Pharma Mega Merger.

American Pharma giant Pfizer recently made a $110 billion bid to acquire Astra Zeneca.

What does it mean for the industry and consumers? There is speculation that the American pharmaceutical company wants to dodge hefty tax liability by operating overseas. But many believe that there is more to this mega-merger. Big pharmaceutical firms face slowing growth as governments around the world attempt to reduce healthcare costs. In turn, this is leading to the rise of low-cost drug manufacturers and generic suppliers that make cheaper versions of proprietary drugs. For example after the loss of the Lipitor patent, Pfizer profits declined by 19%.Uncertainty in the healthcare industry has lead the pharmaceutical companies to fight for a bigger market share to secure profit margins. Almost 700 mergers and acquisitions have taken place over the past three years among pharmaceutical and biotech companies. 

Mega-mergers do not always see synergies or economies of scale because of the integration challenges. The pharmaceutical industry is somewhat unique in this respect. McKinsey’s analysis of 17 large Pharma deals that occurred between 1995 and 2011 concluded that mega mergers add to the shareholders’ value and the long term survival of the acquirer. Companies may also choose to integrate their businesses, like Glaxo SmithKline and Novartis did recently. The two drug companies will join forces in the consumer healthcare sector, while exchanging their oncology and vaccine businesses.

Some other trends are noteworthy in the Pharma industry. Although mergers are the norm in this market, they may have a negative effect on the research and development arm of the companies. Industry consolidation has resulted in less competition and less investment in research and development, at a time when the need for new medical treatments and advancements has never been greater.

One can assume that mergers will increase number of monopolies in the market and to control this growing power government regulation will have to be put in place. Almost 20% of national health care spending is on pharmaceuticals and with a drive to control costs in all sectors of  health care industry, it’s obvious that the Pharma industry will see significant price cuts. The latest news reports have a common thread; that is acquisition (or integration) of the cancer drugs arm of the acquired companies. With the aging population and increased incidence of cancer it is foreseen as a profitable sector of the market. Similarly, with the new health plans covering preventive medicine, acquisition of companies that manufacture vaccines may reap future benefits. These types of mergers raise concerns for the government and insurers; as these mergers can take away much needed leverage, at the negotiating table, in rapidly changing health care environment.

Sources:

1. WSJ    

2. Mckinsey 

3. BBC                

"Doc Fix" Relief.

          The senate hastily passed the “Protecting Access to Medicare Act of 2014” which was first introduced on March 26, 2014. It has spiked both anger and relief from various sectors of the healthcare industry. (1) The bill was signed by the president just in time to avoid Medicare cuts being implemented under the Medicare’s sustainable growth rate (SGR) payment formula. In 1997, the year of the balanced budget act(BBA), Congress created the SGR formula, which set the Medicare budget spending to a fixed rate, with the expected growth in the economy. In the years that followed the BBA, it was evident that health care spending was not in proportion with (in-fact, it out-paced) the total national spending. The Medicare expenditure was not an exception and so, the funding soon fell short. The Protecting Access to Medicare Act of 2014 proposes many changes other than the delay of the SGR implementation. It:

•  Delays, till Oct. 1, 2015, the switch to ICD-10 
•  Provides a 0.5% Medicare pay bump over that 12-month period 
•  Revalues certain physician payment codes 
•  Delays the requirement for hospitals to comply with the "two-midnight" rule for inpatient reimbursement 
•  Pushes back recovery audits of allegedly unnecessary claims until March 2015.

         What are some of the implications of the new Act? The implementation of SGR could have done serious damage, as physicians were facing up to 24 % decrease in  the reimbursements from Medicare. To avoid lower payments, it is predicted that physicians could have resorted to avoid seeing Medicare patients, which could have far worse implications, as far as total healthcare outcomes are concerned. Due to ACA, hospitals are already facing numerous regulations and constraints, with 2014 being a bell-wether year for the healthcare industry. For struggling practices and smaller hospitals, this may well have been a death blow.

         Although this latest act does more good than harm, it's not devoid of criticism. One of the issues that were highlighted in the senate debate, by the Republicans is: whether or not, to completely repeal Medicare’s SGR payment formula, which is viewed by many as draconian. The American Medical Association, strongly opposed the 12-month SGR “doc fix”, saying it would derail efforts to permanently kill the SGR.

      For physicians and the hospital lobbists, the issue is more serious as the SGR fix comes with 2013′s Meaningful Use Stage 2 delay. Section 212 of the act says that the Department of Health and Human Services cannot mandate ICD-10 as the standard code set before Oct. 1, 2015.  Health care is changing fast:;technology and new payment models are being embraced by the industry with open arms. The government, on the other hand, is not able to keep pace with the changes.

       Centers for Medicare and Medicaid services estimate that a one year delay could cost between $1 billion and $6.6 billion, to the industry (2). Not only that, such temporary fixes are not without their price tags. Congressional Budget Office estimates that the U.S. has thus far spent $146 billion on the fixes, while the total cost of repeal would have been only $116 billion (3). It will be exciting to understand what are the reasons for not completely repealing the SGR formula? Having a consensus to discuss the issue in the senate has been reported as one reason. Personally, I believe that great pieces of legislation, ones that affect an entire nation, demand patience from not only the general population, but also from politicians.

References:

1 Washington Post

2 HIT Consultant.

3 Government Health IT

Obama administration delays employer mandate, yet again.

     Are small employers celebrating the latest delay in employer mandate? Should they? In this article the authors report a lukewarm response to the latest delay in the ACA’S employer insurance requirement. The government announced on February 10, 2014 that the requirement for small businesses be delayed, until 2016. The small businesses here, by definition, are the ones that employ anywhere between 50 to 99 employees. The authors point out that some small employers have already taken cognizant steps to comply with the requirements of the new employer mandate of the ACA. They have either: provided health insurance to their employees or cut down on the number of employees to avoid paying for penalties. Therefore, the delay doesn’t mean much to them as they have already planned for the ultimate inactment of the mandate.

     As the insurance premiums became more expensive over the years, some employers are now forced to consider the option of paying a penalty (2000 dollars per employee) rather than buying insurance; thus saving money. This is where the fallacy of the act lies; it does not guarantee coverage to the employees. Although such a practice may hurt employers in long run because the penalties may be higher in coming years, as of now it makes fiscal sense. The Obama administration states that the recent delay will provide ample time to the small employers to decide what plans they want to offer to employees (high deductible or high premium). The employers feel a need to educate themselves, and discuss the options with the employees to come to a decision. True. But many feel that the delay doesn’t mean much. The focus on small employers is not undeserved; according to the statistics small businesses make up 99.7 percent of U.S. employer firms. Even though the ACA is helping the small employers in many ways, the adverse effects of the affordable care act are very real for some businesses. For instance, UPS cut down on insurance coverage to spouses of the employees.

      Whether the latest delay is to give employers ample time to prepare for the future, or merely for postponement of such adverse effects till next big elections; is unclear. Digging deep into the policies and regulations, it is evident that the ACA has many provisions for small businesses. For instance, small businesses with 25 Full time equivalent employees (FTE’s) or fewer, with average wages below $50,000/year, can get tax credits to help save for employee premiums. Not only that, but businesses with over 50 FTEs are exempt from the fee on first 30 FTEs - decreasing the negative effect the law could have on businesses who narrowly qualify as a large firm. The rising discontents of the conservative political class can be mitigated, by the fact that - the law, as it is, will upset less than 0.2 % of small businesses (96% of all businesses or 5.8 million out of 6 million total firms have under 50 employees). It is out in the open: from humble startups to the largest corporations, employers have countless new rules and regulations to keep track of. And in some cases, there are new costs too. How this will play out in the biggest capitalistic economy of the world remains to be seen.

Sources:

1. Wall Street Journal

2. Obama care Facts  

ACA and Women's Salaries.

Show me the money, honey.

In this recent New York Times article, Casey B. Mulligan draws our attention to the intended/unintended consequences of the employer mandate, of Affordable Care Act (ACA, on labor market. The article discusses, in particular, how salaries of female labor force will be affected under the new act. It has been observed that employers are trying to cut down on the number of full time employees to avoid paying for their health insurance; therefore, escape the penalty imposed by the government under the ACA. According to the federal law, part time employees can work up to a maximum of 29 hours to continue to be considered part time. There is a strong likelihood of employers cutting down the hours of employees to 29 hours; they are more likely to shave off extra hours from the workers who are already working close to 29 hours. Casey states: because of this, women are the target of such unintended labor force cuts. Women working as full time employees often work fewer hours (almost twice as likely as men) and devote rest of the time taking care of their families. This type of arrangement, which works very well for a many families, is now under threat. Naturally, working fewer hours means less pay. Now, working fewer hours may also mean fewer benefits. Even though, ACA did not invent part-time work regulations, but it may be encouraging small employers to use it in an unwise manner only to comply with the ACA, and thus it may be increasing the gap between salaries of two genders.

Granting that ACA has multiple provisions for women (free preventive care, outlawing gender rating, maternity coverage, and no co pays for certain preventative services e.g. gestational diabetes etc.), the author takes a deep dive into facts and analyses patterns that will emerge in the labor market because of the ACA. It’s a well-known social phenomenon that the part-time work is a female domain. Choosing family over work, perforce results in career breaks and acceptance of more part time work for women. Such a practice ties them down to gender roles (which are far more difficult to fight), further hurting career development. It is a vicious circle. It does not need a rocket scientist to figure out why women are at a greater risk for old age poverty. Although, choosing part time work is detrimental to anybody’s career (not just women), it is precious for economies. In rapidly aging populations, higher female labor force participation helps mitigate the impact of shrinking workforce, and therefore continues to contribute to macroeconomic gains.

Rebuttal to this argument is that, with the economic growth reviving back to pre-recession rates, employers will soon be faced with a dilemma of: either cutting back on full time workers and therefore hiring new part time employees (which could be more expensive), or to just convert part time workers to full time and pay for their benefits. The decision will depend on cost benefit analysis by individual employer. If the economy picks up, then ACA may well be a tool to empower part time workers, hence women. But if it doesn’t then this type of forecasting begs the question: should health care coverage be divorced from employment status? It would be wise to pose a larger question: in light of these facts, shouldn’t there be policies around safeguarding female labor force participation? Solutions to the current problem are not clear but what is clear is that ACA affects almost every aspect of the healthcare industry. It will also cause ripple effects in other industries and the macro economy for years to come.