Hillary Clinton is offering up insight into her plan to lower the cost of medicine, and her proposal includes a slate of key initiatives that investors ought to know about, including these six that could reshape the industry.
1. Give Medicare more power
Most people are amazed that Medicare, the U.S. healthcare system for the elderly, isn't allowed to negotiate the drug prices it pays to drugmakers, but it's true.
Because of the Medicare modernization bill signed into law in 2003, Medicare pays the same price for drugs that private insurers negotiate, rather than potentially lower prices that it could negotiate thanks to its bigger buying power.
Admittedly, private insurers are savvy negotiators, and the largest insurers, United Healthcare and Anthem, manage plans covering more than a combined 100 million Americans, so it's unclear just how much lower Medicare, with 55 million lives covered, can drive prices down -- especially since the program could face significant patient pushback if it took a hard line and opted against covering a drug because its price is too high.
However, large public healthcare payers in other countries, such as the United Kingdom, do negotiate prices with drugmakers, and typically, people in those countries pay less than we do for their medicine.
Because of this, many drugmakers focus on developing drugs for the more profitable U.S. market first. Therefore, if Medicare is given the ability to negotiate, one unintended consequence could be that drugmakers begin viewing other markets as more lucrative and as a result, shift their innovation overseas.
Regardless, this idea has been floating around for a while and it's fallen mostly on deaf ears in Congress, so it's not clear to me whether or not it would ever gain enough support to become reality.
2. Leverage Medicaid
One way that Clinton believes she can help seniors is to allow more low-income Medicare patients to participate in Medicaid. Unlike Medicare, Medicaid can negotiate drugmakers, and thanks to rebates from them, the prices Medicaid pays for medicine are often lower than the price paid by Medicare.
If low income Medicare recipients are allowed to leverage Medicaid's pricing advantage, then it's estimated that tens of billions of dollars, or more, could be saved over the next decade. That may be true, but a study by the Government Accounting Office last year found that private insurers are struggling to reap the savings expected from covering disabled dual-eligible patients, so the savings may be slower to materialize than Clinton anticipates.
3. Require research
If you're worried that price cuts could cost jobs, then Clinton hopes her plan to mandate a certain level of research spending could help convince you to get on board.
Clinton hasn't said what percentage of revenue would need to go back into the R&D budget, but it's likely to be a big enough number to limit the number of pink slips handed out by companies to scientists. Meanwhile, the plan also intends on eliminating, or significantly reducing, the appeal of businesses like Turing Pharmaceuticals, a biotech founded by a former hedge fund manager that bought and increased the price on a 60-year-old medicine for a rare parasitic infection by a reported 5000%, rather than developing a new drug on its own.
4. Toss-out tax breaks
Scientists in the lab may get job security from the R&D requirement, but marketing employees may not be so lucky.
Clinton's plan seeks to eliminate tax breaks that allow drugmakers to deduct spending on drug advertising as a business expense.
If that tax advantage disappears, Clinton estimates billions of additional dollars will be paid to the government in the form of taxes that could conceivably be used to fund other programs, such as the National Institutes of Health research budget.
5. Limit exclusivity
Currently, biotech companies that develop a biologic -- a costly type of therapy developed within living cells -- can count on market exclusivity that protects them from generic competition for a period of 12 years.
That 12 year period is longer than the typical 5 year exclusivity granted for chemically derived medicine, and Clinton thinks that a 7-year window for biologics makes more sense.
However, altering the exclusivity period to 7 years may not make all that big of a difference when it comes to getting generic biosimilars to the market quicker because patent protection (granted by the patent office) often lasts much longer than exclusivity (granted by the FDA) anyway.
6. Capping out-of-pocket costs
Biotech companies may not be the only companies that feel the sting from Clinton's plans. Health insurers could also be on the hot seat if Clinton's proposal passes.
Clinton wants to limit the amount of money that patients pay out-of-pocket for their medicine to $250 per month, or $3,000 per year.
That proposal could dent the already thin profit margin at insurers or results in higher monthly health insurance premiums because insurers would likely have to make up for the money that isn't being paid by patients.
Tying it together
Clinton will be spending considerably more time outlining these policies in the coming days, and that will offer up important insight that could increase or reduce the impact of her plans on biotech stocks and health insurers. Although the plans under consideration could cause short-term ripple effects, investors should remain focused on the long term tailwinds likely to drive healthcare demand higher, rather than lower, over the coming decades. After all, worries that Obamacare would derail the sector's profitability have failed to materialize, and as a result, people who reacted to regulatory changes associated with the Affordable Care Act by selling healthcare stocks have missed out on substantial gains over the past five years.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns and recommends Facebook. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.