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Health Care Investors Are in Denial About Their Risks

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(Bloomberg Gadfly) — The U.S. health care system is full of things that don’t make much sense. A lot of them are extremely profitable.

One of these, recently highlighted by legendary short-seller Jim Chanos, is dialysis, a market largely split in the U.S. between two large firms, DaVita Inc. and Fresenius Medical Care AG & Co KGaA. If the Senate passes a health care bill similar to one the House of Representatives passed last month, then it may become easier for private insurance plans to stop covering dialysis, cutting off a big source of profit for these companies. 

(Related: 5 States Where Kidneys Look Worse)

This is just one of the more extreme risks, of many, looming over health care companies these days. And yet shares of the two biggest dialysis firms have outpaced the broader stock market since the election, and the rest of health care is keeping up.

Dialysis is a costly procedure that is mostly paid for by government programs — people with end-stage kidney disease become eligible for Medicare, regardless of age. Trouble is, those programs reimburse dialysis companies at a significantly lower rate than private insurers. According to a Bloomberg Intelligence analysis, DaVita made 95% of its Ebitda from patients with private insurance from 2013 to 2016. The profit margin for these patients is 77%, versus 2% for government patients.

Though eligible for Medicare, some dialysis patients prefer private insurance because it can be more flexible. The Affordable Care Act made that insurance easier to get. It requires insurers to cover such patients, says insurers can’t charge those patients more, caps out-of-pocket expenses and helps less-wealthy patients cover premiums.

The Republican effort to change the ACA, the American Health Care Act, seems designed to be a pain for dialysis firms. The law may let states apply for waivers of the regulations that have made private insurance more attainable. If given the opportunity, insurers would likely make plans covering dialysis patients prohibitively expensive, to help keep such people out of their risk pool.

Dialysis companies have already been curtailed in their ability to nudge patients toward commercial insurance by funding third-party charities that help pay for it. The AHCA has the potential to enhance their woes by pricing patients out of the private insurance market, charity or no.

Not every part of the health care sector is quite as exposed to the AHCA as dialysis is. But most companies have similar risks, for which stock prices have failed to fully account.

Drugmakers, for example, also spend significant amounts of money funding charities that help cover out-of-pocket drug costs for patients on expensive medicines. Those costs are expected to rise substantially if the ACA is repealed, hitting revenue and increasing the political and public pressure over high drug prices.

A Kaiser Family Foundation analysis found that 75% of individual insurance plans in the pre-ACA era didn’t cover maternity care, 45% didn’t include substance-abuse services, 38% didn’t include mental and behavioral health services, and 17% had prescription-drug restrictions. The ACA brought those percentages down significantly. Under the AHCA, the individual insurance market is likely to head back to those bad old days in some states, pricing people out of comprehensive coverage — and hurting companies that provide these services and products.

That will have widespread and unpredictable knock-on effects throughout health care. People who don’t get mental-health care also don’t get prescribed medication, and so on.

This is not a small-scale or narrowly concentrated problem. Twenty-three million people are expected to lose health coverage outright under the AHCA, according to the Congressional Budget Office. An unknown number will have substantially skimpier coverage or higher out-of-pocket costs that may dissuade them from getting care. Millions of Americans with employer-sponsored coverage may once again face annual and lifetime coverage limits.

Yet health care stocks in the Russell 3000 index of the largest U.S. companies are outperforming the index as a whole since the election. A few stocks with ACA exposure are down since the election, but many more are up.

It’s become increasingly clear health care investors can’t rely on the Senate to save them. The Senate has gone from publicly decrying the House bill to reportedly working on something that copies it in many respects. There’s not all that much room to soften the House bill, anyway, despite President Donald Trump apparently having come to believe the House bill is “mean.” The revised bill is being designed in secrecy and hastened to a vote (again) for a reason.

The consequences aren’t always as obvious as they are for dialysis firms. But they’re there, and health care investors appear to be in some denial about it.

Peter Grauer, the chairman of Bloomberg LP, the parent company of Bloomberg News, is a member of DaVita’s board.

— Read Cruz Goes From ‘Lucifer’ to Dealmaker in Health Care Overhaul on ThinkAdvisor.


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