Could These Drugs Rain on the Obamacare Parade?

Obamacare has been like a parade for several big health insurers. But could they end up soaking wet because of a new wave of high-cost drugs?

Keith Speights
Keith Speights
May 25, 2014 at 1:25PM
Health Care

Obamacare's biggest fans just might be the health insurance industry. Several of the major insurers have enjoyed nice stock gains since the Oct. 1, 2013 start date for the health insurance exchanges established by the Affordable Care Act.

But could the health insurers' Obamacare parade get rained on soon? Some potentially dark clouds loom ahead – not from health reform itself, but instead from a new generation of medications.

You might expect insurers to be almost giddy these days. WellPoint (NYSE:ANTM), for example, has seen its stock jump 23% since the exchanges launched. Humana (NYSE:HUM) experienced an even larger increase, with shares climbing 27% during the same period.

WellPoint stands out as the health insurer most closely linked with Obamacare. The company participated in the exchanges in every state where it operates. CEO Joe Swedish recently stated that WellPoint expects to add over 600,000 new members from public exchanges. The large insurer also experienced solid growth in its Medicaid business, in part due to the expansion of the program kicked off by health reform.

Likewise, Humana CEO Bruce Broussard thinks that his company will grow enrollment by as much as 500,000 members this year. In Humana's first-quarter earnings call, he noted that the company believes that its exchange enrollment is "skewed to a slightly younger population than the industry as a whole", a trend that helps the bottom line.

Chance of rain?
Both WellPoint and Humana, however, see a potential problem area: the cost of hepatitis C drugs. Joe Swedish said that WellPoint will spend around $100 million more on hep C medications in 2014 – twice what the company forked out last year.Bruce Broussard stated that hep C drugs would cost Humana $0.40 to $0.50 per share in added expense in 2014. 

On Tuesday, the health insurance industry's major trade group, America's Health Insurance Plans, or AHIP, singled out hepatitis C drug Sovaldi as a big reason those expenses are climbing. The drug, developed by Gilead Sciences (NASDAQ:GILD), costs $84,000 per 12-week treatment.

Source: Gilead Sciences 

AHIP hit Gilead hard in an online statement, alleging that the drugmaker priced Sovaldi "at an astronomical level that is not sustainable for consumers, innovation, or society". Sovaldi gained regulatory approval in the U.S. in December and racked up over $2 billion in sales during its first full quarter on the market. That impressive figure seems likely to get even better if Gilead wins approval as expected later this year for an all-oral combo featuring Sovaldi and another of its drugs, ledipasvir.

Sunny forecasts
There are at least a couple of reasons to suspect that the health insurers' forecast is sunnier than AHIP lets on, though. First, competition is coming.

AbbVie (NYSE:ABBV) submitted its FDA application a month ago for a three-drug hep C combo. The pharmaceutical company scored positive results from late-stage clinical studies. Many observers expect AbbVie to be brought to market soon after Gilead's combo.

Merck (NYSE:MRK) also has a strong contender with its hep C regimen including two drugs, MK-5172 and MK-8742. It will take longer for Merck to compete, however. The drugmaker recently announced phase 2 study results and probably won't make it to market until 2016.

It's still too early to know how AbbVie and Merck might price their drugs. Insurers have reason to hope that the competition will help keep hep C costs from spiraling out of control.

The second positive for the health insurance industry when it comes to these drug costs comes from the flip side of the coin. Sure – Sovaldi costs a lot. But it and the other drugs on the way also could prevent the need for liver transplants in many hep C patients. A liver transplant costs around $600,000. Insurers should experience some reduced medical costs along the way from the new generation of hepatitis medications.

All parades eventually end, and the Obamacare parade won't be an exception. Health insurers thinking that hep C drug costs might rain on their parade, though, will probably find the weather to be better than feared.