Late last month, as most people know by now, the Supreme Court reached a final decision concerning the Patient Protection and Affordable Care Act, also known as Obamacare.
And contrary to what CNN first announced – to much humiliation and censure – the law wasn’t struck down. In fact, the whole thing passed, kit and caboodle in a 5-4 ruling.
So that’s that, and Obamacare will stand, at least for now. Conservative organizations such as the Heritage Foundation have already begun preparing themselves to keep the battle alive going forward, especially in the case of GOP presidential nominee Mitt Romney taking the elections this November. Romney has, after all, campaigned from the start on the premise that he will strike down the rather unpopular law if voted into office.
Many anti-Obamacare (they would doubtlessly call themselves pro-free markets or pro-freedom) groups and individuals are worried that Romney, who has been known to flip-flop or play down the middle more than once, is merely spouting the type of political promises meant only for the campaign trail… and nowhere else. But even if they’re wrong and their preferred candidate actually does try to follow through on his word, that doesn’t by any means necessitate a victory for their camp.
The President of the United States doesn’t have the constitutional power to simply strike down a law he or she doesn’t like, regardless of whether it’s considered controversial, unpopular or even downright dangerous. Congress, of course, needs to approve the measure as well. And getting a bunch of politicians to agree on anything, especially something as complex as the 1,000-plus-page Obamacare, won’t be easy.
That’s not to say that it will be impossible, only that it won’t be a walk in the park by any means.
So for now, let’s just say it’s officially passed and upheld. And with that consensus, we need to figure out what the ramifications of that law will be, particularly from an economic standpoint.
Well before the Supreme Court passed its ruling, Investment U’s Jeannette Di Louie published a piece detailing some of the business changes to expect in the years following Obamacare’s passage. As she points out, we won’t necessarily feel its full affects for some time to come. That’s partially because laws usually take a while to fully play out, but also because many portions of the Patient Protection and Affordable Care Act are actually set up to take effect in stages. And much of it isn’t really implemented until after the 2012 elections.
In other words, don’t expect life to immediately produce rainbows, tie-dye and free LSD – as some naïve liberals may believe – or the apocalypse, as their conservative counterparts might think. Whatever happens is going to happen gradually, with the general populace not fully recognizing the positive or negative ramifications for years to come. It might even take decades.
However, even so, it’s usually best to be as prepared for the future as reasonably possible. Which is why it’s important to consider what Di Louie and company have to say on the matter…
A Forward Look at the Pharmaceutical Industry (Back before the Supreme Court Decision)
by Jeannette Di Louie, Investment U Research
Monday, April 2, 2012
Healthcare reform could be a minefield for Big Pharma in the long run.
The Patient Protection and Affordable Care Act – less fondly known as “Obamacare” – was the big story to close out the month of March, as the Supreme Court officially took the case.
In an effort to figure out which way the vote was going to swing, the media analyzed every word, pause and twitch the justices made. Though all of that heavy-duty analysis doesn’t actually prove anything; while the Court has likely already decided the healthcare mandate’s fate one way or the other, “We the People” probably won’t find out until June.
Considering the political left’s repeated complaints about Solicitor General Donald Verrilli Jr. and Deputy Attorney General Edwin S. Kneedler’s admittedly painful performance in explaining and defending the law’s constitutionality, many legal beagles and casual observers alike believe “Obamacare” has less than a glowing chance of standing.
But if they’re wrong and the Supreme Court rules in its favor, there’s one set of stocks that’s going to suffer miserably in the long run.
That sector would be pharmaceuticals, both big and small. And there’s a little-known reason why that’s so…
How the Rest of the World Gets its Healthcare so Cheaply
It’s a commonly known fact that U.S. citizens pay a hefty price for their prescription medication compared to just about any other country.
In December 2009, D. Brad Wright, then a doctoral candidate at the University of North Carolina, looked into the price differentiations of Plavix, Nexium and Lipitor, all important drugs designed to treat common but serious health complications. He concluded that Europeans and Canadians often pay less than half of what their U.S. counterparts are forced to shell out.
That’s definitely a sad story (for the United States, at least), but there’s a twist to it that few people fully understand…
The real reason Americans pay so much more than New Zealand, Canada, Mexico, England, Germany, France, et al. is because – for better or worse – those countries all practice some form of socialized medicine. Because the governments pay the bulk of their citizens’ healthcare costs, they set very strict limits on just how much they’ll pay for medication.
And those limits lead to significant losses for the pharmaceutical companies that sell them. That makes sense, considering how much time and money it takes to bring drugs from theory to viability.
There are costly materials to work with, numerous tests to run, top-of-the-line facilities to maintain, the best and the brightest to hire and retain, and all of the other expenses naturally associated with running a business to pay for. In addition, clinical research can take an easy decade to complete… or they fail somewhere along the way, costing pharmaceutical companies millions and even billions in the process.
In short, there’s a reason why drugs are so expensive to buy.
It’s because they’re so expensive to make.
The Last Healthcare System Standing
The United States is one of the few – if not the only – major countries out there that allows pharmaceutical companies to set their own prices. So America is one of the few countries they actually make a profit off of… a profit they need in order to survive.
Writing for MedcineNet.com, Dr. Omudhome Ogbru explains it this way:
“In a nutshell, the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit. The profit ensures that the company provides a return to investors. Profit is the incentive for the risk that the company takes. Without the promise of a reasonable profit, there is very little incentive for any company to develop new drugs.”
All in all, it’s fairly safe to say that, without the United States paying more than its fair share of costs, the rest of the world wouldn’t have it nearly so easy. But even that cushion can’t last very long if the Patient Protection and Affordable Act stands.
As it stands now, the law requires everybody to have health insurance by 2014, either from a private insurer or the government. And if the U.S. government is going to remain financially feasible for long under that added burden, it’s going to have to start implementing the same price limits that the rest of the world is already working with.
In that case, companies like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), Eli Lilly (NYSE: LLY), Abbott Laboratories (NYSE: ABT), Merck & Company, Inc. (NYSE: MRK), AstraZeneca (NYSE: AZN) and Novartis (NYSE: NVS) are all going to lose out big time before too long.
Jeannette Di Louie
Further Fines, Taxes, Government Fees and Results of Obamacare
Since that article debuted on Investment U and after the Supreme Court ruling, the bill and its ramifications have been given even more scrutiny by businesses and organizations, which means that there is a lot more information easily available to the average citizen. One particular piece of information to make the rounds is that the pharmaceutical industry will actually start suffering a bit sooner than expected through an increase in annual government fees (a.k.a. taxes).
According to the Kaiser Family Foundation, drug companies will have to pay $2.8 billion in government fees (a.k.a. taxes) this year and next, $3 billion each year from 2014 to 1016, $4 billion in 2017, $4.1 billion in 2018, and $2.8 billion in 2019 and beyond.
Insurers will face even more severe fines, starting at $8 billion in 2014 and rising all the way to $14.3 billion in 2018.
Some others on the hook include:
Then there are retailers, many of who have known since 2010 that they didn’t like the bill, despite repeated attempts at lobbying and negotiations. Since they weren’t shy about offering their opinion to The Wall Street Journal and the likes back then, it shouldn’t come as any surprise that they’re not very happy about the court case outcome… or that they’re not holding back about those feelings.
National Retail Federation President Matthew Shay went on record specifically to take issue with the part of the law that mandates businesses to offer health insurance options. “Although the Court upheld the law’s constitutionality, many problems remain,” he stated. “It penalizes employers too much; it doesn’t do enough to reduce the cost of health care; and it is unreasonably complicated and difficult to implement and administer. This law will have a dramatic, negative impact on every employer and employee in the United States and further constrain job creation and economic growth.”
And restaurants feel the same way. In a world where food prices aren’t getting any cheaper, the average eatery has a difficult enough time balancing the budget. Add in the health insurance mandate with its expectation that employers offer options to their employees, and it could be a recipe for disaster, says National Restaurant Association CEO Dawn Sweeney.
Making no bones about where she and her organization stand on the issue, she urged Congress to keep trying to repeal the law since the Supreme Court wouldn’t rule it unconstitutional:
“This unworkable law cannot stand as is. We need reform that address the increasing costs our members are faced with each year. Restaurant owners are looking for solutions that will allow them to provide better health care coverage options for their team members, but they cannot be saddled with excessive costs and regulatory burdens that threaten their very business. We ask members of Congress to take action that helps the restaurant industry continue to help create jobs and grow the national economy.”
The one business type that seemed to thrive on the news the day of the Court decision was the hospital sector. One such example, HCA Holdings – a leading hospital and healthcare facility operator – moved from an open of $26.55 to a close of $29.47. So clearly, the markets expect Obamacare to bring hospitals an influx of new, paying customers.
Only time will tell whether any of the opinions, worries and hopes everyone is busy spouting right now actually happen or not. But one way or the other, it seems safe to say that, unless the law is repealed, we’re bound to see a much different United States of America in the next decade or so.