Drug Stocks Surge After U.S. Says Cost Panel Will Wait Until 2017

The Hidden Cost of Cheaper Drug Prices
  • Projected trigger of ‘IPAB’ is on same schedule as last year
  • Medicare fund shortfall is predicted two years earlier

Drug and biotechnology stocks surged Wednesday after the U.S. government said a cost-cutting mechanism created under Obamacare, known as the Independent Payment Advisory Board, or IPAB, will likely be triggered in 2017, not this year as some investors had feared.

The 2017 projection is in line with estimates from last year by Medicare’s Board of Trustees, which on Wednesday released its annual report on the U.S. health-care program’s long-term finances. The trustees also said that Medicare’s hospital insurance trust fund, which finances some care under the program, will be unable to meet all of its obligations in 2028, two years earlier than projected.

Investors had been watching nervously for news of the determination, concerned that it could trigger this year and set in motion reductions in Medicare payments to biotech and pharmaceutical companies, as well as other health-care firms. The Nasdaq Biotechnology Index of 189 stocks had fallen for 11 of the past 12 trading days as of Tuesday’s close.

The biotech index rose as much as 2.7 percent for the biggest intraday gain in more than a month, and the broader Standard & Poor’s 500 Health Care Index of 56 stocks was up 1.4 percent.

The 2017 initiation of the IPAB leaves the next administration elected in November to deal with what controversially was known as “death panels” during negotiation of the Patient Protection and Affordable Care Act because of mainly Republican claims the cost-cutting would lead to rationing of care.

The report by Medicare’s trustees each year projects the long-term finances of the government’s health insurance program for about 55 million elderly and disabled Americans. Medicare spent $648 billion in 2015, according to the report, making it the single biggest purchaser of health services in the U.S.

The report reflects “the positive impact of the Affordable Care Act on our nation’s health care system,” Treasury Secretary Jacob Lew said when the report was released. “Since the law was passed, increases to health-care costs have slowed substantially.”

Before the ACA was passed, the Medicare’s hospital insurance trust fund was project to run out of funds to cover its obligations next year. Still, the trust fund will be depleted two years earlier than projected in 2015 because of “lower-than-estimated taxable payroll and higher projected inpatient hospital utilization,” according to the report.

The trustees’ spending projections also determine whether the IPAB, one of the Patient Protection and Affordable Care Act’s mechanisms to control U.S. health spending, will go into effect.

Panel Operations

The IPAB is a 15-member panel that would be appointed by the president and has broad authority to propose cuts to payments made through Medicare. Its proposals could affect drugmakers, biotechnology companies, hospitals and insurers, with some restrictions. Congress, which has typically controlled many aspects of Medicare’s payments through legislation, has limited oversight of the IPAB, which was set up specifically to make reductions to U.S. health spending, at a distance from lawmakers and lobbyists.

Once appointed, the board proposes cuts to Medicare payments that will bring Medicare back under target levels that are based on rates of consumer inflation and U.S. gross domestic product. Those cuts are then sent to the president and Congress for fast-track consideration, though it’s not clear how the IPAB’s operations would fare in the face of what could be strong opposition or a legislature determined to fight its conclusions.

Lawmakers on both sides of the aisle have expressed concern, and House Speaker Paul Ryan would abolish the board in his proposed health-care overhaul, released this week.

Investors will have to wait until next year to see if the panel is triggered. If the rate of U.S. health spending slows, it may not be.

Medicare Projections

Medicare’s trust fund pays for hospital visits, nursing care and related services under what’s known as Part A of the program. Medicare Part B, which covers outpatient visits, and Part D, which pays for most prescription drugs, are paid for in part by general revenues and by individuals’ premiums. That means those programs don’t face a risk of funds running out.

In 2028, the Part A fund will be able to pay for only 87 percent of its obligations out of dedicated Medicare funds. Part B and Part D are expected to be adequately financed, the trustees said in the report.

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