Issue 13

Health care remains a top political issue in the upcoming U.S. election and we expect the outcome of the contest to determine the direction and pace of health care reform in the U.S. While there is largely bipartisan support to reform the country's health care system (including by increasing access, improving quality, reducing unnecessary services, and lowering costs) and some surface similarities between the proposals put forth by the Democratic and Republican parties, there are significant philosophical differences between them that will have varying effects on our diverse universe of rated U.S. health care players. S&P Global Ratings believes the overall trajectory of U.S. health care reform will continue regardless of which party wins the election. We believe the relatively gradual pace of change will provide health care companies with time to adjust to any new business practices or legislative changes, limiting their effect on the industry's financial performance and our ratings. However, the situation remains increasingly fluid amid the elevated level of partisan rancor.

There are also major wildcards that could accelerate the pace of reform and increase the pressure on the health care industry, namely the fate of the Affordable Care Act (ACA), the current U.S. recession, and the high unemployment rate. The latest threat to the ACA stems from the upcoming U.S. Supreme Court hearing on the constitutionality of the law scheduled for Nov. 10, 2020 (soon after the election). If the ACA is repealed, the level of industry disruption would likely increase rapidly, particularly if there are no alternatives offered to the over 20 million Americans currently obtaining their health care coverage through the act. Furthermore, policy makers will have to grapple with the effect of the law's repeal on the health of Americans in the context of a U.S. recession, the high pandemic-induced unemployment rate, and the decimated condition of state budgets.

Our current assumptions include:

• We believe that the likelihood of major health care policy decisions remains low over the next year and moderate over the next two years, regardless of the outcome of the presidential election and the makeup of the House and Senate. We anticipate, given the controversy and bipartisan views around key health care issues, that legislative change will be gradual and provide the industry with time to adjust. However, we believe certain election scenarios entail higher risk than others.
• Our current projections for health care companies do not incorporate any significant effects from potential legislative changes in 2021 or 2022. It is simply too difficult to predict policy changes and their potential effects amid this volatile environment. However, the industry has already been adapting to the changing landscape, including the challenges from industry disruptors, chronic payor pricing pressure, the migration to alternative reimbursement methodologies, and the effects of the COVID-19 pandemic. Once we know the post-election makeup of the House and Senate and the new administration's first-100-days agenda, we will update our projections.
• We believe if President Trump is reelected and the Republicans maintain control of the Senate, it would likely lead to a largely status quo scenario. Other the other hand, we expect a blue sweep, in which former Vice President Biden wins the presidency and the Democrats take the Senate and maintain their majority in the House, entails the highest risk given the greater extent of their proposed changes.
• We believe the pharmaceutical and biotech subsectors remain the most vulnerable to significant legislative changes given that both parties have made pharmaceutical pricing a priority and the issue appears to have the most bipartisan support.
• President Trump has been focused on repealing the ACA. While we think it is unlikely that the entirety of the ACA will be repealed, the U.S. Supreme Court has set a hearing on its constitutionality for Nov. 10, 2020. While the Republicans have several proposals that would preserve certain elements of the ACA, most notably the protections for patients with pre-existing conditions, the potential disruption of a repeal without the existence of a viable replacement would put over 20 million Americans at risk of losing their coverage during a period of high unemployment.
• On its surface, a second term for Trump would seem to be low risk for insurers. However, this depends on whether he has a fall back plan prepared in case the Supreme Court invalidates the ACA. If he doesn't have an alternative prepared and the insurance coverage of millions of Americans is disrupted, it would actually entail significant risk for the providers and insurers that handle a large number of Medicaid expansion and exchange members. On the other hand, a Biden presidency with a Democratic Congress would likely attempt to fix the ACA or come up with a fallback plan to neutralize the court's decision. However, if their ambitions include a government-run public option and they are able to gather the votes to pass it (unlikely in our view), we anticipate all providers and insurers would face significantly elevated risks.

The Pace Of Health Care Reform Will Remain Gradual Regardless Of The Election's Outcome

Legislative health care reform is inevitable. It is not a question of if but how and at what pace. While the growth in U.S. health care spending has slowed, it is still rising at a faster rate than GDP (currently nearly 18% of total U.S. GDP). Nonetheless, we believe health care reform will continue to be gradual regardless of which party controls the White House, Senate, or House of Representatives.

We base our view on three factors:

The economy has supplanted health care as the top concern.  While health care remains a major issue in Washington, the priority has likely shifted to the struggling U.S. economy and the stubbornly high unemployment rate. We believe the victor will be primarily focused on the economy immediately following their election.

Partisanship remains.  Despite bipartisan support for many health care reform measures (e.g. the Grassley/Wyden Prescription Drug Pricing Reduction Act of 2020), there are major philosophical differences between both sides, including whether to repeal/replace the ACA and how to handle direct drug price negotiations.

The complexity of many of the proposals, in terms of their implementation, will also be a major hurdle.  We expect both parties to take a gradual approach to health care reform. Despite the initial momentum in President Trump's administration behind health care reform, such as the proposed Blueprint for Pharma, the White House's efforts have stalled. Vice President Biden prefers a continued gradual expansion of the ACA, rather than the implementation of a more game changing Medicare for All approach, and has also supported the creation of a public option and announced his intention to lower the minimum age for Medicare eligibility to 60 from 65. These proposals seek to expand access gradually by enabling industry players to offset potential pricing pressures with greater volumes.

However, some scenarios hold greater risk for certain subsectors of the industry. In the table below, we summarize our assessment of the likelihood of major legislation in the next two years that would be significant enough to lead to rating actions.

Table 1

Partially for the simplicity of our presentation, we assumed that the Democrats maintain their majority in the House, which we believe is likely given that they currently have a 232 to 198 advantage. The House has 435 seats and a party must control 218 for a majority. Therefore, the Republicans must gain 20 seats to secure a majority. However, per the latest polls, there are only roughly 18-28 races that are considered toss-ups, the majority of which are seats held by Republican incumbents. Furthermore, the Republicans have more seats where their incumbent is not running for reelection (31), due to their retirement or decision to run for a different office, whereas the Democrats have only 11 such seats. In the Senate, the contest for a majority is much closer because there are currently 53 Republicans and 47 Democrats. However, the Republicans currently hold 23 of the 35 seats up for election in 2020 compared with the Democrats, which have 12.

A Biden/Sanders Unity Task Force Presages A Moderate, Gradual Approach

We believe a Biden win would entail higher overall risk for the health care industry. However, we believe the risk of major disruptive legislation would be limited. Biden has generally favored expanding the ACA rather than shifting to a more disruptive Medicare for All model. Following his nomination, the former Vice President, along with Senator Bernie Sanders, released a number of proposals under their Unity Task Force. The task force recommended the creation of a public option that would be offered through the ACA marketplace rather than a Medicare for All model, which would have transformed the industry into more of a single-payor system. The task force is also seeking to expand the ACA and other government programs, such as Medicare, Medicaid, and the Veterans Affairs system. In addition, former Vice President Biden has expressed support for lowering the minimum age for Medicare enrollment to 60 from 65.

We see these proposals as more gradual in nature because they focus on the expansion of coverage, which is less negative for the health care industry from an earnings and ratings standpoint because it provides companies with more time to adjust to the new regulation (either through cost cutting or by expanding/diversifying their services) and the opportunity to increase their coverage (offsetting the margin pressure by increasing their top line).

The Fate Of The ACA Amid The Current Recession Is A Major Wildcard

While we believe the pace of health care reform will likely remain gradual, this assumption will be tested if the ACA is threatened or overturned. Over 20 million Americans receive health care coverage through the ACA. If the program is overturned without a clear plan to replace its, there will be significant pressure for legislative action and a material increase in the risk facing the health care industry regardless of which party wins. Indeed, there is likely already increased legislative pressure to reform the health care system given the stubbornly high level of unemployment amid the current recession because roughly 50% of Americans get their health insurance through their employer. Estimates of the number of Americans that have lost their employer-based health insurance this year vary, though they are all significant. The Economic Policy Institute estimates that a net 12 million people (workers and their dependents) lost insurance coverage while the Urban Institute projects 10.1 million people by year end 2020. This potential record increase in the number of uninsured, regardless of whether the ACA is overturned, is something that Washington cannot ignore.

Hospitals And Health Care Services--Surprise Billing And Transparency Are Additional Wildcards

Table 2

Health care remains a major election issue for hospitals and health service companies. The recent confirmation of Amy Coney Barrett to the Supreme Court coupled with the upcoming Supreme Court deliberations on the constitutionality of the ACA scheduled for November 10 have led to elevated uncertainty around the future of the law. President Trump attacked the legitimacy of the ACA even before he won the 2016 election and made clear his desire to repeal and replace the law when he was the President-elect. The upcoming Supreme Court case, California v. Texas, could lead to the demise of the ACA if the court's ruling favors the Justice Department and the Republican-led states. However, we believe the repeal of the ACA would have a relatively modest effect on our ratings on hospitals and health care service companies.

In 2014, when the ACA was being phased in, many public for-profit hospital operators estimated that it would support a positive mid-single-digit percent increase in their EBITDA. At that time, and during the period before the Trump administration began actively working to undermine the ACA, the legislation reduced the population of uninsured American by more than 20 million people. However, the reported improvements in the for-profit hospital operators' EBITDA were insufficient to offset the increase in their overall business risk and did not cause us to take any positive rating actiond. We believe a repeal of the ACA would have a similar, but opposite, effect on their EBITDA and our ratings.

We base our view that a repeal would have a modest impact on the premise that the number of people that gained insurance because of the ACA is relatively small compared with the size of the total insured population. Furthermore, we expect that hospital companies would proactively take steps to mitigate the downside risks, including by instituting more-aggressive expense measures (potentially cutting services and programs they provide at a local level that may become less profitable). We would also expect to see more downward pressure on patient volume than we've recently observed due to the pandemic as well as possibly some downward pressure on their margins. Notwithstanding the effects of the COVID-19 pandemic, the current recession, and the elevated level of U.S. unemployment, we think most of the entities we rate have a sufficient cushion at the current ratings to absorb the effects of a repeal.

Other wildcards include legislation or regulation related to surprise billing and cost transparency. The intentions of both initiatives are to lower costs and protect consumers against large, unexpected bills. However, they are both complicated issues without easy solutions. While some politicians have proposed solutions for the problems of surprise billing and transparency, to date these efforts have not been successful. Therefore, we expect the pressure to implement material reforms will become more intense. We believe there is bipartisan support for surprise billing legislation and anticipate that some related legislation may pass in the next year. On the other hand, we view cost transparency as a more difficult problem. All of the current proposals appear weak and ineffective, thus it will likely take longer for any significant legislation to appear.

Both Parties' Plans For The Pharmaceutical Industry Are Similar, Though There Are Significant Philosophical Differences

Both parties have similar proposals for reforming prescription drug pricing (see table 3 below). However, the Democrat's proposals are further reaching and will have a greater effect on drug pricing. For example, one major difference is that the Democrats want Medicare to negotiate directly with the pharmaceutical companies, whereas pricing is currently negotiated via intermediaries in a fragmented manner.

Pharmaceutical pricing remains a top voter issue due to patient concerns around high out-of-pocket costs. Given the currently elevated level of unemployment and the millions of Americans that have lost health care coverage due to the pandemic, we believe the pressure on pharmaceutical pricing will remain high regardless of who wins in November. We believe a Trump reelection or a Biden victory wherein the Republicans maintain control of the Senate would entail a medium/low chance of significant legislative changes in the near term and lead to minimal negative ratings actions on our rated pharma universe. Alternatively, we expect a blue sweep would entail medium/high risk given the greater extent of the Democratic proposals on drug pricing (e.g. Medicare direct price negotiation), though Democrats will likely need to negotiate with Republicans to overcome a potential filibuster on any major legislation.

Table 3

Drug pricing reform has bipartisan support, more so than many other health care issues, and several Republican and Democratic proposals feature similar provision. Both parties have expressed conceptual support for the use of an international price index, allowing drug re-importation, and limiting drug price increases to inflation. However, the extent of the implementation laid out in each proposal differs. In our view, the major difference is Democratic support for direct drug price negotiation by Medicare, which would enable the U.S. government to leverage its substantial buying power. In contrast, the Republicans have traditionally been against direct drug pricing negotiation. Continued concerns in both parties around the negative effects of these proposals on pharmaceutical innovation are also a hurdle. For example, the Grassley/Wyden Prescription Drug Pricing Reduction Act of 2020, which has already been modified several times, passed the House but continues to await a vote in the Senate due to ongoing negotiations between Democrats and Republicans on certain aspects of the bill.

The Democrats, as outlined in their Unity Task Force proposal, are also looking to be more aggressive in cracking down on the industry's perceived abuse of the patent system (to extend drug exclusivity) and price collusion. There has already been some litigation related to these issues (such as the multiple state Attorneys General's litigation on generic drug price fixing), though a Democratic victory may increase the risk of such litigation and lead to shorter product lifecycles.

Health Insurance--The Devil Is In The Details.

Table 4

Biden's aspirational goal to reach near-universal insurance coverage (he cites lowering the uninsured rate to 3%) would be credit positive for the health insurance industry. However, the key is how he plans to gets there and, more importantly, what role the industry will play in reaching this goal.

Of Biden's various proposals, his call for a public option would, depending on how it's structured, create the most risk for the industry. The lowest-risk scenario would a privately-run public option that fills in existing coverage holes (such as those in states that did not expand Medicaid) without destabilizing the employer group market. The highest risk scenario would be a government-run public option that pays Medicare provider rates and competes against the industry in the individual and employer group markets.

We believe Biden's other coverage proposals (enhancing the ACA's exchange subsidies and new incentives for Medicaid expansion) would likely be generally credit positive for insurers that focus on those customer segments. As for his plan to lower the Medicare eligibility age to 60 from 65, the key determinant of its effect would be whether private Medicare Advantage plans play a role and if it's done as a Medicare "buy-in" plan (an incremental coverage approach) or a true expansion of the Medicare program (affecting the employer group market).

The effects of Biden's various coverage programs on provider rates will be a critical risk factor for the insurance industry. On one hand, if private insurers are involved and can pay Medicare-like provider rates, it would level the playing field between the various industry players. However, if providers simply respond by requesting/receiving significantly higher commercial payment rates, this could render the industry's commercial products too expensive and uncompetitive over time.