk if all of the ACA is overturned. Justices likely will rule before the next SCOTUS session ends in 2021.
Assessing how each of the industries within the health-care sector will perform based on the varying combinations of potential outcomes is difficult. In fact, when looking back at the evolution of ACA and how the markets responded, it was inconsistent at times to what might have been expected—perhaps because it was, unexpectedly, a net positive for the health-care sector.
Surprisingly, ACA was great for the Health Care sector
Some people assume an expansion of the ACA would be bad for much of the Health Care sector, on the theory that when the government heavy-handedly regulates an industry, the end result can’t be good. In reality, there likely would be positives and negatives, just as there have been in the years since the ACA was enacted in 2010.
One of the key provisions of the legislation that worried private insurers when ACA launched was the pre-existing coverage provision, which said insurers could not deny coverage, charge more, or limit benefits for pre-existing condition—like congenital diseases, asthma, cancer or pregnancy.
The other side of the equation was the individual mandate, which requires everyone to have health insurance—thus increasing enrollment and revenues for the insurers to offset the increased coverage requirements. The expansion of Medicaid was also an important provision under ACA. While it was decided that states could not be compelled to expand Medicaid, most of them did. This increased enrollments, but also lowered reimbursements compared to the private sector.
Most Americans had insurance coverage in 2010—primarily through their employers—but more than 48 million people had no insurance, either private or public. Because the individual mandate was to be implemented over several years and didn’t have any real teeth, it was feared that only the sick would enroll, while healthy individuals would take the small tax penalty (which was eventually eliminated in 2018) and simply enroll when they needed it.
However, there actually was broad-based enrollment, reducing the rate of uninsured non-elderly people (under age 65) from 18% to an estimated 11%. With the benefit of hindsight, we can begin to measure the impact on health-care companies. To be clear, there are some shortcomings of the ACA. The “affordable” part of the act hasn’t exactly been achieved. While the pace has slowed, health-care costs have continued to rise—outpacing the rise in household income. While wages have risen 27% since 2010, health-care family premiums on average have risen 55%.1 A poll that the Kaiser Family Foundation conducted in 2018 found that 45% of those still uninsured said they remained uninsured because of the high cost.2
The rate of uninsured non-elderly people in the U.S. has declined
Source: Source: Schwab Center for Financial Research (SCFR), U.S. Department of Health and Human Services Center for Disease Control, as of May 2019. Includes people ages 0-64.
For businesses in the sector, the significant rise in enrollments combined with a continued increase in premiums has been quite positive. Revenues have risen more than 200% for the managed care industry (mainly health maintenance organizations, or HMOs), with the overall sector’s sales up more than 129% and earnings up nearly 109% during the past decade.
S&P 500 Health Care sector revenue, earnings have surged since the ACA was enacted
Source: SCFR, Bloomberg as of 10/12/2020. Past performance is no guarantee of future results.
Regarding industries within the Health Care sector:
- Managed care companies benefited greatly from offering Medicare Advantage, a supplemental policy of Medicare.
- Hospitals and other care services were hurt by lower Medicaid and Medicare reimbursement rates, but benefited from more preventative care, an increase in elective surgeries, and fewer uninsured emergency room visits—particularly in states that opted to expanded Medicaid.3
- Pharmaceuticals and biotech companies also benefited from the increased demand, while enjoying less reimbursement price pressure.
- Medical equipment makers even overcame a tax penalty that was deferred several times.
Health Care sector performance has fluctuated amid ACA challenges
Source: SCFR, Bloomberg as of 10/12/2020. Past performance is no guarantee of future results.
The 2020 election and health-care proposals
Democrats have many high-profile health-care proposals on the table, while the Republicans’ plan is a shorter list with few details—except for one: the total repeal of ACA. So let’s take a high-level look at the Democrats’ primary health-care proposals.
Positive and negative impacts from the ACA and current proposals
Source: SCFR, as of 10/12/2020.
1. The public option
Biden has proposed4 creating a government-run health insurance agency that would compete with other private health insurers—the so-called public option. While some think this would be a step toward a more-expansive Medicare-for-all initiative, it stops well short of eliminating private insurers. It provides a lower-cost alternative to the existing Health Insurance Marketplace, and automatic zero-premium insurance coverage for those who meet income thresholds, currently are uninsured, and live in states that have not adopted the ACA Medicaid plan. Additionally, others who are not satisfied with their current employer or Marketplace policies can enroll, likely with lower premiums. The plan would increase Marketplace subsidies by adjusting the eligibility brackets relative to the poverty rate.
The proposal also limits out-of-pocket expenditures on health care to 8.5% of income, and reduce co-pays under the different plans available. Additionally, the minimum age for Medicare would be reduced from 65 to 60.
- Hospitals, other medical services and equipment makers likely would benefit from another surge in enrollments, but government pricing power likely would reduce profit margins due to lower reimbursement rates.
- Managed care presumably would benefit from the lower Medicare age due to increased demand for Medicare Advantage plans, but that would also likely reduce private insurance enrollments and drive premiums lower.
2. Prescription drug prices
Under the Biden proposals, drug manufacturers would face Medicare negotiated pricing, and reductions in some corporate tax breaks. Drug price increases would be limited to the rate of inflation, and limits would be placed on new drugs launched that have no competition.
Additionally, consumers would be able to buy prescription drugs from other countries. This last point is also supported by the Republicans, but no legislation was introduced under the current administration. That said, there is strong bipartisan support for restraining drug prices, so even with a Biden win and a split Congress, there is likely to be action here. While demand for drugs may increase marginally, it’s hard to see how pharma and biotech don’t face headwinds. Lower-cost drugs would be favorable to health insurers.
- Pharma and biotech likely would see significant headwinds, though demand for drugs may increase marginally.
- Health-care insurers/managed care would benefit from lower prescription claims cost.
3. COVID relief
While the latest COVID-19 relief package has struggled to get bipartisan support, the Biden proposal for a massive spending could have a significant impact within the Health Care sector. Provisions including medical services funding, mass testing, contact tracing, personal protection equipment, and a continuation of the Trump administration’s “Warp Speed” vaccine funding initiative would benefit several areas within the sector, namely lab and testing equipment manufacturers, certain areas of pharma and biotech, and hospitals.
- Pharma & biotech, health care equipment & services, and hospitals would benefit from the stimulus and program funding.
4. Tax proposals
In terms of corporate taxes, Biden’s proposals include a partial reversal of the 2017 Tax Cuts and Jobs Act (TCJA), moving the rate from 21% to 28%. The TCJA had cut the statutory rate from 35%. The Health Care sector was the biggest beneficiary of those tax cuts, reducing its effective tax rate from 34.5% in 2017 to 15.4% in 2019, according to Ned Davis Research. As there were numerous provisions within the TCJA (not just the statutory rate change), it is difficult to know how a partial reversal of the TCJA would affect the Health Care sector. Suffice it to say, it likely would be a headwind for most companies.
- Health care sector overall would face headwinds.
The Supreme Court and the ACA
With Texas v. United States expected to be heard by the Supreme Court in mid-November, the calculus of the election outcome becomes more complex—particularly with the current Senate likely to confirm Trump’s conservative nominee, U.S. Federal Judge Amy Coney Barrett, to fill the vacancy left by the late Justice Ruth Bader Ginsberg. There are generally thought to be four scenarios for the outcome of the case:
- SCOTUS affirms the ACA in its current state, or rules the litigants had no standing in bringing the case to the Supreme Court; in either scenario the ACA continues as it is.
- SCOTUS invalidates the individual mandate. This would essentially keep the ACA intact, as the mandate is already not enforceable, since the tax penalty was eliminated as part of the TCJA.
- SCOTUS invalidates both the individual mandate and pre-existing conditions provisions—in which case, the expanded Medicaid provisions would stay in place and states could choose whether to extend the benefits.
- Total repeal of the ACA.
We will know the outcome of the election by the time SCOTUS rules on ACA, which is likely to happen before its session ends in mid-2021. And the markets may already be pricing in the most likely scenarios based on polling—though we all know the polls can be really wrong (e.g., 2016). That will leave the SCOTUS scenarios for the markets to begin to price after the election. Oral arguments on November 10 could provide clues as to where the court is leaning based on the line of questioning.
In Washington, there is no such thing as clear-cut, if X happens, then Y will happen calculus. And just as when ACA was implemented, there are offsetting positives and negatives. Back then, it took some time for the markets to figure out the net results. But here are some potential outcomes for the different scenarios.
Combined scenarios: What may happen
Source: SCFR, as of 10/12/2020.
Scenario A: Supreme Court #1 & #2 with a split government: If the Supreme Court affirms the ACA, determines that Texas v. United States is invalid, or it invalidates just the individual mandate, then ACA essentially stays the same under a split government regardless of which party occupies the White House (with caveats for potential presidential executive orders).
- All health-care industries would continue to receive the ACA support described above.
Scenario B: Supreme Court #3 with split government: An invalidation of the individual mandate and pre-existing conditions provisions would leave Medicaid premium subsidies in place for each state to decide on coverage of pre-existing conditions.
Ironically, under this scenario there is a good chance for a bipartisan agreement to replace pre-existing conditions coverage in some form. According to a Kaiser Family Foundation poll conducted in July 2019, 72% of respondents said that it is “very important” that the ACA’s protection for pre-existing conditions coverage remains in place.5
The White House has sent contradictory messages, with President Trump periodically promising to protect pre-existing conditions coverage, while also calling for a total repeal of the ACA. Actually, his statements might not be inconsistent after all: While Trump’s plan details are difficult to interpret (at least for me), based on the September 24, 2020 presidential executive order6 it appears that protections would be similar to those prior to ACA, which provided some options for portability of coverage with limited protections against differentiated pricing based on a person’s health. Some question whether this meets the definition of pre-existing coverage, since this was essentially what ACA was designed to replace.
Without knowing what pre-existing coverage would come to fruition, it’s difficult to know how this would affect health-care industries—if it affected them at all. If pre-existing coverage were not replaced, then the viability of ACA would be questionable, and the impact on the industries could be similar as under the next scenario.
Scenario C: Supreme Court #4 with split government: A repeal of the ACA with a split government likely would leave the health-care industry in disarray. It would be difficult to say that it would simply reverse the net benefits for companies that I described above, or if it did, over what time frame.
- Hospitals presumably would see lower Medicaid reimbursement, and more uninsured visits in particular.
- Managed-care enrollments in Medicare Advantage likely would decline (though would be partially offset by reduced required coverage).
- Medical equipment and health services in general would be hurt by lower preventative and elective care.
Suffice it to say, there likely would be some sort of transition and a bitter battle to replace ACA with some form of compromise system that voters would accept. This would result in heightened uncertainty for health care companies.
Scenario D: Any Supreme Court scenario with a sweep by either party: Under a Democratic sweep, many—but not all—of the public-option provisions could be implemented—depending on the size of the Senate majority. There likely would be some Democratic senators who would resist some of the provisions, particularly if industry lobbyists have their way. The impact on the industries is provided in the public option section above.
Under a Republican sweep, the outcome likely would be similar to Scenario C (Supreme Court #4 with split government), but the replacement would look something like what was in place prior to ACA. Again, the transition would be messy, and heightened uncertainty likely would result in high volatility in the sector.
Bottom line: We’re maintaining a marketperform rating until the dust clears
We’re taking a “wait and see” approach until we know the outcome of the election. The president and Congress will not be sworn in until January, and there is usually a lag time to garner support for any new proposals. Without one political party in control, the path seems difficult to climb.
The public option includes positives and negatives, and market volatility could rise amid investor uncertainty. However, if the history of the ACA is any guide, there could be surprising positives for the sector.
Total repeal of ACA would be volatile during a transition, and likely would have a negative impact as ACA provisions are unwound. Higher corporate taxes—which are likely if Democrats sweep the White House and both houses of Congress—would be a negative for the entire health-care sector.
Meanwhile, pharmaceutical and biotechnology companies face headwinds, as there is bipartisan support for price controls and ex-U.S. purchase options. However, the markets may already have priced in this outcome.
1 Kaiser Family Foundation, 2020 Employer Health Benefits Survey, October 8, 2020.
2 Tolbert, J., et al, “Key Facts about the Uninsured Population,” Kaiser Family Foundation, December 13, 2019.
3 Singer, A., et al, “US Emergency Department Visits and Hospital Discharges Among Uninsured Patients Before and After Implementation of the Affordable Care Act,” JAMA Network Open, April 19, 2019.
5 Kirzinger, A., et al, “KFF Health Tracking Poll – July 2019: The Future of the ACA and Possible Changes to the Current System, Preview of Priorities Heading Into 2nd Democratic Debate,” Kaiser Family Foundation, July 30, 2019.
Source: Schwab Center for Financial Research, Bloomberg (for YTD total returns) and S&P Dow Jones Indices (for S&P 500 sector weightings). Sector performance data is based on total return for each S&P 500 sector subindex as of 10/13/2020 (see “Important Disclosures” for index definitions). Sector weighting data is as of 09/30/2020. All data is rounded to the nearest tenth of a percentage point. Past performance is no guarantee of future results.
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