Issue 28

Health care was not a major campaign issue in this past U.S. election, and neither Republicans nor Democrats provided many details about their plans for health care. Now, with a Republican sweep in the White House and in both houses of Congress, President-elect Trump has, at least in the next two years, significant ability to potentially influence U.S. health care. While we do not expect a major ratings impact for health care companies over the near to intermediate term, we believe any changes will be a net negative for the industry from a credit perspective. In this article, we discuss what the incoming Administration may mean for the health care industry and the top five developments we are watching--what happens with the Affordable Care Act (ACA), the Medicare drug price negotiation that is part of the Inflation Reduction Act (IRA), the tone at the Federal Trade Commission (FTC) on M&A and tariffs, and the priorities of the new head of Department of Health and Human Services.

Takeaways

ACA subsidies are likely to expire under Trump

We consider this a negative for health care services. President-elect Trump is highly unlikely to seek to repeal ACA, though he may let several Biden-era subsidies expire at the end of 2025, leading to potentially 4 million people losing insurance coverage. A higher uninsured population would mean fewer people actively seeking health care services and higher bad debt expense, especially for safety-net providers and hospitals.

What happens to Medicare drug price negotiation in a revamp of the Inflation Reduction Act (IRA)?

We think this is uncertain for pharma but already a negative for the industry as whole. President-elect Trump has threatened to roll-back the IRA, starving it of funding. However, he supports the Medicare drug price negotiation part of the IRA, having floated the idea of it in his previous term. But could President-elect Trump possibly accelerate or expand Medicare drug price negotiation and make it more onerous for the pharmaceutical industry given the populist support behind lowering drug prices?

Decreased FTC scrutiny on acquisitions is a positive for pharmaceuticals and health care services

We believe under a generally more business friendly Administration, the FTC's stance on M&A will likely ease, a positive for both the pharmaceutical and health care services industries that have been consolidating over 10 years. While increased M&A could put negative pressure on ratings in the immediate term, the inability to do needed acquisitions could have longer-term negative consequences for competitive position. Also, M&A could divert cash flow away from credit negative share purchase activity.

Tariffs are negative for health care services, possibly for pharmaceuticals

Tariffs on medical supplies from China and other countries will raise costs for health care service providers at a time when the industry is struggling with inflationary costs and elevated labor expenses.

Changes at the regulatory agencies is uncertain for health care

President-elect Trump's proposed candidate for Health and Human Services (HHS), Robert F. Kennedy, Jr., could result in major ramifications for the regulatory agencies underneath it, such as the FDA and the CDC. However, Kennedy is known as a vaccine opponent, and could slow down the processes by which new vaccines are approved.

We expect limited ratings impact over the intermediate term but we see more downside than upside risk

We do not envision any rating changes due to the change in administration until it becomes clear what policies will be implemented and their time frame. However, we see more downside than upside risk to ratings over the near term.

Affordable Care Act (ACA) Unlikely To Be Repealed, But Tax Credits Likely To Expire, Increasing The Uninsured Rate

Negative for health care service providers, especially hospitals.  President-elect Trump has not indicated that he will seek to repeal ACA, having said that he will only replace it if he has something better. President-elect Trump sought to repeal and replace the ACA in his last term but was unsuccessful, despite Republican control of Congress at the time. Given that the program has grown and become more entrenched, we think it is highly unlikely the Trump Administration will be able to repeal it, even with Republican control of Congress again. However, rather than repeal, Speaker Mike Johnson has indicated "massive reform" of the ACA is on the agenda, with changes coming for Medicare and Medicaid.

Repeal of the ACA unlikely.  In his first term, President-elect Trump was very vocal in his desire to repeal the Affordable Care Act, though without a viable replacement plan, the act survived. However, we believe there is substantial risk for major changes, particularly with Republicans controlling both the Senate and House of Representatives, introducing significant uncertainty which most likely would have significant downside risk.

ACA subsidies are likely to expire, lowering coverage.  The President-elect could allow premium subsidies enacted in 2021 to expire in 2025. Absent an act of Congress to extend these subsidies, this will result in millions of people facing what the Kaiser Family Foundation estimates would be a 79% average increase in premium costs. Premiums would become unaffordable for many, resulting in an increase of the uninsured population in the U.S. from the current all-time low of 7.2%, which will hurt providers. The Congressional Budget Office (CBO) estimated that the level of uninsured in the U.S. fell to an all-time low of 7.2% in 2023, but will increase to 8.9% in 2034, due partially to the expiration of enhanced marketplace subsidies after 2025. The CBO also estimates that the number of uninsured would grow by 4 million in 2026, following expiration of subsidies in 2025, with a loss of 3 million people that receive coverage through the marketplace.

Medicaid program cuts.  Medicaid will likely come under tremendous pressure under the new Administration, given President-elect Trump's stated desire to reduce Medicaid financing. It is possible that the basic funding mechanism could be changed, possibly into a block grant program which would cap federal funding but would most likely lead to tremendous cuts in state Medicaid programs. In addition, the federal matching dollars that have been provided for those states that participate in those programs could be reduced. Furthermore, the Trump Administration is considering adding work requirements for Medicaid recipients. Currently, Medicaid payments to providers are already low and its common for providers to lose money on their Medicaid business, with many providers not participating in the program. Further cuts or restrictions to the program would be a negative development for the health care services industry.

Medicare increasingly transitioning to Medicare Advantage.  Medicare enrollment has been rapidly shifting from traditional Medicare to Medicare Advantage (MA), which is operated by commercial insurers. Over half of eligible Medicare beneficiaries are now enrolled in MA plans. It appears Trump intends to aggressively push the MA model and make it the default option, and may also give insurers more control of Medicare, essentially privatizing it. Because MA plans are far more restrictive than traditional Medicare and typically operate with limited physician networks, many hospitals and physicians already refuse to contract with MA plans. The administrative costs associated with these plans include significant preauthorization requirements that tend to be a margin headwind for providers. Consequently, aggressive expansion of the MA program would likely be a credit negative for providers.

Tariff Increases

A negative for both pharmaceutical and health care service providers.  The U.S. health care industry has been increasingly dependent on imports, both for medical supplies (gloves, face masks, syringes) and pharmaceuticals (active pharmaceutical ingredients, finished product), especially from China and India. For pharmaceuticals, an estimated $170 billion of products are imported annually from abroad. However, an overwhelming portion of the imports are from Western countries, where pharmaceutical companies have set up manufacturing due to tax-friendly policies, such as Ireland. China currently accounts for a relatively small but growing portion of U.S. pharmaceutical imports, consisting mainly of active pharmaceutical ingredients (APIs). However, China accounts for a significant percentage of key APIs, especially for use in important large volume generic drugs. Also, China's market share of imports may be understated, as its APIs are used in pharmaceuticals imported from other countries, including branded drugs from Ireland and Switzerland, which account for a much larger portion of imports on a dollar basis. Thus, China accounts for a larger portion of imports than is known.

However, we believe the Trump Administration is unlikely to impose hefty tariffs on pharmaceutical imports, especially given the end goal of lowering U.S. drug costs. (COGS is a small part of the cost of drugs, and API is even smaller, especially for high-price branded products. Tariffs on API shouldn't affect branded drug prices too much. It could be more material for generics.) If tariffs are intended to encourage bringing manufacturing back to the U.S., re-shoring of pharmaceutical production is not something that happens quickly given the lengthy regulatory approvals and time needed to develop adequate local manufacturing expertise. Generics account for roughly 90% of all U.S. prescriptions, and tariffs would potentially raise costs for a significant portion of the market from a prescription basis. Also, while the U.S. is not a large exporter of pharmaceuticals to China, China could retaliate by restricting sales of key APIs. These products may be low dollar value, but they are utilized in widely used generics in the U.S. Given the recent shortages of generic drugs in the U.S. causing near medical emergencies, we believe the incoming Trump Administration will be cautious and likely carve out pharmaceuticals from any future-imposed tariffs.

For medical supplies, a tariff increase would be a definite negative for health care service providers that are still struggling with inflationary pressures that are moderating but remain at elevated levels. Medical product distributors, such as Medline Borrower L.P. (B+/Positive/--), OMI Corp. (BB-/Stable/--), and Cardinal Health Inc. (BBB/Stable/--), that source products from China could see margins squeezed as well if they are not able to pass on the higher costs to customers. The Biden Administration had already raised tariffs on China for syringes and needles (to 50% from 0%) and personal protective equipment, such respirators and face masks (to 25% from 0%-7.5%) earlier in 2024, to encourage the growth of domestic manufacturers. The impact of shortages of key medical products, such as face masks and gloves, was highlighted during the COVID-19 pandemic, when other countries restricted exports of products to reserve them for their home markets. The Biden Administration has been cautious on tariffs on medical supplies, as a further rapid increase in tariffs may impose too great a cost on the health care system and it takes time to transition manufacturing to alternate sources. Thus, we do not expect the incoming Administration to raise tariffs aggressively in the near term.

Potential Changes To The Inflation Reduction Act?

While the overall impact is unknown, it's already a negative for pharmaceutical industry.  The Medicare drug pricing negotiation feature embedded in the IRA is the Biden Administration's signature drug pricing legislation, which enabled Medicare for the first time to negotiate drug prices, instituted a $2,000 annual limit on out-of-pocket costs for patients, and provided for a maximum $35 price limit on insulin products. The negotiated drug prices go into effect in 2026 and, based on the announced initial 10 drugs selected for the program--with further drugs to be added each year--will generate an estimated $24 billion in savings annually by 2031.

While President-elect Trump has indicated that he plans to defund the IRA, revoking funds to implement the climate change features of the legislation, it appears he will leave the drug pricing portion of the act given bi-partisan support for lowering drug spending and his earlier expressed support for Medicare drug pricing negotiation. However the president-elect, with Republican control of Congress, could accelerate or expand the drug pricing provisions within the IRA, or add provisions that could be more onerous for the pharmaceutical industry.

FTC Lessens Scrutiny On Health Care Industry M&A

A positive for an industry that needs M&A.  We believe FTC scrutiny on M&A will moderate under the second Trump Administration, compared to the Biden Administration's aggressive stance under FTC head, Lina Khan, who made health care one of her areas of focus. However, populist mistrust of large companies potentially possessing too much pricing power, anger about pharmaceutical pricing, and escalating health care costs in general will mean scrutiny on the health care industry will likely remain heightened under a Republican administration. The FTC and the Department of Justice have also updated their merger guidelines, which indicated a broader mandate at reviewing M&A, and how that may guide policy under a new Administration and FTC head is uncertain.

Still, any moderation in policy is a positive for business prospects, albeit potentially harmful to leverage and ratings, given how important we believe M&A has become in preserving competitive positions of pharmaceutical companies and health care service providers. For the pharmaceutical industry, pressures from insurers on pricing, stiffer competition, and the looming Medicare drug price negotiation, as well as upcoming patent expirations have led to companies looking to M&A to diversify their portfolios, deepen their pipelines, and spur future growth.

Despite increased scrutiny, The FTC did not block any major pharma acquisitions. Merck & Co. Inc.'s $10.8 billion acquisition of Prometheus Inc., Pfizer Inc.'s roughly $43 billion acquisition of Seagen Inc., Amgen Inc.'s $27.8 billion acquisition of Horizon Therapeutics, Bristol-Myers Squibb Co.'s acquisitions of Karuna Therapeutics for $12.7 billion and RayzeBio for $4.1 billion, and AbbVie Inc.'s acquisitions of ImmunoGen for $10.1 billion and Cerevel Therapeutics for $8.7 billion in late 2023 were all permitted to proceed, though some deals faced requests for additional information.

In contrast, the FTC blocked Community Health Systems Inc.'s planned sale of two facilities to Novant Health, which would have raised much-needed cash, and HCA Healthcare Inc. called off the purchase of certain health care facilities in Utah following FTC action to scuttle the deal. On another note, the FTC lawsuit against the major pharmacy benefit managers (PBM) for inflating the costs of insulin in their negotiations with pharmaceutical companies would probably continue as the wave of anti-PBM sentiment persists. The PBMs included CVS Health Corp.'s Caremark Rx, The Cigna Group's Express Scripts, and UnitedHealth Group Inc.'s OptumRx. While pharmaceutical companies are not the target of the lawsuit, it is uncertain how it may affect industry practices.

On the health care services side, M&A has also played a critical role in enabling companies to increase scale to gain efficiencies as well as to exert greater pricing power in reimbursement negotiations with the insurers. Another area of increased scrutiny regards private equity's role in health care, with many private-equity-owned service providers pursuing roll-up strategies to gain scale (and theoretically increased pricing power) in local markets. The FTC had increased scrutiny on private equity owned transactions as well as major health system acquisitions and increasing negative sentiment on private equity participation in health care, we believe scrutiny on M&A in health care services could remain relatively higher than on pharmaceuticals. In another development, the FTC has moved to limit non-compete agreements. Given that upwards of 40% of physicians operate under non-compete agreements, the ban could be a significant wildcard for health care service providers which continue to struggle with rising labor costs.

Make America Healthy Again

Potential health care agency picks will likely have a slightly negative impact on the health care industry.  Much has been made of President-elect Trump's plan to appoint Robert F. Kennedy Jr. to lead the Health and Human Services (HHS) and what Kennedy's "Make America Healthy Again" (MAHA) campaign could mean for the health care industry. Ultimately, we expect the potential health care agency picks to have a slightly negative credit impact on health care companies. Given the initiatives outlined in his MAHA campaign and past statements, we believe Kennedy is more likely to focus on reforming the food industry before attempting a major shakeup in health care. Kennedy has pledged to remove toxins from food and water and to increase their testing. Increased efforts toward testing could provide upside for life sciences tools companies, such as Agilent Technologies Inc., Bio-Rad Laboratories Inc., Revvity Inc., Thermo Fisher Scientific Inc., and Danaher Corp., potentially boosting demand for instruments and consumables from regulatory bodies.

Areas where Kennedy could shake up the health care industry are a bit more nuanced. His anti-vaccine stance is unlikely to have a major impact on policy. However, as the head of HHS, the federal government's endorsement of vaccines could lead to fewer vaccine sales, including those for shingles, pneumonia, and RSV. This could be problematic for GSK PLC, Merck, Pfizer, Sanofi, and AstraZeneca PLC, which rely on or are anticipating growth in U.S. vaccine sales for key products. It could also lead pharmaceutical companies to invest less in vaccine development in anticipation of lower uptake for newly released vaccines.

Despite all criticisms, the FDA and its user-pay model have improved significantly in its ability to quickly review novel drugs at a time when new drug candidates are more complicated than ever. It seems unlikely that the new Administration will be effective in moving this to a taxpayer-funded model at a time when the newly formed Department of Government Efficiency (DOGE) is focused on cutting government costs. Additionally, as Kennedy's food agenda is expected to seek additional FDA funding, a plan it to simultaneously remove a major source of the FDA's funding seems unlikely.

Kennedy's most aggressive position has been his intent to reform the National Institutes of Health (NIH), which could drastically change the direction of medical research in the U.S. This would likely take far longer than four years to have a major impact on the pharmaceutical industry. The U.S.'s edge in pharma research is due in large part to the government-directed research. A significant shakeup to the status quo could pose longer-term risks to pharmaceutical companies' new drug pipelines.

Appointments to key positions, such as heads of FDA, CDC, CMS, and NIH could provide additional insight as to how a second Trump presidency and Kennedy-led HHS could have on the health care industry. While it seems clear that the Administration is looking to change things up, we see incremental (rather than radical) change as most likely, particularly when the appointees have little governmental experience.