Current law prohibits the federal government from interfering in private sector negotiations, including negotiating drug prices in the Medicare benefit. There are also no direct price negotiations in Medicaid, although manufacturers have to adhere to a set pricing formula to participate in the program. Investors want to know if Congress is willing to revisit the Medicare Part D law. While Clinton and Trump have expressed an interest in direct negotiations with manufacturers, it remains unclear how the next administration would implement a new program. To improve pricing, the government would likely have to threaten to deny manufacturers the ability to sell their product to seniors. While the concept of a national formulary doesn’t sound too daunting, in reality it would be a political nightmare, triggering endless debates regarding which drugs should and should not be covered. At the end of the day, we would expect Congress to back off this idea and embrace more subtle changes, such as the recent reforms proposed by the Administration.
A Likely Scenario: Medicare Cut
No matter who wins the White House, we believe it is highly likely that Congress will pass a bill that curtails entitlement spending. Nearly every president since Ronald Reagan has cut Medicare, so it wouldn’t be a surprise to see a bill under the next administration. Fiscal hawks will be quick to point out that the expected doubling of annual entitlement expenditures to $2 trillion, or 40% of federal revenues in 2026, are simply unsustainable and that the imbalance will need to be addressed at some point. While pundits will haggle over possible solutions, Congress tends to return to a formula it knows well: reducing reimbursements to the provider community. While that can be unsettling for many investors, these types of cuts are usually watered down and can take years to implement, which often helps avoid the worst-case scenarios.
Although the upcoming election raises new questions for health care investors, we believe that future changes to the health care system will be more evolutionary than revolutionary—a sharp contrast to what we experienced in 2008 and 2009. Furthermore, the sector has always been nimble and able to adapt to policy changes. While that can take time, we believe that health care companies will continue to find a way to grow.
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