By Grace Totman and Hunter Hammond

The Mounting Shifting Sands in Healthcare Policy

July 12, 2023 – The 2023 healthcare policy backdrop has had no shortage of drama. The confluence of increased regulatory scrutiny, lessening Congressional sympathies for the industry, and significant shifts in Medicaid and Medicare alike— all against a backdrop of macroeconomic concerns, shrinking COVID aid, and higher interest rates— have set the groundwork for a busy second half of the year. Coming into the year, Capstone predicted the industry would face looming cuts and challenges (See our 2023 Healthcare Preview).

We think the drama is far from over. From Medicaid and pharmacy benefit managers to hospitals and underappreciated rulemakings, Capstone expects the second half of 2023 to feature a swath of action across the healthcare policy landscape that we believe companies and investors alike are underappreciating.

Capstone expects the second half of 2023 to feature a swath of action across the healthcare policy landscape that we believe companies and investors alike are underappreciating.

In a recent Q&A, Capstone’s co-heads of Healthcare, Grace Totman and Hunter Hammond, provide updates on the remainder of what 2023 holds for underappreciated healthcare policy.

What expectations did you have for the year that have already played out?

Medicaid Redeterminations: As we predicted early in the pandemic, Medicaid redeterminations are now in full swing and as chaotic as we thought they would be. In states like Florida and Arkansas, disenrollment percentages are higher than 50%. In states like Virginia, however, the process appears to be running smoothly, routinely producing disenrollment percentages in the mid-single digits. While the process is in its early stages, and many of the largest states, namely Texas, have yet to release data, we continue to believe managed care insurers (Centene and Molina) are underestimating the ultimate impact. CBO data released recently suggests that there are 4.6 million enrollees who have both Medicaid and employer-sponsored insurance and are, therefore, “double covered.” These enrollees have been highly profitable for the insurers, worsening the impact of redetermination from an acuity perspective. The insurers also believe most states will push the brunt of disenrollments into 2024, something which is not playing out based on data released so far. Recent data from Florida, which breaks out membership loss by managed care insurer, suggests that ultimate disenrollment- as a function of original projections- could be worse for Molina than it will be for Centene. It is still too early to say this trend will continue, but Capstone will continue to track data releases from various states and update our views on the ultimate impact on managed care insurers and providers.

PBM Attention: In March, Capstone noted that pharmacy benefit managers (PBMs) face the biggest threat of reform in years but that we believe material legislation is unlikely in the next two years. We predicted lawmakers would continue to call for reforms, spurred by the forthcoming release of the Federal Trade Commission’s (FTC) report on PBM vertical integration. So far, all has been true. Though we are still awaiting the FTC report, PBMs remain a topic of conversation on the hill, even making their way into debt ceiling negotiations at one point. Still, we continue to believe meaningful reform is unlikely, but only slightly (we assign a 40% probability). So far, multiple committees in both the House and Senate have conducted hearings and processed legislation. We believe the conversation on the Hill will turn to formulating a bill or package of legislation that both parties and chambers can agree on. However, finding agreement is difficult, and finding a legislative vehicle that doesn’t collapse under its own weight with the addition of other healthcare priorities (insulin caps, hospital payments) is difficult. Look for the Senate Finance Committee to take a stab at genuine policymaking, with the best chance of passage occurring in 3Q or 4Q of this year as lawmakers deal with appropriations bills.

What do you think was overlooked in the first half of this year that clients should be paying attention to?

Aggressive Regulatory Decisions: In the first half of the year, we saw the Centers for Medicare & Medicaid Services (CMS) make a series of aggressive regulatory decisions in the healthcare world. These included a significant overhaul of the Medicare Advantage risk adjustment system as well as a profit cap for home-based Medicaid personal care providers. These moves go against what we thought would be a relatively benign and litigation-adverse Biden administration. The profit cap for home-based Medicaid providers is particularly shocking as it is the first federal mandate on healthcare profitability since the ACA’s introduction of medical loss ratios for insurers. This administration has signaled that they think of, and intend to regulate, healthcare as a right more than a for-profit business, suggesting continued aggressive regulatory decisions are likely for the remainder of Biden’s tenure.

Lack of Congressional Healthcare Support: Coming out of the pandemic, lawmakers’ appetite to dump money into the healthcare industry has dissipated. Capstone has heard anecdotally that the American Hospital Association, who previously held enormous power on the hill, is struggling to get meetings. The sentiment is that healthcare companies, namely hospitals, benefitted massively during the pandemic and that additional funds are unnecessary. Republicans and Democrats alike agreed to claw back unused COVID-19 funding for debt limit purposes. Many investors still appear to be betting that Congress won’t let a hospital go bankrupt. However Capstone believes they are overestimating Congressional sympathy for the healthcare sector. While hospitals – and other healthcare sectors – will likely get some minor wins this year (e.g., disproportionate share hospital cut delays), gone are the days of massive hospital bailouts.

What underappreciated themes do you expect to play out this year in your sector?

Payer Power: For years now, the largest payers have slowly – and quietly – bought providers and pharmaceutical entities across the healthcare landscape. The US antitrust system is inadequate at blocking vertical integration, providing little hope of regulatory intervention in the near-term. For providers already facing labor shortages and inflation, this ‘payer power’ dynamic continues to pressure rates in an unsustainable way. For example, in the post-acute world, we’ve seen Humana purchase Kindred at Home, United purchase both LHC Group and Amedysis. Both payers have moved to in-housing almost the entire care continuum, from post-acute to pharmacy benefit management, leaving providers on the outside with little negotiating power. One theory is that progressive lawmakers have allowed this to occur with the goal of creating a handful of all-encompassing payers (UnitedHealth Group, Elevance, Cigna) whom they can then regulate aggressively. We have dubbed this “UnitedHealthcare for All.” Watch for continued mergers in the second half of 2023 and an eventual regulatory/lawmaker awakening to the vertical integration that has been allowed to occur.

Watch for continued mergers in the second half of 2023 and an eventual regulatory/lawmaker awakening to the vertical integration that has been allowed to occur.

What are the big questions you are paying attention to for the balance of 2023?

How do Medicaid redeterminations shape up in the second half of 2023?

With data from larger states likely being released in early to mid-summer, we are acutely focused on what types of beneficiaries are being disenrolled from Medicaid and the speed at which states are disenrolling individuals. Texas, which is expected to release data this coming week, is a particularly interesting case study given the state’s size and political ideology. Additional state data will inform the eventual impact on managed care insurers from a revenue and profitability perspective.

Will CMS continue to be controversial in the upcoming rulemaking season?

In the last several weeks, we’ve seen a less-than-ideal payment boost for dialysis facilities, a very negative proposed home health update, and a 340B hospital payment rule. By the end of July, we will find ourselves in the middle of the annual CMS rulemaking season. Payment updates for hospitals, physicians, ambulatory surgical centers,  and more are all forthcoming. In addition to the standard payment updates, which will inform whether providers will see relief from recent rate pressure, broader policy themes often emerge in rulemaking cycles. In recent years, value-based care, health equity, and social determinants of health have all been present across almost all of the rulemakings. This year, Capstone is watching closely for whether any new policy themes emerge, as well as the outlook for the rate environment.

How will the launch of Medicare drug pricing negotiations go?

With the list of the first 10 drugs to be negotiated under Medicare Part D set for September 2023 release, we are eagerly watching for policymaker reaction, potential litigation, and industry response.

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