Drug Companies and Hospitals Get a Boost from Healthcare Reform

By Kerri Shannon, Associate Editor, Money Morning • March 24, 2010

After months of trying to predict how the healthcare reform proposals would affect the respective futures of their industries, drug companies and hospitals are optimistic about the prospective long-term profits the final version of the health care reform bill could bring them.

President Barack Obama yesterday (Tuesday) signed the $940 billion health care reform bill with support from pharmaceutical companies and the hospital industry. Both will benefit from a sharp increase in the number of insured customers, as the bill expands healthcare to up to 32 million more people.

While the bill will cost tens of billions of dollars over the next 10 years, the planned reforms create something drug companies and hospitals can't live without: paying consumers.

"They're going to get a new base of customers they don't have today, and a third party for the most party will be picking up the tab for brand drugs, and that will lead to a nice new source of revenue," Edward Kaplan, from the consulting firm The Segal Co., told NPR.

And the favorable implications are more than just a customer increase:

• Hospitals: Over the next 10 years, hospitals will contribute $155 billion to paying for the legislation by taking smaller payments from government-funded programs. But they will gain a much larger customer base seeking medical care - one that is insured and will not cost hospitals billions in bad debt - that offsets those fees. Hospitals will suffer less financially by no longer treating patients who can't pay for the care they receive.

• Brand name drug companies: Healthcare reform fees and lower drug prices for Medicare patients will cost drug companies $85 billion in the next 10 years. However, those companies will gain tens of millions of customers. They also stand to profit from already-insured patients who have more affordable healthcare and are less likely to skip prescription refills or medicine doses to cut costs. A special perk also exists for companies that manufacture pricey biologic drugs - drugs made from living cells. They now have 12 years of market exclusivity, preventing generic names from tapping into their market share.

• Generic drug makers: The healthcare reform bill's final version dropped a provision banning brand-name makers from compensating generic producers for delaying the introduction of competing drugs. Although some - including the Federal Trade Commission - see this allowance as anti-competitive, it allows generics to make money from Big Pharma fearing profit loss.

The legislation is much more favorable to these industries than initially anticipated. Drug companies were facing price caps and cost-containment measures in earlier proposals, but these were cut out, allowing the industry to "avoid any of the issues that were particularly of concern - price control or more regulation by the federal government," Barbara Ryan, a Deutsche Bank (NYSE: DB) analyst, told The New York Times.

With a clearer picture of the future, these companies can start to strategize for long-term profitability.

In the short-term, health care companies saw initial market gains. Before Obama's inked signature could dry, making the bill a law, stocks rallied as the veil of uncertainty over healthcare stocks lifted.

Hospital stocks, like Tenet Healthcare Corp. (NYSE: THC) and Health Management Associates (NYSE: HMA), saw huge gains Monday in anticipation of the law passing, rising 9% and 11%, respectively. Tenet edged up another 0.48% yesterday to close at $6.30 a share, while Health Management remained flat at $9.05 a share.

Pharma stocks rose more modestly, with world leader Pfizer Inc. (NYSE: PFE) up 3.37% this week and Bristol Meyers Squibb Co. (NYSE: BMY) up an even 3%.

The Standard & Poor's 500 Pharmaceuticals Index, which tracks 11 drug makers, rose 0.8% Monday and 0.93% Tuesday.

News and Related Story Links:

• NPR:
  Health Care Firms See Mixed Blessing in Overhaul
  
• The New York Times:
  In Health Care Overhaul, Boons for Hospitals and Drug Makers
  
• Money Morning:
  Obama's Healthcare Plan: A Prescription for Disaster
  
• Money Morning:
  Shaky CBO Deficit Projections Help Healthcare Reform Bill Pass House
• Money Morning:
  Obama's Targets Insurers with $950 Billion Health Care Reform Plan