Government run healthcare - effect on IB?

I hate to say that this is a serious case of wait and see, but it's a serious case of wait and see. Before I even get into my take on this, the question becomes what the final plan to be put in effect is. This covers everything from drug pricing to reimbursement rates to changes in the standard of care. We're talking a massive, complex overhaul of the system already in place. And don't forget, ICD-11 is in the early stages of rollout. That will have a huge effect on things come 2022. It will be a huge money sink, so things like that will need to be considered.

That said, let me get into my breakdown. First, from a care facility standpoint, if everything goes under a standardized reimbursement rate, I honestly expect to see a significant amount of industry consolidation to create fewer, larger, organized health systems, all purchased at a lower than expected pricing (relative to today's valuations) to gain economies of scale. Why the lower prices? Well, if everything is reimbursed on a CMS Basis, your reimbursement from insurance companies will decline by a significant percentage. If Medicare, on average, pays out a nickle on the dollar and insurance companies pay out 60 cents, you're losing 55 cents of revenue on every dollar spent. While I can't account for the impact of EMTALA/Non-Insured Illegal Immigrants, I assume some of the revenue that would, otherwise be a loss, will be paid out to offset th0e reduction.

The upside to this, however, is that consolidation would mean an increase in purchasing power for these health systems. But let's be real here, if the revenue from healthcare facilities is reduced, that means the cost of supplies across the board has to be reduced. Using HCA as an example, they make 46,667MM in 2018. 24,467MM of revenue came from managed care and other insurers while 19,089MM came from managed and non-managed medicare and medicaid programs. Since the managed care and other insurers portion of revenue is going to decline, the question is how big of a haircut will there be. For simplicity sake, let's call it 50%, which reduces that 24,467MM to 12,233.5MM. This reduces HCA's earnings by about 25% to 34,433.5MM. The only way that revenue doesn't fully tank is by adding back a portion of the uncompensated costs. I have a feeling that only the charity care costs will be added back in as a result. So we're tlaking another 8,600MM added back, which would bring the revenue up to 43,033.5MM. Based on the rest of their financials, they spent 41,342MM in operating expenses, with 21,425MM covering Salaries, 7,724MM covering Supplies, and 8,608MM in other expenses. That's 91% of their expenses right there. So what has to happen? They need to cut jobs, cut other expenses, and reduce the cost of supplies. That leaves ~1,800MM as your EBIT. My gut tells me that if HCA is going to experience a 25% decline, every hospital system will experience similar declines in revenue under a medicare-for-all system.

From a purchasing power perspective, if revenue is defined by the government's mandatory reimbursement rates and any and all legislative intent, the only real cost savings there is will come from layoffs, which will hurt an already strained system even more or acquisition. By buying more facilities, the larger parents will create some cost savings on the purchase of single-use goods. If I'm a hospital system, I'm going to reevaluate every single contract I have and reach out to competitors to eek out every single sent of cost savings I can on goods. Why spend money on BD Surgical Blades when I can buy from Cincinati Surgical at a cheaper rate? As a result, I see suppliers being forced to reduce prices in order to stay competative. I see some portions of Healthcare IT going the same way. I expect to see longer usage out of older systems to reduce IT spend and upgrade costs as well as extentions on the lease life of older machines that are still viable. I'm not sure how much of a decline in revenue this will produce, but it will produce a decline in revenue.

When it comes to medical devices, this is where it will get interesting. I see major consolidation of market share among the biggest names in the market. Not to say that they don't already have it, but we're talking hospitals pricing out brands they otherwise would have used regardless of the doctor preference. Medical device revenue is going to drop drastically. Instead of $10K for a pair of screws, the price will drop to $500 or $1000. Spacers, joints, hardware, etc. will all reimbursed at the government mandated rate. So how do you think that will affect Medical Device companies? If HCA saw a 25% drop in total revenue (before adding back charity care), how much do you expect J&J's Depuy Synthes, Zimmer Biomet, or Smith and Nephew to drop? It also will put a damper on some of the more expensive surgical cases. So expect medical device companies to experience a drop in revenue too. It doesn't mean there won't be activity in the space, but companies are going to be more careful when it comes to acquisitions of specialty technology unless it fits in their portfolio.

Healthcare IT, I honestly think, will be fine for the most part. I believe that it will survive because of the services provided are all long term and generally come with some sort of license component.

Pharma... yeah... I think that this one is the biggest boondoggle simply because you have to balance R&D costs with the new reimbursement costs in place. While I expect that Pharma will continue to have M&A activity, I think that most of it will be driven by acquisition of biotech and higher-risk startups who have a product that fits the existing portfolio. I don't think that much will change with regard to M&A activity, but this is the one that has me most unsure. I'm unsure simply because I don't know what happens with this one. Moreso than any area in healthcare, Pharma reimbursement rates are going to drive everything. So while we won't have a Mylan fucking over people who need epipens, who knows what will happen for on-patent drug pricing which is where most pharma companies derive their revenue from anyway.

Finally, we get to the providers. This is the one area where I'm truly not sure what will happen. I don't know what will happen here. Does this mean the death of private practice and a shift to a pure hospitalist system? Does this mean that private practice will continue given the decline in revenues theat everyone will face without any reductions in offsetting costs? What kind of an effect will it have on the number of doctors currently in practice? From a deal perspective, this is the hardest to gauge because there is no guarantee of anything.

For those that want the TL;DR, here's the short and simple. No clear plan means there's no clue as to what will happen. Dealmaking will continue, but at a reduced price because of structural changes. HCIT/HC Services will end up being the most stable area for healthcare banking, while there will be an initial uptick in HC Facilities M&A activity in the first few years post-rollout, followed by a decline in that space. Medical Devices will end up consolidating. Pharma is up in the air because of too many unknowns on where reimbursement goes, but expect it to continue. HC Providers is a total clusterfuck.