There are two aspects of the current US government’s spending for healthcare, also including the various states and local municipalities, which could come under scrutiny. First, current Federal legislation prohibits Medicare from negotiating pricing discounts based on volume. (Which has led some wits to wonder why when corporations use their purchasing volume to lower prices it’s capitalism, but, when the governments do it, it’s Communism.) This goes beyond the usual debate over generics and non-generics. Even generics would be considerably cheaper if Medicare were to seek volume discounts. Next, the nature of prescription drugs could be open to government scrutiny. Drug companies have been coming under criticism in the popular press for their tendency for the last several years to treat the symptoms of chronic illnesses rather than actually curing anything. How many people do we all know who are taking statins for chlolesteroel and have been told by their physicians that they will probably stay on these drugs for the rest of their lives? In addition, some public healthcare systems like the United Kingdom are only willing to reimburse for drugs based on their effectiveness. While these approaches might not significantly reduce the cash outflow to the drug companies assuming the savings would be used to either hold costs down or to purchase additional product, they could be faced with pressure on their profit margins.
Faced with aggressive purchasing authorities at Medicare, the drug companies will have to re-look at their costs and investments as they struggle to maintain their earnings and meet Wall Street’s expectations. Drug research and development could be the first target of opportunity. Significant sums are spent here every year by the world’s pharmaceutical companies and not all research leads to a successful drug let alone a blockbuster. Add to this the risk that the treatment might not be approved by government watchdogs and the drug businesses might decide not to take certain risks. So, short term, everybody’s happy, right?
Not so fast. Medicare and drug company senior management might be happy, but, investors shouldn’t be. The industry’s future product pipeline is already under pressure. Reductions in spend, shutting down of facilities, and laying off of research personnel would not do anything to help here. We would see consolidation around the few companies that are true thought leaders in research and development and have the funds to purchase assets that might be available for something less than the premiums that they once carried. As the US Presidential election draws closer in November, investors should be thinking about the implications for the drug companies. A strong showing for the Democrats could lead to changes in public policy in purchasing drugs which will continue the trends in the industry that this blog has been writing about.