The Food and Drug Administration isn't the only entity in Washington that health-care investors need to keep their eye on. Congress has just as much control over the profits of drug and medical device companies as the agency that actually regulates them.
And Congress slipped a potential doozy into the massive stimulus bill. Assuming there are minimal changes to the House's bill, a Council for Comparative Clinical Effectiveness Research will be created, which presumably will try to figure out the most effective drugs and devices to use when treating different diseases.
That doesn't seem all bad: I've always been in favor of the FDA basing its decisions on whether treatments are safe and effective and letting the marketplace -- doctors and patients -- decide whether they're useful or not. In some ways, the council will just be pushing this idea along a little quicker by giving doctors and patients the right information. And with most people's medical records being digitized thanks to another provision in the bill, doing the comparative analysis shouldn't be too hard.
But remember, one of President Obama's goals is to lower the cost of health care, and that means putting a price on how much a better treatment is worth. How do we put a dollar value on the reduced pain that Intuitive Surgical's (Nasdaq: ISRG ) surgical robot provides? What is the price of extended life, even if it's for a few extra months, that Onyx Pharmaceuticals' Nexavar cancer treatment provides?
Never mind the slippery ethical slope of saying you can't use something because it isn't cost-effective according to those who decide such things: For companies and their investors, it could mean millions of dollars of lost revenue. What if the price tag for a product is set too low, or worse, the product is deemed "not effective enough"? And what would that do to innovative research and products, which tend to be more expensive when introduced?
What's old is new again
In some respects, this isn't anything new. Discouraging high-priced treatments has been the mantra of health insurance companies for years. A lot of insurance plans have higher co-payments for brand-name drugs than for generics, and the co-payment for emergency-room visits is often more than if you had waited to see your primary-care physician the next day.
Even today, getting past the FDA isn't enough to guarantee a commercial success; drug companies also have to convince insurance companies to pay for the treatment. One of the reasons that Pfizer's (NYSE: PFE ) inhaled insulin Exubera failed is because insurance companies weren't willing to pay for the device when injected insulin worked just as well.
But that's private entities deciding what's best -- and patients could vote with their feet if they thought their health insurance company was being unrealistic. Once the federal government gets involved, all bets are off.
The great equalizer
All is not completely lost for the drug and medical device industry, though. While President Obama wants to lower health-care costs per individual, he's also hoping to insure more people through some form of universal health care.
In whatever form it takes, increasing the number of people insured would result in increased spending on drugs and medical devices. Unfortunately, the companies being hurt by cost-effective spending wouldn't necessarily be the same ones receiving the benefit from an increased customer base. Smaller developmental-stage drugmakers like Exelixis (Nasdaq: EXEL ) , with just a small handful of drugs available, will be at more risk than drugmakers such as Merck (NYSE: MRK ) or GlaxoSmithKline (NYSE: GSK ) , which have many drugs on the market.
The other clear beneficiary would be companies selling lower-priced generics. If low-cost options are going to be a high priority for Washington, then generic drug companies like Teva Pharmaceutical (Nasdaq: TEVA ) and Mylan (NYSE: MYL ) would benefit through higher volumes. Such companies should also be able to gain additional revenue from copycats of biologic drugs. Thus far, Congress hasn't set up a pathway for the FDA to approve so-called follow-on biologics, but if it's serious about lowering the cost of health care, that's clearly the next step.
Keep your eyes open
Just like the stimulus isn't going to help overnight, the shift in health-care spending won't change in the blink of an eye. But Foolish investors need to keep up with Congress and the FDA and its marketing approvals. Both look like they're going to be equally important to the sales potential of health-care companies in the not-too-distant future.
More Foolishness on stimulus packages:
RSS Headlines
Fool UK