With so many reforms coming and so much uncertainty around the details, health care companies need to prepare for the most likely scenarios while readying themselves for a wide range of possible outcomes.
Payers. Payers need to reassess where to play and answer hard questions about where they can win. While a newly deregulated individual market may seem attractive, this market segment has yielded low margins (or been entirely unprofitable) for most payers under both the ACA and pre-ACA scenarios. Meanwhile, many payers have ignored or underinvested in employer-sponsored insurance, which looks to remain the dominant path for nonsenior insurance in the US. With the potential for this space to become more competitive as restrictions are dropped, payers will need to up their game.
In addition, payers will need to reassess their Medicaid and Medicare strategies. If these sectors move toward 100% privatization, the potential market opportunity will be significant. While the experience curve is steep, even those not doing well today will need to take a fresh look at these segments and weigh the risks against the now-larger rewards.
While it is possible that Republican efforts to increase competition across state lines will yield some additional opportunities for payers, the reality is that network building and pricing are based on metropolitan statistical areas, and many payers operate fluidly across states today. As a result, this is unlikely to be a near-term focus for payers.
Finally, payers will need to pursue partnerships and integration with providers to help keep costs down. In a future where cost is paramount, having meaningful control over care delivery will be a key differentiator.
Providers. For providers, revenues and margins will be further constrained. As CMS rates compress and the pool of paying individuals and Medicaid customers shrinks, systems with high exposure to these segments will need to shore up revenues or change their cost structures. While reestablishment of disproportionate-share hospital payments will provide some cushion, most health systems will experience a decline in revenue (particularly those that have been competitive in winning new ACA-funded patients). As consumers bear greater costs and select high-deductible plans, they may delay care, put pressure on primary care physicians to provide specialist care, and more actively weigh the pros and cons of seeking additional care.
To stay competitive, providers need to keep delivery costs down and appeal to consumers, who will increasingly have a choice about where to be treated. As the number of uninsured will likely increase, providers should expect increased uncompensated utilization of ERs serving low-income populations, and they will need to consider how they can reach more patients with the ability to pay. Physicians will likely gain more protection from medical malpractice, which will reduce legal costs.
Some providers will continue to pursue value-based health care and forge partnerships with payers to capture more patient volume. For others, their market structure will keep them in a fee-for-service world for now, while they optimize delivery costs to remain in competitive brackets. In either case, continued M&A activity will be helpful in improving economies of scale, geographic reach, and differentiated service lines.
Biopharma. Demographic trends and the increasing use of specialty medicines suggest that spending on drugs will continue to rise, resulting in continuing pressure on biopharma to address costs.
Given the likelihood that consumers will have to bear more of their own health care costs, biopharma companies should be prepared to address a consumer base that is less able to pay high prices. Without yearly out-of-pocket maximums, many specialty medications will no longer be affordable for a significant number of patients, and the public outcry over the high costs of important, life-saving drugs may intensify. For non-Medicare patients, biopharma companies can partially address this issue by beefing up co-payment assistance cards and providing foundation support for the uninsured. Companies will also need to carefully manage price levels and price increases, since calls for transparency will continue.
While it's still unclear what specific short-term policies the incoming administration may adopt, biopharma companies should prepare for a gradual transition from fee-for-service to value-based health care. The Medicare Access and CHIP Reauthorization Act (MACRA) was passed with overwhelming bipartisan support in 2015. Even if some elements come under pressure, such as the ability of CMMI to test alternative payment models, MACRA has at its core a clear objective: to move from the current fee-for-service structure (which tends to reward volume) to one that pushes a certain amount of financial risk onto providers, and hence recruits them in the effort to control costs and improve quality of care. If cost becomes a more important factor in prescribing decisions, physicians may prescribe less or choose less expensive alternatives, including generics, biosimilars, and older drugs.
To thrive in the value-based environment, biopharma companies will need to demonstrate superior clinical outcomes and/or lower overall costs. This means providing clear clinical and observable evidence of the effectiveness of their products, as well as experimenting with alternative payment models and “beyond the pill” solutions to increase benefits and reduce risk.
The incoming administration will also introduce changes that will benefit biopharma. First, there is the possibility that the corporate tax rate will be lowered. Fundamentally, biopharma companies rely on R&D-driven innovation, which is a long and expensive process. If the administration follows through on promises to lower corporate taxes, companies will be able to repatriate their significant overseas profits and reinvest in innovation and M&A. In addition, if the administration speeds up approvals of new drugs, that could have a positive impact on the industry (as long as efficacy and safety are not compromised).
Medtech. Elimination or modification of the ACA's individual mandate and mandated benefits could have a negative impact on unit volume growth, particularly for products used in discretionary procedures. Medtech companies need to carefully adjust their planning to match revised volume growth projections. On the other hand, the medical device excise tax (which has been suspended) is likely to be permanently eliminated by the Trump administration and the Republican Congress. This will free up cash, which medtech companies can invest in R&D or return to shareholders.
Companies that produce directly reimbursed products or services (such as glucose meters and strips, outpatient testing services, and continuous positive airway pressure devices) will need to track the incoming administration’s stance on reimbursement levels. Trump has already discussed reimportation of drugs and allowing the CMS to negotiate with pharmaceutical companies. It’s possible that the administration will pursue similar tactics for medical devices and services. Medtech companies would be wise to reorient product development toward value-based products that can withstand such pressures—and provide strong evidence for the value of their products.
We also expect capitated funding to grow more rapidly. Trump's interest in private markets and in pushing responsibility onto the states means that Medicare Advantage (which is administered by private payers) and managed Medicaid plans (often also privately administered) will grow, perhaps even at increased rates. Much more than fee-for-service plans, capitated funding mechanisms create strong incentives to manage end-to-end costs and outcomes over an extended episode of care. In turn, providers will increasingly seek products and services from medtech companies that support value-based health care objectives. As we have seen with companies that have already gone down this path, this requires a significant change to the traditional medtech innovation model.
We are on the brink of another major overhaul to the US health care system, but it’s important to remember that there will be significant opportunities for growth in the private sector. As Trump’s health care agenda takes shape in the coming months, we will stay close to this topic and publish additional insights on how best to thrive as the new administration’s policies take hold.
This article was developed by BCG’s Health Care and Public Sector practices in the firm's new Center of Excellence, which focuses on health care reform in the United States. The Center will lead BCG's research and analysis on the potential health care policy reforms proposed by the incoming administration and model their implications for consumers, employers, payers, providers, and other health care stakeholders. The Center is led by Nate Holobinko, with leadership from an advisory committee including Adam Farber, Sharon Marcil, Sanjay Saxena, Ozgur Adigozel, Priya Chandran, Colm Foley, Alan Iny, Jon Kaplan, Barry Rosenberg, Brett Spencer, and Dan Vogel. We acknowledge the contributions to this article of Michelle Chiu and Cordelia Chansler, as well as the expertise of the advisory committee and other partners, including Ashish Kaura, Peter Lawyer, Daniel Gorlin, and Srikant Vaidyanathan. Special thanks also go to Amy Strong and Katie Sasser for their engagement and support on the content development, as well as to Katherine Andrews, Gary Callahan, Kim Friedman, Abby Garland, Gina Goldstein, and Sara Strassenreiter for editing, design, and production.