The health care industry is subject to many regulations and at many levels of government. This makes things challenging not only for the businesses (from providers, to payers, to suppliers), whose success or failure is subject to understanding and adhering to these regulations, but also for investors who may only be tied to the health care industry through a position in a portfolio.

When I consider risks for a recommendation in the health care industry, I always list government regulations as a risk. Depending where a company falls within the health care ecosystem may dictate the amount of risk, but that there are regulations and that those regulations are subject to change presents some level of risk for every health care business. So how do the health care components of the new Inflation Reduction Act that was recently signed into law affect different companies, and perhaps more interestingly to this audience, investors?

The Inflation Reduction Act (which may actually have little to do with reducing inflation) presents some of the most dramatic changes to the health care industry since the Affordable Care Act. The most monumental component is the ability for the Department of Health and Human Services (HHS), more specifically the Center for Medicare and Medicaid Services (CMS), to negotiate drug prices, creating the ability to lower prescription drug costs for many Americans.

As a consumer of medications, this may be welcomed news. But as an investor of companies that produce and sell drugs, is this cause for concern? As with most things, the devil is in the details, so let’s take a closer look to see if we should be worried.

• The price negotiations begin in 2026 with only 10 drugs covered under Medicare Part D. It increases to 15 drugs in 2027, then 15 Part D and Part B (administered by physicians) drugs in 2028, and 20 Part D and Part B drugs in 2029. Given that a pharmacist is required to know the ‘Top 500’ drugs, 10-20 is not a lot, although they might be some of the most expensive drugs that Medicare covers. This may cause the companies that produce these drugs to lose revenue, but frankly, they can reprioritize their expenses to regain profits – I, for one, would be happy to see fewer drug advertisements, which seems (to me anyway) to only create a society of hypochondriacs, fueled by Dr. Google, who are looking for a solution in pill form and do not want to work to make a change. I will step off of my soapbox now…
• The drugs that are to be negotiated are not yet known. But there are certain requirements for how they qualify:
  • The drug cannot have a generic or biosimilar available – could this be an opportunity for generic or biosimilar-focused companies like Teva Pharmaceuticals (NYSE: TEVA) or Coherus Biosciences (NASDAQ: CHRS)?
  • The drug needs to have been on the market for nine years for a small molecule drug or 13 years for a biologic. This means that the drug is likely nearing the end of its patent lifespan.
  • The drugs are some of the highest-cost drugs covered by Medicare. And this is where some investors might find a conflict (I know I do!) – how does a pharmaceutical company maintain its fiduciary responsibility to investors while making its products available at a price the market values? PhRMA (Pharmaceutical Researchers and Manufacturers of America) representatives have been fighting this price negotiation for some time, stating that it will hurt the industry. It may in the short term, and therefore could impact some investors, especially those who don’t have the stomach to hold on through this transition. But I think this disruption could be good for the pharmaceutical industry, which has become complacent in some ways regarding its ‘blockbuster drugs’. Having to refocus efforts on innovation might be exactly what the doctor ordered.
  • Starting in 2023 drug makers will have to pay a rebate to Medicare if drug prices rise faster than inflation. Drug prices from 2021 will be used as the baseline. This certainly may affect revenues and investors as a result, but as an investor I’d rather see the company increase revenues because its sales grew, not because it significantly raised its prices for the same product year over year.

Some people, particularly those who have been involved in trying to reform health care, don’t think these changes are significant enough. That may be true. But as a realistic optimist, I am excited about these first steps. They open the doors (perhaps precedent in legal terms) for further changes to take place, and given that the health care industry is so resistant to change, these little pebbles may be just enough to start bigger things moving. It creates opportunities for new, disruptive companies to grow and flourish. And these newer companies, with lower valuations, may prove to be high-growth investments over a long period of time. For a long-term investor interested in the health care industry, this may prove to be an exciting time!

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