Related Expertise: Health Care Payers, Providers, Systems & Services, Biopharma, Medical Devices and Technology
In early January, Republicans took the first step toward repealing the Affordable Care Act (ACA). Using a process known as reconciliation, Congress passed a budget resolution that set the stage for repeal of many existing ACA provisions. In his first press conference since the election, President Trump commented on two issues related to health care, laying out a timeline for repeal of the ACA and pledging to force drug makers to bid for government business.
In light of these recent developments, we are updating this article to reflect our current thinking as of January 20, 2017. (The original article was published on November 11, 2016 and updated on December 20, 2016.) This version includes our views on how reconciliation will affect the ACA and how Trump’s stance on drug pricing will impact biopharma.Given the fluidity of the situation, we will continue to update our analysis as we gain a clearer picture of the new administration's proposed health care reforms.
On January 20, 2017, a new US president was sworn in whose health care agenda represents an about-face from the previous eight years. Donald Trump has promised to repeal and replace the ACA—which has served as the cornerstone of President Obama’s health care agenda—and introduce new health care reforms that follow free-market principles.
But the transition will not be simple. The health care industry and the US government have never been more interconnected—and their relationship has never been more complicated. Trump’s efforts to replace the ACA will have profound implications for our health care system across payers, providers, biopharma, and medtech. While a repeal of the ACA is an immediate priority for the Trump administration, many more reforms will follow as the administration seeks to fulfill its promise not just to repeal but to replace.
Companies have been asking, Will the Trump administration support further innovation in payment models? Will merger and acquisition (M&A) regulations intensify? Will the government take a more active role in setting prices? Is regulatory oversight of medtech and biopharma likely to expand? And how will this affect access to health insurance and out-of-pocket expenses for consumers?
With so many fundamental issues in play, it’s only natural to question what will happen next. But that’s only half of the equation. Health care executives also need to be asking themselves, What should we be doing to prepare for the changes to come? And how can we mitigate risk in an environment punctuated by so much uncertainty?
The GOP platform advocates minimal government involvement in health care, limited industry regulation, a shift from public to private administration of health care, and increased payer competition. While a number of proposals have been put forward by different leaders within the party, Republican priorities generally include the following goals:
Given their majority in the House and Senate, Republicans will have an opportunity to repeal major portions of the ACA without significant compromise. Two key votes occurred during the week of January 9—the final week of legislative activity prior to inauguration—when Congress passed a budget resolution. The resolution instructs congressional committees in both chambers to consider proposals and draft legislative text. During this committee phase, we expect to see specific language repealing portions of the ACA. The House and Senate committees must craft the reconciliation bill by the nonbinding deadline of January 27.
Despite this move to speed legislative action, it is unclear whether Republicans agree on how and when to move forward, creating uncertainty as to whether we will see repeal and replace or repeal then replace. Some Republicans, including Senator Rand Paul of Tennessee and Senator Susan Collins of Maine, have voiced strong opposition to repealing the ACA until a clear plan has been crafted. House speaker Paul Ryan has also said he would push for repeal and replace. The Republicans have yet to resolve differences and align on a single plan, though the congressional Republican retreat in Philadelphia in late January may provide an opportunity for them to do so.
The only aspects of the ACA that can be repealed during the reconciliation process are those that impact the budget. These include:
The nominee for secretary of HHS, Tom Price, a former orthopedic surgeon and six-term Republican congressman from Georgia, is a long-time critic of the ACA. His most recent bill, the 2015 Empowering Patients First Act, aimed to fully repeal the ACA and offered tax credits for the purchase of individual and family health insurance policies. Many of his proposals have been incorporated into the House Republicans’ "Better Way" agenda.
Trump has also nominated Seema Verma as CMS administrator (a position that reports to the HHS secretary). As president of a health care consultancy in Indiana, Verma worked closely with Governor Mike Pence to expand Indiana’s Medicaid eligibility under the ACA. The Healthy Indiana Program (HIP) 2.0, of which Verma was architect, represents a significant departure from traditional Medicaid. HIP incentivizes individuals to become good stewards of their health care dollars by, for example, requiring co-pays and monthly contributions to an HSA.
Republican health care reforms will have the biggest impact in five areas: the individual market, Medicaid and Medicare, payment models, consumer choice, and drug pricing.
Dramatic Changes to the Individual Market. The Republican agenda aims to create a market that will look quite different from today's system in several ways:
Increased Privatization and Deregulation of Medicaid and Medicare. Republicans have floated proposals to shift Medicaid to a block grant program. This would give states more autonomy, but at lower funding levels than they experience today; therefore, states would have to modify eligibility rules, reduce coverage, or chip in funds themselves.
The GOP has also proposed raising the eligibility age for Medicare and potentially even shifting the program to a premium-support model. Shifting more or even all Medicare members to a privatized MA model would be a change for most seniors (68% of whom receive government-administered, fee-for-service Medicare), but this model has relatively few drawbacks for either the government or the private sector. Private-insurance-based MA plans have a track record of containing costs better than fee-for-service CMS plans, while delivering better-quality outcomes.
Changes in Payment Models. Under Republican leadership, we expect to see several changes in payment models:
Increased Role of the Consumer. The ACA exchanges enabled individuals to evaluate health products from a more consumer-based mindset, and Republican reforms seek to introduce further consumer choice into the health care system.
Today, health care decisions are typically made by doctor and patient, with little concern for costs. But HSAs will change this. HSAs encourage consumers to set aside money to pay for their own health care when they get sick. If scaled over time, as Republicans have proposed, HSAs would put much more discretion into the hands of patients. Given the choice between a $25,000 partial knee replacement and a modestly priced biologic injection, patients will likely choose the more cost-effective option. As consumers pay more attention to the costs of drugs, medtech products, in-network versus out-of-network visits, co-pays, and deductibles, health care companies will need to significantly enhance their engagement with patients as decision makers. It remains to be seen how much consumer pressure can or will drive costs from the system, but all health care companies will need to articulate their value proposition in compelling, transparent, and easy-to-understand ways that help consumers evaluate tradeoffs.
Changes in Drug Pricing. While Republicans have typically taken a laissez-faire approach to pharmaceutical pricing, Trump and his close advisor Newt Gingrich have been more outspoken. In his press conference, Trump took direct aim at drug makers, which sent biotech stocks into a tailspin. In his remarks, Trump suggested that CMS should be allowed to negotiate pricing and that suppliers should be forced to shift manufacturing to the US—a move that would likely raise prices for low-cost generics. Hours after the press conference, the Senate narrowly rejected (by 52 to 46) a proposal to allow importation of cheaper prescription drugs from Canada, with 12 Republicans supporting the drug import measure and 13 Democrats opposed. Party crossover on this vote, the President's comments, and long-standing Democratic support for such moves (notably from Senator Amy Klobuchar, of Minnesota, who has publicly urged Trump to allow the government to negotiate prices with biopharma) indicate that this issue may have the power to unite enough members of both parties to pass legislation.
Medicare and Price Negotiation. Currently, the prescription drug benefit for Medicare patients is administered by third-party private payers. Since these private payers already negotiate with drug manufacturers for formulary access, a change to the current model would not be likely to affect drugs filled through pharmacy benefits. However, the impact on Part B drug spending (which is directly reimbursed by Medicare) could be quite significant. For instance, if the administration scraps the current model, which allows free pricing and reimbursement based on the average sales price, and instead invites manufacturers within a drug class to submit competing bids, biopharma may experience very significant price erosion.
Changes in health care policy have significant repercussions for the broader health care industry—and the American economy overall. Industry trade groups have quickly mobilized in advance of the presidential transition to advocate for their industries and tease out the implications of ACA repeal.
Payers. America's Health Insurance Plans (AHIP), a leading trade association for payers, has expressed concern that repealing the ACA without an immediate replacement will bring further instability to the nascent marketplaces. AHIP is calling for Congress to extend an ACA reinsurance program, which is set to expire this year, until 2019, as a means to cushion insurers against financial losses from enrolling high-risk, costly individuals. The trade group also advocates cost-sharing reductions that reimburse insurers when they provide discounts to low-income ACA enrollees. Significantly, AHIP did not advocate for the individual mandate, one of the most unpopular elements of the ACA. Instead, AHIP has suggested that alternatives are needed to encourage young and healthy individuals to sign up for coverage.
Providers. The American Hospital Association (AHA) and the Federation of American Hospitals (FAH) have publicly stated that repeal of the ACA without a replacement could cost hospitals hundreds of billions of dollars. They describe the loss of coverage as an “unprecedented public health crisis.” In the event of an ACA repeal, the AHA and FAH have urged Congress to allow hospitals to be reimbursed for Medicare and Medicaid patients at pre-ACA levels (the ACA reduced the payments hospitals receive for these patients because they benefit from the newly insured seeking care).
The Health Care Transformation Task Force, a 43-member group (including 6 of the top 15 health care systems and 4 of the top 25 payers ), sent a letter to Trump, Pence, and members of Congress from both parties calling on government leaders to support the continued transition from a fee-for-service to a value-based model.
Industry mobilization efforts have just begun and we anticipate many additional voices to emerge as the administration lays out more of its agenda. While there is broad consensus that change involves significant risk, there is little consensus on what effective change would look like.
With so many reforms coming and so much uncertainty around the details, health care companies need to prepare for the most likely scenarios while readying themselves for a wide range of possible outcomes.
Payers. Payers need to reassess where to play and answer hard questions about where they can win. While a newly deregulated individual market may seem attractive, this market segment has yielded low margins (or been entirely unprofitable) for most payers under both the ACA and pre-ACA scenarios. Meanwhile, many payers have ignored or underinvested in employer-sponsored insurance, which looks to remain the dominant path for nonsenior insurance in the US. With the potential for this space to become more competitive as restrictions are dropped, payers will need to up their game.
In addition, payers will need to reassess their Medicaid and Medicare strategies. If these sectors move toward 100% privatization, the potential market opportunity will be significant. While the experience curve is steep, even those not doing well today will need to take a fresh look at these segments and weigh the risks against the now-larger rewards.
While it is possible that Republican efforts to increase competition across state lines will yield some additional opportunities for payers, the reality is that network building and pricing are based on metropolitan statistical areas, and many payers operate fluidly across states today. As a result, this is unlikely to be a near-term focus for payers.
Finally, payers will need to pursue partnerships and integration with providers to help keep costs down. In a future where cost is paramount, having meaningful control over care delivery will be a key differentiator.
Providers. For providers, revenues and margins will be further constrained. As CMS rates compress and the pool of paying individuals and Medicaid customers shrinks, systems with high exposure to these segments will need to shore up revenues or change their cost structures. While reestablishment of disproportionate-share hospital payments will provide some cushion, most health systems will experience a decline in revenue (particularly those that have been competitive in winning new ACA-funded patients). As consumers bear greater costs and select high-deductible plans, they may delay care, put pressure on primary care physicians to provide specialist care, and more actively weigh the pros and cons of seeking additional care.
To stay competitive, providers need to keep delivery costs down and appeal to consumers, who will increasingly have a choice about where to be treated. As the number of uninsured will likely increase, providers should expect increased uncompensated utilization of ERs serving low-income populations, and they will need to consider how they can reach more patients with the ability to pay. Physicians will likely gain more protection from medical malpractice, which will reduce legal costs.
Some providers will continue to pursue value-based health care and forge partnerships with payers to capture more patient volume. For others, their market structure will keep them in a fee-for-service world for now, while they optimize delivery costs to remain in competitive brackets. In either case, continued M&A activity will be helpful in improving economies of scale, geographic reach, and differentiated service lines.
Biopharma. Demographic trends and the increasing use of specialty medicines suggest that spending on drugs will continue to rise, resulting in continuing pressure on biopharma to address costs.
Given the likelihood that consumers will have to bear more of their own health care costs, biopharma companies should be prepared to address a consumer base that is less able to pay high prices. Without yearly out-of-pocket maximums, many specialty medications will no longer be affordable for a significant number of patients, and the public outcry over the high costs of important, life-saving drugs may intensify. For non-Medicare patients, biopharma companies can partially address this issue by beefing up co-payment assistance cards and providing foundation support for the uninsured. Companies will also need to carefully manage price levels and price increases, since calls for transparency will continue.
While it's still unclear what specific short-term policies the incoming administration may adopt, biopharma companies should prepare for a gradual transition from fee-for-service to value-based health care. The Medicare Access and CHIP Reauthorization Act (MACRA) was passed with overwhelming bipartisan support in 2015. Even if some elements come under pressure, such as the ability of CMMI to test alternative payment models, MACRA has at its core a clear objective: to move from the current fee-for-service structure (which tends to reward volume) to one that pushes a certain amount of financial risk onto providers, and hence recruits them in the effort to control costs and improve quality of care. If cost becomes a more important factor in prescribing decisions, physicians may prescribe less or choose less expensive alternatives, including generics, biosimilars, and older drugs.
To thrive in the value-based environment, biopharma companies will need to demonstrate superior clinical outcomes and/or lower overall costs. This means providing clear clinical and observable evidence of the effectiveness of their products, as well as experimenting with alternative payment models and “beyond the pill” solutions to increase benefits and reduce risk.
The incoming administration will also introduce changes that will benefit biopharma. First, there is the possibility that the corporate tax rate will be lowered. Fundamentally, biopharma companies rely on R&D-driven innovation, which is a long and expensive process. If the administration follows through on promises to lower corporate taxes, companies will be able to repatriate their significant overseas profits and reinvest in innovation and M&A. In addition, if the administration speeds up approvals of new drugs, that could have a positive impact on the industry (as long as efficacy and safety are not compromised).
Medtech. Elimination or modification of the ACA's individual mandate and mandated benefits could have a negative impact on unit volume growth, particularly for products used in discretionary procedures. Medtech companies need to carefully adjust their planning to match revised volume growth projections. On the other hand, the medical device excise tax (which has been suspended) is likely to be permanently eliminated by the Trump administration and the Republican Congress. This will free up cash, which medtech companies can invest in R&D or return to shareholders.
Companies that produce directly reimbursed products or services (such as glucose meters and strips, outpatient testing services, and continuous positive airway pressure devices) will need to track the incoming administration’s stance on reimbursement levels. Trump has already discussed reimportation of drugs and allowing the CMS to negotiate with pharmaceutical companies. It’s possible that the administration will pursue similar tactics for medical devices and services. Medtech companies would be wise to reorient product development toward value-based products that can withstand such pressures—and provide strong evidence for the value of their products.
We also expect capitated funding to grow more rapidly. Trump's interest in private markets and in pushing responsibility onto the states means that Medicare Advantage (which is administered by private payers) and managed Medicaid plans (often also privately administered) will grow, perhaps even at increased rates. Much more than fee-for-service plans, capitated funding mechanisms create strong incentives to manage end-to-end costs and outcomes over an extended episode of care. In turn, providers will increasingly seek products and services from medtech companies that support value-based health care objectives. As we have seen with companies that have already gone down this path, this requires a significant change to the traditional medtech innovation model.
We are on the brink of another major overhaul to the US health care system, but it’s important to remember that there will be significant opportunities for growth in the private sector. As Trump’s health care agenda takes shape in the coming months, we will stay close to this topic and publish additional insights on how best to thrive as the new administration’s policies take hold.
This article was developed by BCG’s Health Care and Public Sector practices in the firm's new Center of Excellence, which focuses on health care reform in the United States. The Center will lead BCG's research and analysis on the potential health care policy reforms proposed by the incoming administration and model their implications for consumers, employers, payers, providers, and other health care stakeholders. The Center is led by Nate Holobinko, with leadership from an advisory committee including Adam Farber, Sharon Marcil, Sanjay Saxena, Ozgur Adigozel, Priya Chandran, Colm Foley, Alan Iny, Jon Kaplan, Barry Rosenberg, Brett Spencer, and Dan Vogel. We acknowledge the contributions to this article of Michelle Chiu and Cordelia Chansler, as well as the expertise of the advisory committee and other partners, including Ashish Kaura, Peter Lawyer, Daniel Gorlin, and Srikant Vaidyanathan.