Path to tax reform emerges from Obamacare repeal

The job of replacing the US Affordable Care Act has not got any easier. US government forecasters’ new estimates of health insurance coverage changes under House-passed legislation virtually ensure that the replacement will not be enacted as passed, leaving it to Senate negotiators to come up with a bill agreeable to all sides.

Having a firm estimate keeps the legislative train running, however, giving lawmakers an idea of how the Affordable Care Act (ACA) repeal can achieve savings that in turn can be used to pay for tax cuts. This is likely to bring some comfort to the sector – a reduction in corporate tax rates is much more of an obsession for big pharma executives and their shareholders than any shift in insurance coverage.

Coverage improved – slightly

The report itself was somewhat benign in that it did not represent a big change from earlier estimates. The Congressional Budget Office (CBO) provided an update to its forecast of the American Health Care Act (AHCA) based on the wording passed earlier this month (Obamacare repeal vote the first move on congressional chess board, May 5, 2017).

Because the House-passed bill made changes to an earlier version of the AHCA that failed to get a House vote, the CBO drew up a new estimate (When will biopharma speak up about 24 million uninsured?, March 14, 2017).

Those changes included provisions to ensure the stability of markets for people purchasing insurance individually; to prevent people from being excluded for having a pre-existing medical condition; and to provide some funding for maternity and substance abuse care.

Thus the House-passed legislation now saves $119bn over 10 years compared with spending under the ACA, rather than $151bn. And, at the end of 10 years, 23 million more people than under the ACA would be uninsured, rather than 24 million as with the previous version of the bill.

In 2018, 14 million more people will be without health insurance, the CBO says. In total, 51 million people will be without health insurance coverage in 2026, the forecasters write.

A steeper drop in savings might have required the House to pass a whole new version of the legislation, delaying the legislative process, Evercore ISI analyst Terry Haines wrote. However, the Senate can continue its negotiations using the AHCA as a base document thanks to the CBO score.

It will be even more difficult to get legislation through the Senate, as President Donald Trump’s Republican allies have only a 52-48 majority – as it was, the House passed the AHCA with two votes to spare, and 20 Republicans voted against it.

Over to the Senate

The Senate will undoubtedly want to pass legislation that has a smaller impact on insurance coverage, although this would also probably have the effect of saving less money.

The biggest hunk of savings comes from reducing federal support for the state-based Medicaid programmes for the low-income and disabled – $834m over 10 years – which also has the biggest 10-year impact on uninsurance – 14 million of the 23 million in increased uninsured in 2026 will result from Medicaid changes.

Quickly passing an ACA replacement is essential to the legislative strategy of Mr Trump and the congressional leadership. With the savings established in this legislation, congressional House leaders can fold it into a larger budget bill that will then contain instructions to committee chairmen to draw up a corporate tax cut bill.

Mr Haines believes that there is an 80% chance that the ACA replacement can be agreed by the August congressional recess, allowing for a 2018 budget to be passed in the autumn and tax legislation to pass in late 2017 or the first half of 2018.

This should be encouraging news in big pharma C suites, and many investors believe that companies are holding off making big strategic decisions until the direction of US tax reform emerges. It might come at a cost of millions of paying customers – time will tell if big pharma executives begin to notice an effect on the top line.

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @ByJonGardner on Twitter