Healthcare & the Midterm Elections: Everything You Need to Know

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627 richard@ / hinds@ /


October 6, 2014

Healthcare & the Midterm Elections: Everything You Need to Know

  • Republicans almost certainly will maintain control of the House, and have roughly 60% odds of gaining Senate control – 70% if independent Maine Senator Angus King agrees to caucus with Republicans. Republican leadership of the Senate would likely bring the medical device tax repeal measure to the floor; on-record non-binding votes indicate the measure would pass – thus a Republican Senate obviously is good for Medical Devices
  • A Republican Senate also raises the odds of a repeal vote on the Independent Payment Advisory Board, or ‘IPAB’. An IPAB repeal is further enabled by the fact that latest projections indicate no budget savings from IPAB before 2024 – which means Congress can for the first time repeal IPAB without having to find other sources of savings (so called ‘pay-fors’) the IPAB would have delivered. If IPAB is repealed Medical Devices and Biotech dodge a bullet – since IPAB almost certainly would give CMS permanent pricing authority over branded drugs and devices used by Medicare beneficiaries under Parts A and B
  • Eight of the states that have not yet expanded Medicaid are likely to lean at least a little bit more away from ‘R’ and toward ‘D’ following the midterm – which raises the odds these states choose to participate in the Medicaid expansion following the election. Hospitals are the obvious beneficiaries, particularly HCA and THC, who have large percentages of their total beds in these states
  • Away from the election, but still fair game in the context of ‘R’ vs. ‘D’ battles over healthcare, legal challenges to the federal government’s ability to give health insurance subsidies to persons buying coverage on federally managed exchanges (i.e. in states that did not build their own exchange) appear destined for the Supreme Court. Contrary to the conventional wisdom if plaintiffs win, instead of beneficiaries on federally managed exchanges being denied subsidies, we see the states in question being forced by their own citizens to operate exchanges. Consider that in these states, the number of persons currently receiving federal subsidies to buy health insurance outnumber teachers 2:1, and the average subsidy is $265/month

Opposition to healthcare reform has been a central Republican campaign theme in the last two elections; however the theme has become less relevant in the run up to the 2014 midterms

The House has voted 54 times to ‘undo’ the Affordable Care Act (ACA) in whole or in part; none of these votes were procedurally relevant given the realities of a Democratic president and a Democratically controlled Senate. And, as coverage has been effectively expanded to nearly 11 million additional persons, the ‘repeal and replace’ theme also is losing political relevance. Consider for example that even with modest enrollment on the ACA’s health insurance exchanges (HIEs), there are now twice as many persons receiving subsidies to purchase health insurance as there are teachers; and, the average monthly subsidy is roughly $265

Even though health reform is no longer a central electoral theme, there are nevertheless a number of significant ACA-related changes that could be on the table pending the outcome of several Senate, governor, and state-legislative races. Within the healthcare space, Medical Devices, Biotech and Hospital subsectors are most affected – and all seem likely to benefit. Medical Devices may benefit from the repeal of the medical device tax, and may also benefit (along with Biotech) from the repeal of the Independent Payment Advisory Board (IPAB), which if in force would likely reduce both of these subsectors’ pricing to Medicare Parts A and B. Hospitals may benefit from further Medicaid expansion in states that currently have not expanded

Congress – Senate control may pass to Republicans; repeal of the medical device tax and IPAB are realistic possibilities

We take as given, as there is statistically almost no question, that Republican will retain control of the House in November – and if anything could gain seats. Currently, The Washington Post Election Lab puts odds of Republican control at >99 percent, with a projected net gain of 10 seats (to 244 out of 435; or 56 percent)

Control of the Senate, where Republican currently trail 45 / 55[1], is much closer to a toss-up, but chances slightly favor Republicans – in which case repeal of the ACA’s medical device excise tax and repeal of the Independent Payment Advisory Board (IPAB) are potential outcomes

Exhibit 1 summarizes the odds of Republicans gaining control of the Senate; the x-axis reflects the number of Republican Senate seats, the y-axis the probability that Republicans hold at least that number of seats following the midterm elections. The odds of Senate control shifting to Republicans are nearly 60 percent, and better than 70 percent if Maine’s independent Senator Angus King agrees to caucus with Republicans. The data underlying Exhibit 1 are from Nate Silver’s excellent Senate forecasting model at

Medical Device Tax

The ACA levies a 2.3 percent tax on sales of taxable medical devices by both manufacturers and importers (excluding retail-purchased devices, eyeglasses, contact lenses and hearing aids). The tax obviously is opposed by industry, but also by a large majority of lawmakers in both parties (and in both houses of Congress). A 2013 nonbinding vote on a repeal bill (with 4 Democratic Senators[2] cosponsoring) passed the Senate by a 79-21 margin; and a similar House repeal bill attracted 260 bipartisan cosponsors. Though the administration continues to oppose repeal, this proven base of support suggests that both the House and Senate could muster veto-proof supermajorities…if both chambers have the chance to vote on a binding resolution

Whether the binding resolution reaches the Senate floor is a question of leadership – such a vote is unlikely under Democratic control, but likely under Republican control. Majority Leader Harry Reid (D, NV) has been a consistent and vocal supporter of the device tax and as recently as May blocked an amendment that would have put the tax on hold for two years, in spite of his own caucus’ position. A shift to Republican control would eliminate Senator Reid’s ability to keep the bill from a full Senate vote

The Independent Payment Advisory Board (IPAB)

We’ve written extensively about the Independent Payment Advisory Board (IPAB) in the past[3], and argued that its impact could be very significant, albeit for a very narrow subset of the health sector – namely reimbursement to Medicare Part A and Part B innovators (especially non-commodity device manufacturers and makers of physician-administered injectable drugs). The strategic relevance of IPAB goes well beyond any price cuts made early on; far more important is that IPAB could (and we believe would) effectively make CMS[4] influence over drug and device prices (at least in Parts A and B) a permanent reality

The IPAB’s authority to propose cost reductions is triggered when certain per-beneficiary Medicare growth rates exceed target growth rates that reflect broader economic activity. In the recently released 2014 Medicare Trustees Report, current projections call for the IPAB’s authority to be triggered starting in determination year 2022 for implementation in 2024. This is a full six years later than projected in just the previous (2013) report

This has two major effects: First, by indicating that Medicare spending growth is within targeted ranges without the IPAB, the perceived need for the IPAB fades. Second – and of far greater practical relevance – the latest Report moves any possible savings from the IPAB to the very outer edge of the 10-year budget horizon. Because of this, IPAB can now be repealed without Congress having to find ‘pay-fors’; i.e. for the first time since the IPAB legislation was passed, Congress can eliminate IPAB without also having to eliminate an amount of spending equal to the savings IPAB was expected to produce

As with the medical device tax, a straight IPAB repeal measure almost certainly cannot get an up/down vote on the Senate floor as long as the chamber remains under Democratic control. In contrast, a new Republican majority leader (Mitch McConnell, who is in a close race himself, or John Cornyn) could likely count on some measure of bipartisan support for an IPAB repeal. For example, while most Senate Democrats have been coy about commenting on the IPAB directly, Sens. Hagan and Pryor (both in toss-up races) are on record opposing the IPAB and Sens. Cardin and McCaskill have at least betrayed a willingness to revisit the issue. Howard Dean is the most prominent – and probably most liberal – Democrat to voice strong opposition to the IPAB, and may provide ideological air cover for other Senate Democrats to vote for repeal

The States – several main lean further from R to D, and in doing so become more likely to expand their Medicaid programs

At the state level, the key unresolved health-related issue remains whether or not, and when, the 23 holdout states choose to expand Medicaid eligibility in line with the standards set out in the ACA. These holdout states are overwhelmingly Republican controlled – either in the governor’s mansion, the state legislature, in average voter partisanship or, most commonly, some combination of these

We categorized all 50 states by the party affiliation of their governor; legislature; and average voter and looked at whether or not the state had expanded Medicaid. Not surprisingly, 100 percent of the ‘Pure Democratic’ states (14/14) have expanded Medicaid, while just 14 percent (3/21) of ‘Pure Republican’ states have. In between the picture is somewhat more complicated. When faced with other institutions that are controlled by the opposing party, the party affiliation of state legislature appears to be the best predictor of expansion action; followed by voters’ direction and degree of party loyalty; and finally by governor. That said, there is a significant step-up in probability of expansion when any of the 3 institutions switches from Republican to non-Republican control

Of the 23 holdout states, 15 will elect governors in November (all of which have Republican incumbents). Among these 15, six of the races are considered ‘toss-ups’ by either The Cook Political Report, or Real Clear Politics

To gauge potential party-switches among state legislatures, we consulted the Republican Legislative Campaign Committee (RLCC) “Path to Victory” List and Democratic Legislative Campaign Committee (DLCC) “Emerging Majority” and “Chambers to Watch” Lists. These lists highlight 16 state legislative bodies per party in which the national committees see the best opportunities to flip control. Of the 23 holdout states, 4 have at least one legislative chamber on the DLCC lists (and 3 have both chambers). In addition both Maine’s House and Senate are RLCC’s targets

In Exhibit 2 below, we examine the 6 states with toss-up gubernatorial elections (AK, FL, GA, KS, ME, WI), plus the 2 states (MT, NC) with no gubernatorial election this cycle but with legislatures that may see changes in control. Taken together, these 8 Medicaid hold-out states contain more than 5M potential expansion beneficiaries, equal to nearly 36 percent of total potential expansion beneficiaries, and $18B in additional healthcare spending

Hospitals had strongly outperformed Healthcare for several years, until taking a breather over the past +/- 2 months. On a FY+3 PE basis, Hospitals trade at just a 4 percent premium to the sector, despite projected annualized EPS growth 44 percent higher than the sector. On a PEG-basis, Hospitals trade at a discount to the sector and just in-line with the broader SP500

Only about a quarter of (publicly traded) hospital beds (26.7 percent) are in states that have expanded Medicaid; a full 2/3 of the remaining beds are in non-expansion states where party control is unlikely to be affected by the midterms

By orders of magnitude, HCA and THC are best positioned to benefit from Medicaid expansion in the eight states we have highlighted – both in absolute bed-counts, and as a share of total company beds. Only 14 percent of HCA’s beds are in states that have already expanded Medicaid, while more than 34 percent are in the eight states we believe are more likely to expand Medicaid following the midterms. 33 percent of THC’s beds are in states that have already expanded Medicaid (fewer than all peers expected HCA); and 27 percent are in the next most likely expansion states (less than only HCA, and more than twice the next closest peer) (Exhibit 3)

We should emphasize that we believe all states ultimately will participate in the Medicaid expansion, at least partially (i.e. expanding eligibility to at least 100 percent of the federal poverty level (‘100 FPL’), rather than to the full 138 FPL called for by the ACA). Current reluctance to expand strikes us as an acute-phase political / ideological reflex, rather than as a carefully considered politico-economic decision for the longer term. As the current administration winds down, we believe hold-out states are more likely to decide that the economic gains of expanding Medicaid outweigh the perceived political / ideological barriers. It bears noting that the initial Medicaid roll-out following the program’s enactment in 1965 (Exhibit 4) bears more than a passing resemblance to the earliest stages of the current expansion

The Judiciary — Halbig v. Burwell

The ACA provides for federally run health insurance exchanges (so-called ‘federally facilitated marketplaces or ‘FFMs’) in states that choose not to (or cannot) operate their own exchange. 27 states containing more than 70 percent of total national subsidy eligible persons declined to operate their own exchanges, thus each of these states currently have FFMs

In Halbig v. Burwell, plaintiffs allege the ACA restricts the availability of subsidies to persons purchasing coverage on state-operated exchanges, i.e. plaintiffs allege that beneficiaries purchasing coverage on the FFMs are not eligible to receive subsidies. The Court of Appeals for the D.C. Circuit found in favor of the plaintiffs (i.e. Halbig) on July 22 of this year; however the Court vacated this decision pending rehearing by the entire roster of D.C. Circuit judges (a so-called ‘en banc’ review). Given the more liberal make-up of the D.C. Circuit’s full roster, it seems likely the court will find for Burwell. Nevertheless other similar challenges are working through the Circuit Courts; most recently in Oklahoma a federal district judge found for plaintiffs whose allegations parallel those of Halbig, setting up a likely review by the 10th Circuit

Given the diversity of viewpoints in the judiciary and the prominence of the issue, we expect disparate Circuit rulings, which set the stage for a possible Supreme Court review. This in turn raises the possibility that plaintiffs could prevail, eliminating subsidies for beneficiaries in states with FFMs

Be that as it may, the likely result of a plaintiff’s victory is not a loss of subsidies, but a shift of FFM states toward ‘legitimate’ state- operated exchanges. The ACA provision calling for FFMs in states not operating state exchanges effectively enabled these states’ decisions not to operate their own exchanges – i.e. because of the FFM provision there were few if any practical or political downsides to not operating a state exchange. However if FFM beneficiaries lose their subsidy eligibility, politicians in the affected states face a far more consequential decision – remain as FFM states and deny a larger percentage of voters access to subsidies; or, operate a state exchange and allow the same large percentage of voters continued access to subsidies

Even though exchange enrollment thus far is relatively modest – less than 40 percent of subsidy-eligible persons are enrolled – these current subsidy recipients have considerable political weight. For example current subsidy recipients outnumber teachers 2:1, and the number of subsidy eligible persons is roughly on par with the number of living veterans (Exhibit 5). What’s more, the average subsidy received by current recipients is around $265 / month

  1. 53 Democrats plus Independents who caucus with Democrats, Bernie Sanders (VT) and Angus King (ME)
  2. Al Franken (MN); Amy Klobuchar (MN); Bob Casey (PA); Joe Donnelly (IN)
  3. See for example, “The Bull Case for Specialty Drug Pricing,” SSR Health, July 7, 2014
  4. Centers for Medicare and Medicaid Services
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