Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Another day, another refusal to admit that GOP efforts to repeal and replace the Affordable Care Act (ACA) are dead

In an interview with Fox Business that aired on Wednesday, President Donald Trump said it's been "misreported" that his administration has failed in its efforts reform health care. He suggested that his party's reforms will result in $900 billion in government savings, and that an ACA repeal will come before an attempt at tax reform.

Hospitals and Medicaid insurers, stocks that are most exposed to changes to the ACA, saw shares fall once again yesterday. A repeal is still unlikely, despite the President's continuing optimism. But continuing to tilt at that windmill doesn't enable tax reform, it renders it more distant and difficult to count on. That's a bigger issue than repeal for much of the health care sector.  

Short Lead
Health care stocks have outperformed the broader market in 2017 in spite of start-stop efforts at health insurance reform
Source: Bloomberg

It's hard to tell exactly what President Trump meant by citing $900 billion in savings. Deficit reduction seems most likely, he suggests using "savings" to pay for tax cuts in the interview. But the initial version of the American Health Care Act (AHCA) --- the GOP's proposed replacement for the ACA -- would have reduced deficits by only $337 billion. Last minute changes during the GOP's failed attempt to salvage enough votes to pass the bill reduced the savings to $150 billion.  

It's unclear where any further deficit reduction might come from. The two versions of the bill already cut more than a trillion dollars from federal spending, mostly from Medicaid, and use the majority of those savings it to fund tax cuts. Any further cuts would likely increase the number of Americans expected to be lose health insurance under the changed law, currently pegged at 24 million.   

Wrong Way
Changes to the AHCA reduced the bill's budget savings, and that trend may continue as the GOP tries to find a passable version of it
Source: Congressional Budget Office

GOP "negotiations" on the future of health care, which President Trump refers to in the interview, seem more likely to decrease savings from any replacement plan. Changes suggested in the weeks after the initial bill's failure, including funding high risk pools for Americans with pre-existing conditions and "invisible" risk sharing payments, would add to the cost of the bill. 

The internal divisions that have derailed reform efforts so far haven't been bridged. Conservative members want to further gut the Affordable Care Act's protections for those with pre-existing conditions. More moderate Republicans want to preserve more of them. Both groups have the power to stop a bill, and don't appear to be close to an agreement.

The refusal to move on from health care endangers the tax overhaul, especially if it rests on mysterious health care-related savings. Though a higher uninsured rate and the rise of skimpier health insurance plans that may have resulted from the AHCA would have come to hurt large portions of the sector, the impact of delay on tax reform is more immediate and quantifiable. Many U.S. pharma and device firms have large amounts of cash, much of it overseas, which they would like to bring home and spend in the event of a repatriation holiday.   

Additionally, a 20 percent corporate tax rate would likely mean a lot more for pharmaceutical firms and insurers than a repeal of the ACA's taxes on the sector.

Collecting Dust
U.S. health care companies have accrued large global cash piles, and are reluctant to bring them home due to high corporate tax rates
Source: Bloomberg
U.S. domiciled health care companies with a market cap of more than $40 billion

If the Trump administration gives up on health care, it isn't an unambiguous positive for the industry. Without savings from repealing the ACA, the administration and congressional leaders may turn to favored policies like the R&D tax credit to pay for other reforms. 

But that's a small sacrifice compared to the possibility that tax reform may fail to materialize at all. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net