Weekly Wisdom – June 21, 2023

By Hightower Great Lakes on June 21, 2023

Elective Procedures are Back

The recent buzz surrounding the medical device industry was fueled by comments from the largest health insurance provider, UnitedHealth (UNH)[1], at a conference on June 13.

The company stated that they are facing higher costs related to a recent uptick in some medical procedures, like orthopedic knee and hip surgeries. This uptick reflects the long-lasting, pandemic-driven pent-up demand.

Specifically, the cost metric that will be impacted from the rise in these types of procedures is the medical care cost ratio, which is what these procedures will cost UnitedHealth (UNH) divided by the premiums they collect from their customers. This medical care cost ratio will now be at the high end of the company’s prior guidance or even slightly above the guided figure[2].

During the pandemic elderly persons had to weigh the costs and benefits of undergoing an elective procedure. On one hand the elective procedure (commonly an orthopedic surgery) may improve the life of the patient, but on the other hand the patient did have a risk of contracting COVID-19 from being present in the hospital/ambulatory surgical center.

Considering nearly 40% of all surgeries in the United States are performed on senior citizens (65 years and older), and senior citizens are a sensitive group when it comes to complications from COVID-19, this caused the pent-up demand for these medical devices[3].

This commentary surrounding the orthopedic device recovery caused many device makers’ stocks to rise while health insurance providers fell. Device makers Stryker Corp (SYK) and Zimmer Biomet (ZBH) both closed ~4% higher as a result of the news while UnitedHealth (UNH) fell ~6%. In fact, nearly $60 billion of health insurers’ market values were erased due to the news, while $20 billion was added to the market cap of medical device and hospital companies.[4]

It is important to distinguish that specifically the device companies that make orthopedic products like knee or hip replacements are the ones that should see the benefit. Procedures like heart-related surgeries have already returned to pre-pandemic levels since these kinds of surgeries are not considered elective.

Chart 1: U.S Joint Replacement Market Size[5]

The Inflation Reduction Act: How it will Impact Big Pharma

Drug price reform featured in the Inflation Reduction Act has come into the spotlight among recent lawsuits from multiple large pharmaceutical companies. Firstly, to understand why these companies along with the U.S. Chamber of Commerce are suing the Biden Administration, the legislation must be explained.

The piece within the Inflation Reduction Act, which was passed in August of 2022, that these lawsuits pertain to is regarding drug price negotiations. Under the Inflation Reduction Act the government will be able to essentially impose the price that they think is fair when it comes to a select number of expensive prescription drugs, which includes insulin.

Chart 2: Medicare Drug Price Negotiation Timeline[6]

The government is incentivized to impose the price of these drugs because it predicts that these price negotiations will save them $25 billion annually by 2031, as well as saving beneficiaries’ money.[7] In fact, Medicare Part B drug spending is concentrated among a small number of drugs; the top 20 drugs accounted for 53% of spending, while the top 10 drugs accounted for 40% of Part B drug spending in 2021.[8]

The other important piece of this legislation is the inflation-based rebates, which states that drug manufacturers will have to provide rebates to Medicare if the price of their prescriptions rise faster than inflation.[9]

Although the true dollar impact is still unknown, this legislation could have a significant impact on many pharmaceutical giants once the negotiated prices take effect in 2026. This significant impact can be seen when viewing the list of drugs that will be impacted by the legislation, some representing ~25% of the company’s total revenue for the year.[10]

Chart 3: List of Drugs that Will Be Impacted by the Inflation Reduction Act[11]

Big Pharma Backlash

The first lawsuit against the Department of Health and Human Services came from Merck & Co. Inc (MRK) on June 6 of this year.[12] Merck & Co is specifically concerned about their Type 2 diabetes drug, Januvia, which makes up about 9.5% of their total revenue.[13] Two of Merck & Co’s other drugs, Keytruda and Janumet, are also expected to be affected by the legislation, further amplifying its impact. The company went as far as saying that the new legislation was a “sham” and “tantamount to extortion.”

Bristol Myers Squibb (BMY) followed suit and also filed a lawsuit against the Department of Health and Human Services this past Friday stating similar points that Merck and Co. made[14]. Both companies are suing based on the 5^th amendment which states that the government must pay reasonable compensation for private property taken for public use.

Click here to read last week’s Weekly Wisdom (6/14).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Reuters.com. As of June 15, 2023  

[2] Source: Marketwatch.com. As of June 14, 2023

[3] Source: Cnn.com. As of November 25, 2022

[4] Source: Reuters.com. As of June 15, 2023

[5] Source: Grandviewresearch.com. As of July 20^th, 2021

[6] Source: Kff.org. As of January 24, 2023

[7] Source: Reuters.com. As of June 16, 2023

[8] Source: hhs.gov. As of June 9, 2023

[9] Source: Kff.org. As of January 24, 2023

[10] Source: Seeking Alpha. As of June 20, 2023

[11] Source: Healthaffairs.org. As of June 9, 2023

[12] Source: CNBC.com. As of June 6, 2023

[13] Source: Bloomberg. As of June 20, 2023

[14] Source: Reuters.com. As of June 16, 2023