Episode 11: Drug companies and the biggest healthcare reform in a decade

Catherine Ford:[00:00:05] Welcome to the Signal, a podcast presented to you by Third Bridge, the world’s leading investment research provider exploring how some of the globe’s most investible industries are facing upheaval. My name is Catherine Ford and I’m a journalist with a 20 year track record of reporting on a wide range of financial topics such as capital markets, developments and M&A. In this episode of The Signal, we are going to take a deep dive into the Inflation Reduction Act of 2022 and its impact on healthcare provisions. Joining me today are Lee Brown, Third Bridge’s Global Sector Lead for healthcare, and Benedict Polito, senior fellow at the American Enterprise Institute, where his research focuses on public finance and health economics. Hi to both of you, thank you so much for joining me for this really, really interesting and timely conversation. Before we get stuck in, can I ask each of you for a few words of introduction, just so our listeners get a sense for how you are approaching this topic leap. Maybe you can kick us off.

Lee Brown:[00:01:04] Thanks so much, Katherine. Super excited to be here. I’m the global team leader for healthcare at Third Bridge, where I manage roughly 25 dedicated professionals who conduct an aggregate over 500 interviews a quarter covering every sector within the healthcare industry across asset class as primarily from offices in New York, London, and Shanghai. Now, Third Bridge is a market leading global investment research firm that provides unique human led insights to some of the world’s largest hedge funds, mutual funds, private equity funds, and management consultancies to help our clients make better investment decisions.

Lee Brown:[00:01:39] Thank you so much. And Ben, tell us where you are coming from.

Benedict Polito: [00:01:42] Well, my name is Ben Dippolito. I’m an economist at the American Enterprise Institute, which is a think tank in Washington dc And so I do a host of research on issues within healthcare broadly, and that includes a whole bunch of topics that were included in the inflation reduction act like drug pricing. Very happy to be here.

Catherine Ford:[00:01:58] Fantastic. Now, the Inflation Reduction Act was brought into law earlier this year via a reconciliation process, and we’re gonna talk a little bit about how that process actually works and its application. But before we do that, let’s take a step back and set the scene and give our listeners a bit of an insight into some background. Ben, if I can come to you and ask you to outline how this act relates to the healthcare industry specifically.

Benedict Polito: [00:02:23] Sure. Yeah. So these wide ranging laws are sort of difficult to talk about because it’s, we’ve got a bill here, the IRA that touches on climate issues, infrastructure, tax issues, but healthcare really does make up one of the central pieces of this bill. And so when you talk about the healthcare stuff, I think there’s two big buckets that I put the provisions in. The first is there’s an insurance expansion, all right? As a result of the law, in short, the federal government’s going to give people more money. They’re gonna give larger subsidies to purchase insurance, so there’s gonna be more people with coverage in the US that there otherwise would’ve. But maybe the more novel piece of this is that there’s a real new foray into regulating the drug market. And so we can get into the details later, but generally speaking, the federal government is now gonna have a lot more authority through the Medicare program specifically to determine how and what it pays for certain brand drugs. And that, I think is really gonna represent the key novel pieces of this legislation. And it’s a lot of what the healthcare headlines are really about.

Catherine Ford:[00:03:22] So this whole aspect of regulating the drug market, I mean, that’s obviously really new. It’s unusual for the US If we think about this in terms of winners and losers of this Bill Lee, I know that you feel that there are some people who are just gonna be jumping for joy when it comes to this piece of legislation and the impact that it’s having on their business, but then there’s also gonna be some people to whom it’s actually going to have a quite detrimental impact on their business. Can you talk us through some of your thoughts on that?

Lee Brown:[00:03:46] I think the interesting aspect of this bill is how active the government is in picking winners and losers. And when I was having a conversation earlier we hosted two interviews with Ben earlier that I’d recommend if their clients enjoy, but at Ben’s point, was the government’s always picking winners or losers? And I kind of took a step back from that and appreciate it. I think the bigger issue here is just when you go and look at capping out of pay costs for seniors or reforming, reforming drug prices north of 70% of the US population is for it. And in fact we’ve been on both sides of the aisle trying to advance healthcare drug pricing reform.

Benedict Polito: [00:04:34] I think the winners and losers point is important. Whenever legislation passes, it has larger or smaller effects for different parts of the market. And it’s a function of how and why that legislation was passed. This law was passed through a particular legislative tool that we can talk about more if you want the reconciliation, reconciliation process. But one of the results of that is that the provisions really are targeted to Medicare. And so the way that the drug pricing provisions work is that drugs that have been on the market for at least say nine years and don’t have a generic, suddenly Medicare is gonna have a lot of authority about what those drugs are able to be priced at in the Medicare program. And so when you think about things like winners and losers, I’d focus on that distinction. Are you a drug company that has a portfolio with a heavy Medicare presence? Do you treat conditions that are common? Things like Alzheimer’s, things like osteoporosis, stuff like that. Well, if you do well, then suddenly this bill really, really matters for you. If you’re a drug company that you know specialize in mental health drugs, in contraceptives, whatever it might be, well then you might look at this very differently. Suddenly your exposure to these new policies is way, way lower. And so I think that’s one of the key distinctions I would draw when thinking about winners and losers. Now,

Catherine Ford:[00:05:44] Lee, jump in on this one, please.

Lee Brown:[00:05:45] Yeah, I mean, I like to more, I guess properly address what this is doing in terms of prescription drug pricing. I mean, the law requires that CMS negotiate the prices of certain prescription drugs under Medicare beginning in fiscal year 2026. Specifically, CMS must negotiate the maximum prices for brand name drugs that do not have other generic equivalents in that account for the greatest Medicare spend. What’s interesting is you can simply go online and if you Google cms, Medicare spend dashboards, it will easily take you to the list of the drugs. Happy to follow up on that later. But the concentration of spend across a very small number of drugs makes it very easy to identify who the winners and losers are. And I think this gets into the question of how this bill becomes operational.

Catherine Ford:[00:06:44] Now, we’ve spoken just really briefly at the beginning of the conversation about the process that brought this act into being. So I think it’s probably worth taking a step back and asking you guys to talk us through that specific process, how it affects the kind of bill that comes into being and why that process was taken in this particular instance rather than the usual legislative process.

Benedict Polito: [00:07:08] This is the kind of stuff that only people like me used to <laugh> these arcane rules about how US Congress, you

Catherine Ford:[00:07:15] Can geek it out, geek it out for us, Ben. That’s absolutely fine. Yeah,

Benedict Polito: [00:07:18] I mean, the big challenge in US politics is that if you wanna pass a law for example, you need 60 votes in the Senate. Well, one political party doesn’t typically have 60 votes. And so suddenly you’re in this position where you might have some priorities that you wanna pass as Democrats or the Republicans, but now you’ve gotta work with the other team. And so that really means that you gotta compromising water down what you were gonna do. Well, all else equal political parties don’t wanna do that. And so with the reconciliation process is in short, is it’s a somewhat unusual process that was originally designed to adjudicate uncontroversial budget issues. But these bills are allowed to be passed with only 50 votes. And so suddenly it makes it much easier for one political party to pass a bill without having to involve the other political party.

Catherine Ford:[00:08:01] You made a really interesting point there. You said that it was actually used, it’s supposed to be used in uncontroversial situations. Would you classify this situation as uncontroversial?

Benedict Polito: [00:08:10] Oh, hardly. And this is really what’s novel about this. It’s not that reconciliation is novel, but it’s the way that it’s being used. It’s now being used in recent years to pass major partisan legislation by both parties to be clear. But it comes with these constraints, and this is what people worry about. Suddenly the only things that are allowed to be included in a reconciliation bill, they have to have a budget impact, for example. Well, there might be important pieces of your policy that don’t have a budget impact. Well, those aren’t allowed, right? There are rules about it can increase the deficit after 10 years or more than 10 years in the future. Well, that means all sorts of policies now have to sunset, and it creates this really unstable policy environment for firms who are trying to think about making investments that are 10 plus years down the road. Suddenly there’s all this uncertainty. And so it’s got this positive politically speaking that you can pass a bill without involving the other party, but it has real constraints that comes along with it.

Catherine Ford:[00:09:02] Lee, do you want to jump in on this? Because I know that you’ve got quite some strong feelings on this particular topic as well for us.

Lee Brown:[00:09:07] Well, I like to say I’m balanced and fair. <laugh>.

Catherine Ford:[00:09:12] Do just how we’re laughing about that

Lee Brown:[00:09:15] <laugh>.Oh boy. What kinda reputation do I have? So I think Ben does a nice job highlighting one of the primary concerns with reconciliation is that many of the policies aren’t allowed to be permanent. And this gets into the idea of cliffs or what some refer to as sun setting of provisions. And obviously this can create a great deal of policy uncertainty and can be very problematic. I mean, think about being an industry leader and trying to make very important decisions on capital deployment especially as it relates to r and d spin, which I want to get into later. I know that the CBO has kind of denigrated the proposition that this will dampen innovation, but I think that might be a bit of static analysis. I think the other issue in earlier, Ben and I had this conversation is about transparency. One of the important things that occurs when a bill is appropriately debated and formulated via difficult compromise is that there’s a real potential to better understand the gives and takes and support it on a partisan fashion when it’s just jammed through this.

Lee Brown:[00:10:27] There’s a full lack of understanding of how exactly the bill is going to be operationalized. So one of the other big this sort of setbacks with going through the reconciliation processes I’d be willing to bet that this law is gonna face a similar barrage of legal challenges that are looking to undermine its true benefits and potentially create it into a dysfunctional piece of law when it’s really has things that are university supported. I think that’s wrap this up, but I think that’s the biggest disappointment is the American people want this. The Democrats delivered it, the Republicans wanted to deliver it, and now both parties are gonna fight to want to preserve it in another, to undermine it, even though it’s what’s best for the US populace.

Catherine Ford:[00:11:15] So this specific bill is going to make some quite fundamental changes to the way that the US drug market works. So first of all, let’s look at the status quo up, up until now that lawmakers felt needed to be addressed. And then what are those consequences that we’re gonna see in the future? Ben, maybe I can ask you to answer that one first as well.

Benedict Polito: [00:11:35] Yeah. Well, I mean the first answer is an easy one. We spend a lot on drugs. <laugh>, the US spends nearly 600 billion per year.

Catherine Ford:[00:11:43] Can we just, again, for our audience all over the world, can we put that into context? I mean, how does what the US sitters spends on drugs or the US spends on drugs compare to what we see, say in Europe, for example?

Benedict Polito: [00:11:54] Yeah, I mean, this is one of these things that I think is really hard to understand outta context. The US is by far the most important purchaser of drugs. So when the US changes policy, it is by far the most important for thinking about what it means for the drug industry. These stats are outta date. But I think in 2017, the US for example, spent as much of the rest of the top 10 spending countries combined on drugs. Now, a lot of those countries are smaller than the US and so it’s never a perfect comparison. But to give you a sense, I mean the US really is just the gorilla in this market. It is the most important purchase of drugs. And the reason that we spend so much money on drugs and not because we take that many more drugs, at least on a per capita basis, it’s because brand drugs are more expensive. And when it comes to the politics of this, I think that key point is a number one, it puts stress on Medicare, it puts stress on Medicaid. If the public programs in the us, it puts stress on the commercial market. But more than that, people really notice it. When you go to fill a prescription, the fact that that price is really high is that you’re out of pocket spending is gonna be high. And so it’s that which gives it real salience to the average voter.

Catherine Ford:[00:12:57] Ok. Let me just ask Lee to jump in here because I know that Lee has some actual facts and figures on his fingertips.

Lee Brown:[00:13:03] I think Ben said it. Well, I mean, the problem isn’t driven by over utilization. In fact, if you look at the share of adults reporting that they took prescription medication on a regular or ongoing basis, the US does come in at the top of the charts at around 58%, but the average is 51%. So that’s not really, that’s where the drug spends coming along. It’s the fact that the expensive drugs are staying expensive for a prolonged period of time. And if you look at the capita spending on prescribed medicines and dollars the US spends twice as much on a per capita basis than the comparable country average. And then just to put that into a more specific context, on a per capita basis, the US spends about one and a half times more than Canada, 1.65 times more than Japan, and nearly four times more than the United Kingdom. So it is problematic and it does need a solution.

Catherine Ford:[00:14:01] So do you feel that this bill is going to be the solution to that problem?

Lee Brown:[00:14:06] To me, Catherine

Catherine Ford:[00:14:06] <laugh>. Yeah, that’s to you,

Benedict Polito: [00:14:08] <laugh>.

Lee Brown:[00:14:08] Well, I think it’s an interesting question. If you look at how it was scored, again, the overall bill was deficit reducing, which I applaud. I think that anyone who believes that the companies aren’t going to pursue avenues to get around this Let’s set that aside for time being. It’s very easy to identify the top spend, and then it’s very easy to feel that the government will do a good job negotiating. And the reason why is you don’t negotiate with the government. You’re gonna be told what you’re gonna be paid. But do we need to curb spending? Do we need to do something about how we formulate pricing?

Benedict Polito: [00:14:50] Indeed, I wanna jump in on that. Cause I think Lee is alluding to something, and one of the things that always strikes me is that people are, they assume way too little uncertainty. This bill, like many other bills, faces uncertainty with legal uncertainty, economic uncertainty, political uncertainty, right? Legal uncertainty. There are key provisions in this bill, like the penalty that forces a drug maker to accept the price that Medicare gives them, right? That’s going to be challenged in court. Whether that stands up or not is going to be central for the influence of this bill. Suddenly either Medicare is gonna be able to tell you what the price is, or they’re gonna have almost no power. To tell you what, it’s economic uncertainty. Every drug firm is gonna wanna circumvent these policies to the best they can. How successful will they be? That’s a big question.

Benedict Polito: [00:15:33] And then political uncertainty, I think is the big one that I would highlight. One of the things that I think is critical to understand about this law is that Congress gave an agency the Health and Human Services Agency a lot of flexibility in setting prices for drugs. They gave me some guardrails, but there’s a lot of flexibility. And as a big question about how exactly are they gonna use that flexibility? And you can very easily imagine a world in which a presidential administration that is relatively antagonistic to the drug industry, really using that to lower prices quite aggressively, versus one that is perhaps a little bit less antagonistic, not lowering them nearly as much

Catherine Ford:[00:16:09] On How do you think the drug companies are going to navigate that? I mean, is this something where therefore planning will need to change, they will need to bring in more advisors to work on it? Or what specifically will they need to do to actually get to grips with this?

Benedict Polito: [00:16:21] So some of this, we know because we see related settings and we see how drug firms behave in those settings. And so for an example, under this new law, if you get selected for rate regulation in the Medicare program, then your revenues are gonna go down, period. There might be some range about that, but they’re gonna go down. And so you have this big incentive to avoid being selected for rate regulation. And so the question is, how are they gonna do that? We’ve seen firms do things where, I won’t get into all the details, but they basically enter into agreements where they allow a generic to enter the market formally, but don’t actually see much market to that generic. So they kind of essentially have a legal agreement with them. That’s the kind of agreement we can imagine firms trying to pursue. And so that’s the kind of thing that suddenly, if that’s really successful, well you can circumvent this whole rate regulation process cause you’re no longer eligible if you’ve got generic on the market. And so it’s those kinds of things that we’re looking for.

Catherine Ford:[00:17:15] Ben, can I nail you down and ask you to talk about some drugs specifically, and even some companies specifically that you feel will be really feeling that pinch and that pressure at the moment and being affected by the legislation?

Benedict Polito: [00:17:29] Oh God. Now I really gonna have to recall the specifics. I think things like Eliquis come to mind really the way to think about this, Is this a high selling drug and do you sell it to old people? That’s the key distinction. <laugh> cause Medicare. Medicare, for those who don’t necessarily know in detail, Medicare primarily covers people over the age, age of 65 in the United States. And so I often think it’s a little bit easier to think in conditions rather than specific drugs. So things like Alzheimer’s, like osteoporosis cardiovascular drugs, things like that. Those are gonna be the kinds of drugs that are gonna be much greater at much greater risk. If you’re thinking about stuff like mental health, contraceptives, things of that nature, HIV medication, hep C and so on, those tend to treat younger populations. And so if Medicare is changing the way that they set drug prices, well, I mean it’s not that big of a deal for you.

Catherine Ford:[00:18:19] B, could you pitch in here as well, when we’re thinking about the actual companies that will be affected by this legislation, have you seen any of them springing into action already and trying to shore up support shore up their business in light of this legislation?

Lee Brown:[00:18:32] Well, I don’t think they’re happy about it. I, you’ve seen an executive from recently resign over a number of missteps. So its just something maybe we can talk about if folks aren’t aware of it. But yeah, I mean, this doesn’t leave anyone unscathed. You look at the top 10 companies with Medicare Park D Spin, it’s Bristol Myers it’s j and j, it’s Merck, it’s Eli Lilly, it’s AbbVie, it’s Snow Fee, Pfizer, AstraZeneca, Novo, Nors, Gilead, they’re all on there. So

Catherine Ford:[00:19:14] It’s all the big players basically in the space.

Lee Brown:[00:19:16] <laugh> a group of very powerful people. And you look at part B, it’s Merck, it’s Regeneron, it’s Amgen, it’s Biogen, it’s Roche, it’s Bristol, the, it’s very easy to figure out who who’s on the list. And just one of the things that’s interesting is if you look at the top 10, part B covered drugs the account for 43% of all part B spending and you’re talking about that’s the top 10 out of roughly 600 drugs. So if the top 10 are 43%, so it’s very easy to go after where the money spent. Similarly the top 10 part D D drugs accounted for roughly 39.4 billion out of 183 billion spends. So it’s significant in terms of where you’re spending the money and how easy it is to cut. And that’s what raises the stake so much.

Catherine Ford:[00:20:20] Talk me through and talk our listeners through how this new drug pricing will actually work in practice. And then also let’s spend some time talking about some of the uncertainties. Ben, you spoke about some of the challenges that are out there, that uncertainty is obviously something that no company ever wants to really face. I’d like to hear a little bit more about that, but let’s get started with how this actually works on a day to day basis, Lee.

Lee Brown:[00:20:44] Sure. I mean, this all kicks off in fiscal year 2026. So specifically CMS must negotiate the maximum prices for brand aid drugs that do not have another generic equivalence and that are also account for the greatest Medicare spend. So the number of negotiated drugs is gonna be limited to 10 part D drugs in 2026. Now, this is a fiscal year another 15 part D drugs in 2027 yet another 15 part D drugs. And then the initial 15 part B drugs in 2028 and another part 20 part D and part B drugs in 2029 and thereafter. So I know it’s maybe difficult to keep score, but by 2029, what we’re talking about is up to 60 part D drugs and 35 part B drugs that are gonna be under negotiated pricing.

Benedict Polito: [00:21:37] In terms of to the specifics, the way I kind of think about this is if you look at the high spending drugs, just look at the blockbusters out there that have big Medicare markets, things like Eliquis and Zerto’s up there, all sorts of insulins. Those drugs are gonna be on a list. And if you make up enough spending, if you’re spending as high enough in the Medicare program, then suddenly you get selected for this regulation process, this negotiation process, excuse me, once you’re selected, the Secretary of Health and Human Services has a large amount of discretion about how they’re gonna set the price, and that’s really where a lot of the uncertainty comes from. But in terms of understanding who exactly is gonna be selected and when the easiest thing to do is just look down the list of high selling drugs, and almost every blockbusters on that list <laugh>

Catherine Ford:[00:22:24] Something for us to work with.

Benedict Polito: [00:22:25] It makes it easy.

Catherine Ford:[00:22:27] That is true.

Lee Brown:[00:22:28] Yeah, I can help out. We were trying not to call the names out, but he did mention Eliquis, and you have Trulicity Anda and Lantis and Jardiance and Ibrance and goes on and on and on. Victar Opdivo. And you were asking Catherine what categories. I mean, what’s interesting is there’s a lot of diabetes drugs on here there’s a few anticoagulants, and then it’s sort of a mixed bag whether that’s osteoporosis or rheumatoid arthritis or a bone marrow stimulant. But to Ben’s point, the list is well known. The question is sort, what are they gonna do in response to being on this list?

Erica Gomez : [00:23:18] Hi, my name is Erica Gomez and I’m an analyst at Third Bridge. If you’d like to know more about the subjects discussed today, our foreign team have over 30,000 company and sector transcripts available on demand. They offer extensive insight into drug companies, healthcare reform, and much more. Each transcript features a one hour interview between an unbiased analyst like me and an industry executive. You can find this content at Signal the third bridge.com. And now back to the podcast,

Catherine Ford:[00:23:53] I was gonna move the conversation on now and have a little chat about some of the longer term effects of this deal and how the law will evolve. Lee, it sounds as if you are seeing high levels of discord in the future, upset not just within the drug industry, but elsewhere as well. Ben, how do you see this playing out

Benedict Polito: [00:24:12] In the immediate term? I think the effects are modest, but not earth shattering. At least that would be sort my modal expectation in the long run. That’s where things get a lot more uncertain. And the two things that I guess I would highlight is, number one, there’s gonna be some uncertainty about how obviously this gets implemented. But number two, there’s a lot of political discussion already about changing the actual law, namely expanding the law. There’s a lot of progressive Democrats, for example, who voted for the law, who as soon as it was or as it was being negotiated, excuse me, within the party, said, Hey, we’ve just gotta get on board because it’s a lot easier to create a new authority to set a price, for example, than it is, or it’s a lot harder to do that than it’s to expand it. And so in other words, they really view this as the start of a much more aggressive regulatory regime towards the drug market.

Benedict Polito: [00:25:01]And so thinking long term, the only way that I see this, or the way that I see this becoming a real profound change to the drug market is if future legislation builds on this, namely I, will it expand it to include more drugs? Right now, only 20 drugs per year are selected. Or more importantly, will it start to include drugs earlier in their life cycle? Right now, you can only be selected after you’ve been on the market for nine years. What if they make that five years? That’ll raise a lot of money for the federal government. That’ll be very tempting. What if they expand these regulations to not only affect the Medicare drug market, but they affect the commercial drug market? That’ll save a lot of money too. So those are gonna be very attractive political targets likely for democratic policy makers and the future. And so that’s where I see the biggest outside risk for firms in this area.

Catherine Ford:[00:25:44] Lee, listening to Ben there, my immediate thoughts are jumping to the lobby industry. What are they doing on behalf of the healthcare industry in this particular setting? I mean, the situation that Ben describes there really does make me think, well, are they kicking up a fuss? How much of a fuss are they kicking up? What are they targeting? Targeting specifically to counteract some of these measures?

Lee Brown:[00:26:05] Yeah, I mean, I would disagree that it’s not a significant impact near term. I think Ben’s point is this doesn’t kick off until fiscal 26, and then it builds over time. I think one of the more interesting parts of the analysis was and it makes some sense, is that the amount of savings don’t really grow in an exponential fashion over the projected window by cbo. As you’re expanding the number of drugs, you would think that would go up, but at the same time, you’re moving your way down the list from the biggest spin to lighter spin, but still when you segment where the money spent. It’s interesting that analysis doesn’t balloon and I think it, I’ve already mentioned litigation, so I don’t wanna keep pounding the drum there. I wanna get more into what the CBO estimates as the reaction from the industry and tied to these drug pricing provisions of the ira.

Lee Brown:[00:27:11] And they’re saying that it will only have a very modest impact on the number of new drugs coming to the market in the US over the next 30 years. And I think most Americans agree with that. They look at this and say, Well, the drug companies aren’t gonna stop innovating. The CBOs pretty adamant about this. They say that there’s only gonna be 13 fewer out of roughly an expected 1300 drugs coming to market. So they’re saying, Hey, this is a reduction of just 1% fewer than one drug over the 2023 to 2032 period. It’s roughly about five fewer drugs in the subsequent decade, and about seven fewer drugs in the decade after that. So if you believe the cbo, you say, Okay, there’s nothing to worry about. Right? But here’s the reality is that the r and d of new drugs costs between one to 2 billion a year.

Lee Brown:[00:28:03] And considering that only about 12% of drugs tested are approved by the FDA talking about the average r d cost per approved drug to be north of 12 billion. So if you think they’re gonna have their top selling drugs ravaged by a stipulated versus air negotiate drug pricing process that could potentially spill over into the commercial market, you’ve gotta believe that they’re not gonna keep spending the amount of money that they are. And I’ll throw another figure out. In 2019, the pharmaceutical energy spent about 83 billion on r and d adjusted for inflation. That amount is about 10 times what the industry spent in the 1980s. They’re spinning around 25% of revenue on r and d. This is outpacing only the spending in r and d of the semiconductor industry. So what I would say is, despite the CBOs estimate saying that this will absolutely have no impact on innovation, I think the very real possibility is that they’re underestimating their reaction to this new law by the drug companies, namely a swift cut in r d spend.

Benedict Polito: [00:29:15] It’s not just the drug companies here that I think matter for the reaction. That’s that when I think we think drug companies that many of us go to the big names Pfizer, Merck, GlaxoSmith client and all those. But a lot of the novel innovation comes at a very sort in a different context. Smaller biotech firms that have, they’re funded by much more mobile capital. That’s not what CBOs modeling. CBO doesn’t model early stage venture capital type stuff. And so we really don’t have, you shouldn’t think of the score. It’s a reasonable attempt to estimate this, but it’s not perfect and it’s missing things. And if I were to think about areas where I’d be a little bit concerned about the innovation effect, it says early stage companies where capitals particularly mobile, where suddenly there’s a lot of alternatives that exist outside of the drug industry where you can flow those you can send that money. And so that’s really one of the areas where I think the CBO probably is missing the market a little bit.

Catherine Ford:[00:30:06] Now at the beginning of the conversation, both of you commented on how this piece of regulation is an interference in the market that we haven’t necessarily seen before. So if we take a step back and sort of think about the big picture, where does this leave us healthcare? Is this something where we think we are going to see more government intervention going forward? What are some of the things that could potentially be addressed and where do we think attention we focused in the future? Lee, can you talk us through some of your expectations first?

Lee Brown:[00:30:34] Well, I think as been said, as far reaching as, and as important as this law is, I mean, it is the most consequential healthcare reform that we’ve seen in over a decade since the Affordable Care Act has passed. And yet it really passed with little to no debate. Obviously, as it stands, we’re gonna see increasingly more interference. And to Ben’s point, some people don’t think this goes far enough. I would just draw folks attention to the very creation of Medicare Part D. And for the folks that don’t know what that is, that was the program that created CMSs ability to cover retail prescription drugs. And when that law was established there was this clause that the Part D benefit had a provision called a non interference clause. And it’s stipulated that the HHS secretary could not interfere with the negotiations between drug manufacturers and pharmacies and PDPs. Those are prescription drug plan sponsors and may not require particular formulary or institute a price structure for the reimbursement of covered Part D drugs. So there was a reason why we were able to get part in place in the first place, and that’s because they would only put it in place with this non interference clause included. And now we’ve gone down the road and now we have HSS doing this exact thing. I think it’s problematic, and I do worry about the ramifications for innovation and new drug advancement in the future.

Benedict Polito: [00:32:15] When I think about the future, I think about when I talk to folks on the hill, on Capitol Hill in Washington, at the root of nearly everything I hear ultimately is cost, right? So the US it is just hard to understand how much the US spend. We spend about 4 trillion a year on healthcare in the US that strains government budgets, that strains people’s pocketbook, it makes private insurance expensive. And so when we think about where’s healthcare going and what isn’t addressed, there’s always going to be this undercurrent of cost pressure in the US market. And so drug pricing absolutely is gonna still be in the crosshairs. There are absolutely going to be efforts to expand the powers that have just been created that is guaranteed moving forward. In terms of specific areas beyond what we’re talking about, the one I hear a lot about on the hill now is private equity. Private equity back healthcare is a major focus and it has a certain salience to I think voters and to policy makers that is different. It’s different than a nonprofit hospital or whatever it might be, or a local doctor, something like that. And so in terms of areas that I would keep an eye on moving forward, private equity backed healthcare is problem the top of my list.

Catherine Ford:[00:33:23] You raise a really interesting point there, Ben, because obviously, I mean, if you say that private equity is something that we should be looking out for in this sector, that to me suggests that despite all these changes that we are seeing, the attractiveness of the sector is fundamentally still, there is still an interesting sector to invest in. Does it still offer those opportunities that we’ve expected that we’ve seen from it in the past, Lee?

Lee Brown:[00:33:43] Well, I think what’s interesting, Catherine, is that’s a static based analysis. It’s where venture capital and private equity have been. The rules have just been dramatically changed. To Ben’s earlier point, that’s the real question that I don’t think CBO is taking into account. Given how much money is required to bring a new drug to market, is there an attractive return on investment anymore? So if you wanna get into treating orphan diseases these rare genetic diseases, and there’s not a attractive sort of future stream of cash flows, you’re just not gonna do it. And I think the, you’ve gotta balance that with this whole idea of cost pressures, and I think Ben did a great job. CMS is in trouble. I mean, when you look at the facts, and some people say this is all hoopla, but Medicare, Medicaid are constantly battling insolvency, and so something’s gotta be done. I think we can all sit around the table and say, This is a situation that needs to be fixed.

Catherine Ford:[00:34:57] Now I like to wrap up our podcast by asking my speakers to give me the one to watch, and that might be a company in the space, a development in the space, any sort of activity in the space that they feel that we need to keep a really, really close eye on. With regards to the future. Lee, if I can put you on the spot, first of all, what’s the one thing that you feel people need to keep an eye on?

Lee Brown:[00:35:19] Well, I don’t wanna single out. You always do this to me, but I don’t wanna sing on a particular company or particular drug. There’s a lot of interesting things going on in healthcare. I always like to say the future is now in healthcare innovation, but there’s a part of this policy, this law that now stands that we didn’t discuss, which I think is really important. The law now allows us to cap drug price inflation at cpi. And in the past we’ve had some pretty aggressive pricing in various markets. So I think this is a really nice measure that’s going in, I think longer term that this will keep a cap on prescription drug pricing inflation. And I think the other interesting thing that this does is it limits, I think Ben mentioned this earlier, but it’s limiting out of pocket costs. So this is gonna be interesting to see how this plays out over the next few years.

Catherine Ford:[00:36:18] Thank you very much. Ben. Can I ask you for your one to watch?

Benedict Polito: [00:36:22] I’ll say, I’m gonna do the annoying thing and I’ll do two cuz I already mentioned one of ’em. I’d say within and out within and outside of drug markets, I would say private equity. I would say how is Congress treating private equity? That’s gonna be one of the big things I’m gonna be focusing on. And that’s not just a drug issue. Private equity, back staffing companies nursing homes, things of that nature have been getting a lot of attention. And I can easily see that being a source of new legislation on the hill. The second thing that I’m gonna be watching within the drug space is how CMS treats these latest Alzheimer’s medications. That’s an area where almost everyone that takes those drugs in the United States is on Medicare. And so it’s a real big budget, budget issue for the Medicare program. And so it really heightens all the issues we’ve talked about. Art just crystallized because Medicare’s on the hook for every single one of those patients. And so I’m gonna be seeing how exactly they cover those drugs, if they cover them, what kind of conditions they’re gonna be under.

Catherine Ford:[00:37:20] Ben and Lee, thank you so much for sharing your insight in this incredibly complex but also incredibly interesting topic. I feel that we once again only scratched the surface, but I’m sure our listeners have appreciated getting that insight from you guys. I’d like to also thank again once our audience for listening to this episode of The Signal presented to you by Third Bridge, the world’s leading investment research provider. Join us again in a fortnight for the next episode. And in the meantime, please rate, review and follow our podcasts. Indeed, if you like it, tell a friend, find us on Spotify, Apple Podcasts, and wherever else you get your podcasts from. Plus third bridge.com/signal for me, Katherine Ford. That’s, Thank you very much. And until next time,