Following the presidential debate on September 10th, RBC Capital Markets research analysts hosted a discussion with healthcare policy experts from both sides of the political aisle to explore how the upcoming election could shape the healthcare sector. Although healthcare may not have been a central topic during the debate, it's likely to generate discussion along the campaign trail, influencing investor sentiment and market dynamics within the industry.
A focus on incremental reforms
Our Democratic expert anticipates that "low costs" will be a prominent theme on the campaign trail. Notably, Democrats seem poised to avoid advocating for universal healthcare, instead opting for a more pragmatic approach to reform. Key policy goals may include insulin price caps and controlling out-of-pocket costs. This could signal stability for investors, as radical changes to the current healthcare system are less likely.
One area of concern, however, is the potential acceleration of the Inflation Reduction Act (IRA). Our expert suggests that Democrats might expedite the drug negotiation process, pulling forward the timeline to include up to 20 Part D and Part B drugs sooner than the original 2029 schedule. This could pose revenue risks for pharmaceutical companies, nonetheless, the focus remains on incremental changes rather than sweeping reforms.
From the Republican side, our expert highlighted themes centered around oversight of healthcare funding, with particular scrutiny on the funds raised from the IRA and critiques of the Affordable Care Act (ACA), without necessarily advocating for its repeal. The focus again seems to be on pragmatic tweaks rather than a complete overhaul of existing structures.
The Republican stance could also present some risks to the biotech sector. One notable concern is the potential development of a Part D formulary that would not cover all approved drugs, impacting utilization and potentially pricing within the biopharma industry. Brands facing loss of exclusivity in the near term might be particularly vulnerable.
If a Republican victory occurs, they may use executive powers to mitigate the effects of the IRA. This could involve slow implementation, minimum discount requirements, or modifying ancillary aspects of the bill, such as green subsidies, and reallocating funds toward healthcare.
"There is potential for compromise on issues such as IRA reform, tackling competition from China, Medicare adjustments, and addressing medical debt."
Room for Bipartisanship
Interestingly, both experts suggest that healthcare policy may see more bipartisanship than other contentious areas, with both parties indicating a preference for evolution over revolution. There is potential for compromise on issues such as IRA reform, tackling competition from China, Medicare adjustments, and addressing medical debt. This bipartisan approach could offer stability for healthcare investors, reducing the likelihood of abrupt policy changes.
Both experts also point to bipartisan support for a tougher stance on competition with China in biotechnology and genomics. This may drive policies that protect U.S.-based life science tools and diagnostic companies. Republican experts believe the Biosecure Act could be expanded, indicating further policy shifts to safeguard U.S. leadership in biotech.
"With the high possibility of narrow margins in both chambers, investors should not expect radical reforms."
Policy Implications for Investors
Control of Congress and federal appointments will be crucial in shaping healthcare policy. Both experts emphasized that Congressional control might be even more pivotal than the presidency in determining healthcare policy direction. With the high possibility of narrow margins in both chambers, investors should not expect radical reforms, supporting the notion of policy continuity in the sector.
Tax policy remains another key consideration. Democrats propose raising the corporate income tax to 28%, while Republicans lean towards reducing it to 20% or even 15%. A Democratic sweep could mean the end of current tax cuts, potentially impacting the broader healthcare sector, including medical devices. However, the chances of such a sweep are viewed as low.
On the regulatory front, our experts believe that the FDA's focus on intelligent regulation for medical devices is unlikely to change, regardless of the election outcome. Historically, the federal government has sought to balance maximizing value while ensuring patient safety, a trend that seems set to continue.
Low Political Risk… and a Defensive Play
From an equity market perspective, political risk to the healthcare sector appears relatively low regardless of the election's outcome. The consensus among our experts suggests a continuation of the status quo, with incremental policy changes rather than sweeping reforms.
For investors, this creates a more favorable environment, making healthcare a potentially attractive defensive market cap in equity portfolios, especially in the latter part of the election year.
Earnings sentiment also remains positive, with consensus forecasts showing upward revisions for both earnings per share (EPS) and sales across the sector. This solid backdrop, coupled with a more predictable policy environment, could make healthcare an increasingly appealing investment.
In conclusion, while risks exist – such as changes to drug pricing negotiations or potential shifts in biotech policy – and the IRA already poses meaningful headwinds to biopharmas revenue tails, the overall political environment seems conducive to stability within the healthcare sector. For investors, this presents an opportunity to reassess the sector's role as a defensive play, particularly in light of ongoing bipartisan support for pragmatic and incremental policy evolution.
The RBC Global Healthcare Equity Research Team authored “Beyond the Ballot: Healthcare Policy KOL Call” published on September 12, 2024. For more information on the full report, please contact your RBC representative.