Healthcare Reform


In the United States, health insurance is mostly provided by private insurance companies through employers.[1] While 85% of Americans have health insurance, nearly 46 million Americans are uninsured and 25 million more are considered underinsured as of 2009.[2] Moreover, healthcare spending in the United States was $2.4 trillion in 2007, a per-capita rate that exceeds all other nations by 52%.[3] These figures have led to calls to reform the healthcare system from the White House and Congress.

A major aspect of the new healthcare plan is the introduction of public competition to the private health insurance companies, such as Aetna (AET), UnitedHealth Group (UNH), and WellPoint Health Networks (WLP), that currently dominate the sector. The public option, which has faced staunch Republican opposition,[4] involves the establishment of a government-run insurance program to directly compete with private companies. The public option could take several forms, ranging from a fully-fledged program that pays 5% above Medicare rates, to a dormant program that would be "triggered" if reforms fail to make health insurance more affordable, to a program that would negotiate pay rates locally, much as private insurers currently do.[5] There has also been discussion around a co-op health plan, in which consumers band together to form insurance groups, somewhat like a credit union.[6] However, the fragmented nature of co-ops in relation to a government-run program or a private insurance company would make them a much less formidable competitive force in the health insurance industry.

While debates around healthcare reform have focused on the public option, there are several other aspects of reform that will have an impact on the healthcare industry. A critical aspect of healthcare reform is expanded coverage. Congress is currently debating whether to expand coverage by raising the Medicaid eligibility line and expanding employer-based coverage. Other strategies such as obligatory coverage for those who can afford it (much like with car insurance) also exist, though have not picked up as much momentum.[7] Expanded coverage would benefit health insurance companies as well as pharmaceutical companies, such as Merck (MRK), Novartis AG (NVS), and Pfizer (PFE), medical device companies, such as Baxter International (BAX), Boston Scientific (BSX), and Medtronic (MDT), and retail pharmacies, such as CVS Caremark Corporation (CVS), Rite Aid (RAD), and Walgreen Company (WAG).

Taxes have also played a prominent role in healthcare reform debates. No matter what final form the eventual healthcare bill takes, billions of dollars in funding will be required. In addition to taxes on individuals, several proposals for fund raising have included excise taxes on so-called "Cadillac" plans, which cost more than $8,500 per year for individuals or $23,000 for families. Tax proposals have also been introduced that would directly tax health insurance profits, and increases have been proposed for cosmetic medical treatments.[8][9][10]

Reimbursement pricing is a less concrete aspect of healthcare reform that may eventually have a more direct negative impact on the pharmaceutical and medical device companies that provide treatments. Some proposals have introduced price controls, giving the government more leverage to negotiate down the cost of care for its Medicare plans.[11]

Recent News

  • 11-7-2009: The House of Representatives passed H.R. 3962, the Affordable Health Care for America Act, marking the first step forward in healthcare reform within Congress.[12] The bill, sponsored by Rep. John Dingell,[13] includes a public option as well as several taxes on health insurance plans and companies, and will provide coverage to millions of uninsured by expanding Medicaid and subsidizing private insurance.[14]
  • 11-21-2009: The Senate voted in favor of moving ahead to a floor debate of the healthcare bill.[15]
  • 12-25-2009: The Senate passes a healthcare bill without a public option or Medicare expansion 60-39 in a vote that will enable a final bill to be created by blending the Senate and house versions. A final vote will be required on the blended bill (which will likely resemble the Senate version more so than the house version), after which an approved bill will be sent to President Obama's desk for official approval.[16]

Healthcare Reform Impacts Range of Insurance and Drug Players

Health Insurance Companies

Private health insurance companies stand to both benefit and be hurt by the new healthcare reform proposals. One the one hand, expansion of Medicaid to tens of millions of currently uninsured Americans would drive revenue growth for health insurance companies. On the other hand, increased taxes and publicly-driven competition in the health insurance market would hurt health insurance companies' bottom line. It is important to note, however, that little has been finalized on the issue, and there can only be speculation of what form reform will eventually take.

One feature of the healthcare reform proposal is a government-run insurance program. Such a program would grab market share from private insurance companies, thus hurting the bottom line of health insurance companies. This facet of the healthcare reform bill is a point of controversy that received criticism from Republicans and some moderate Democrats. In the face of this opposition, President Obama has stated that he would be willing to accept a proposal that included non-profit health insurance cooperatives instead of a government-run program.[17] In health insurance cooperatives, consumers band together to form insurance groups (somewhat like a credit union),[18], and while they would introduce competition into the health insurance market, their fragmented nature compared to a government-run program would make them a much less formidable competitive force against private health insurers.

Another contentious issue is whether the government will tax health care benefits provided by employers.[19] Such a tax could fund governmental healthcare initiatives, but would likely adversely affect health insurance companies, which argue that the costs would be passed on to consumers. Taxes and fees threaten private health insurance companies by either directly skimming from their bottom line or indirectly squeezing margins by making certain plans, such as the "Cadillac" plans, more expensive.

Health insurance companies would benefit, however, from the expansion of Medicaid to the tens of millions uninsured Americans. Expanding the pool of citizens who qualify for Medicaid coverage would Medicaid contractor services, which are typically owned by health insurance companies.

Major Health Insurance Companies:

Pharmaceutical Companies

Drug companies will also face threats from healthcare reform, although potential benefits appear to outweigh the threats at this point. While cost-cutting measures to drive down reimbursement prices and reduce over-treatment of patients may hurt the bottom line of drug companies,[20] companies will benefit from an expanded market as currently uninsured patients gain insurance. Under the Affordable Health Care for America Act, pharmaceutical companies are also responsible for upholding the industry's $80 billion agreement to provide rebates and savings on drugs over the next decade.[21]

One provision of the bill under debate, dubbed the "botax", includes a tax on so-called "vanity procedures", including breast implants, tummy tucks, and wrinkle-smooting botox injections. This tax would come in the form of a 5% excise tax on cosmetic surgeries and procedures (not including those done to correct deformities or injuries).[22] Such a tax would hurt companies with sizable surgical cosmetics divisions, such as Johnson & Johnson and Allergan.

Biologics-makers, such as Amgen, Roche, Biogen Idec, and Abbott Labs, were helped by provisions in the healthcare bill giving them at least 12 years of exclusivity before generic "follow-on" biologics may be produced by competitors.[23] Debate over the appropriate length of exclusivity has ranged from the pharmaceutical industry proposal of 14 years to the AARP-backed proposal of 7 years.[24]

Major Pharmaceutical Companies:

Medical Device Companies

Medical device manufacturers face a similar situation as drug companies. Device companies will benefit from expanded patient populations, but will face greater pressures on reimbursement pricing as reform efforts aim to cut medical costs. In order to cut costs, proposed reform efforts will impose taxes on medical device makers and require full disclosure of financial ties between doctors and device companies that may influence purchasing decisions.[25] The Senate bill includes a 10 year $20 billion tax on medical device companies, which is significantly lower than the $40 billion tax proposed in the House bill.[26]

Major Medical Device Companies

Retail Pharmacies

Retail pharmacies benefit from expanded coverage, but could be adversely impacted by strengthened price negotiations.[27] While expanded coverage would increase the overall market, reports show that underinsured customers provide higher margins to retail pharmacies. Lower margins from insurance payers, which carry more negotiating power than individual patients may soften the beneficial effect of the expanded market.[28]

Major Retail Pharmacies


  1. Wikipedia:Health insurance in the United States
  2. Wikipedia:Health insurance in the United States
  3. What you need to know about health care reform
  4. Reform Opposition Is High but Easing
  5. Public Option Shows Signs of Life
  6. What are Nonprofit Health Insurance Cooperatives?
  7. Debate Over Healthcare Reform Moves Into Final Phase
  8. Health bills would raise taxes well before changes roll out
  9. Who's Paying for Health-Care Reform?
  10. The Botax? Nip/tuck levy to help health care plan
  11. The Impact of Healthcare Reform on Medicare Part D
  12. House passes health care reform bill
  13. H.R. 3962: Affordable Health Care for America Act
  14. Senate Health Care Bill Faces Crucial First Vote
  15. Health care debate headed to Senate floor
  16. Senate OK's health care bill in victory for Obama
  17. Obama may drop U.S.-run health plan
  18. What are Nonprofit Health Insurance Cooperatives?
  19. Raising taxes at center of health care reform debate
  20. The impact of healthcare reform on Medicare Part D
  21. Healthcare stocks not unduly hurt by Senate plan
  22. The Botax? Nip/tuck levy to help health care plan
  23. Brand 'Biologics' Retain Edge in Bills
  24. The High Cost of Biologics
  25. Medical device prices in crosshairs of reform
  26. Winners, losers in U.S. Senate health bill
  27. 10% To 15% Of Spending In Health Care System Is Prescription Medicine
  28. Healthcare Reform: Bullish for PBMs, but Not Pharmacies
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