Wide Disparities in Stock Returns and Profit Growth;
Health Insurers Big Winners, Pharmaceuticals Trail
With Congress considering changes to the Affordable Care Act (ACA), it’s a good time to take a look at the winners and losers among health industry groups from the reforms enacted during the Obama Administration. The ACA was signed in March 2010, but uncertainties about its structure and implementation continued for many months afterwards. We decided to look at stock performance and profit growth for groups and key individual companies over the five years ending Feb. 13, 2017.
The S&P 500 Health Care Index, which includes all the health components (pharmaceuticals, biotech, insurers, hospitals, and more) in the Standard & Poor’s 500-Stock Index, the large-cap benchmark, returned an annual average of 14.9% for the period (all returns include dividends). That is a full point better than the S&P 500 itself.
The S&P 500 Select Pharmaceuticals Index, by comparison, returned an annual average of just 11.7% over the five years.
The four largest U.S. pharmaceuticals, by market capitalization (shares outstanding times price), are Pfizer, which returned an annual average of 12.2% over the five years; Merck, 14.1%, and Bristol-Myers Squibb, 13.1%. Johnson & Johnson returned an annual average of 14.9% over this period, but a bit less than half of its sales came from prescription drugs, the rest from medical devices and consumer products.
There are no separate indexes for health insurance stocks or hospitals, but theDow Jones U.S. Select Health Providers Index includes the largest public companies from these sectors as well as pharmaceutical benefit managers (PBMs), nursing homes, and Medicaid and Medicare service specialists. The index has returned an annual average of 16% for the past five years – more than a point better than health-care stocks overall and more than four points better than pharmaceuticals.
The largest individual health insurers have done extremely well. UnitedHealth Group has returned an annual average of 25.8%; Aetna, 22.5%; Cigna, 27.3%; and Anthem, 21.8%.
There are few large publicly traded hospital companies, but the largest, by market cap, is HCA Holdings, which has returned an annual average of 26.5% over the past five years. In the PBM sector, which also has only a few large players, ExpressScripts returned an annual average of just 6.4%, and CVS Health, which owns the giant PBM Caremark as well as the drugstore chain, returned 14.4%. Among medical-device makers, Stryker returned 19.3% and Becton Dickinson, 19.9%. Among wholesalers, Cardinal Health returned 15%; McKesson, 12.2%.
Biotechs excelled. The Nasdaq Biotech Index, which includes 164 stocks, returned 19.8% over the five-year period. Among individual large biotechs, Amgen returned an annual average of 21.8%; Gilead, 20.9%; Biogen, 19.9%.
We also looked at annual average earnings growth over the same five-year period, using data from the Value Line Investment Survey.
The four large pharmaceutical companies, taken together, registered average annual earnings-per-share growth of less than 1%. Pfizer did best, at 4%, followed by J&J at 3.5%.
Earnings at the four health insurers, by contrast, grew an annual average of 12%, with Aetna leading at 14.5%, followed by Cigna at 13.5% and UNH at 11%. HCA’s earnings growth averaged a whopping 19%; Express Scripts, 10%; CVS, 12%. Among biotechs, Gilead led on the strength of its Hepatitis C drugs, with five-year average annual growth of 38.5%, following by Biogen at 29% and Amgen at 14%. Becton-Dickinson, the device maker, grew at a rate of 7%; McKesson, the distributor, at 16%.
Of course, in all these cases, factors besides the ACA influenced profits and stock prices, but it’s nonetheless clear that the biggest gainers were health insurers, selected hospitals, and biotechs.
Here is a table that shows some of the more important figures:
Health Spending Growth: Hospitals, Doctors Outpace Pharmaceuticals
The Altarum Institute on Friday issued a new report on health-care spending in the U.S. during 2016. Of the three major categories of spending, which account for 62% of total costs, the slowest growth came from pharmaceuticals. Prescription-drug spending rose 4% in 2016 compared with 2015. By contrast, hospital-care spending rose 5.3%; physician and clinical services, 4.9%. Gross domestic product over this period rose 3.5%.
In dollars, hospital spending rose $44 billion in 2016 over 2015; physician and clinical rose $31 billion; and prescription drugs, just $13 billion. In other words, hospital and doctor spending increased more than five times as much as drug spending.
According to the Altarum report, hospitals represented 32% of total spending in 2016; physicians and clinical, 20%; drugs, just 10%.
If policy makers want to make a dent in overall health-care spending, they should direct their attention to where the money is. The U.S. now spends $3.4 trillion on health care. Of that, $1.1 trillion goes to hospitals; $683 billion to physicians and clinical services; and $347 billion to prescription drugs. Also, as we have pointed out before, spending money on drugs frequently preventsspending on hospitals and doctors.
Drug-Pricing Policies: Some Predictions
In the Feb. 2 issue of the newsletter Axios Vitals, reporter Caitlin Owens makes some predictions about likely – and unlikely – policies regarding drug pricing.
“Most likely,” she says, will be “a host of policies designed to bring more generic competition to the market” by speeding up the approval process and other measures.
“Somewhat likely” are: increasing competition in Medicare Part B (drugs administered in doctors’ offices and hospitals); “increasing drug price transparency,” perhaps by “asking manufacturers to report on how they set prices”; plus, “something targeted at middlemen in the pharmaceutical supply chain [who] drive up the prices of drugs.”
“Less likely” are “allowing Medicare to negotiate drug prices” and importing drugs from abroad, policies that may have populist appeal but don’t necessarily make sense in practice.
Is It a Coincidence That Survival Rates Are Higher Here, Too?
In recent years, cancer drugs have been dominating news both because of the benefit they bring and the price tags. If you live in the United States, getting access to those drugs is a good deal easier than in other developed countries. That is the conclusion of a studyjust published in the February issue of the Journal of Managed Care and Specialty Pharmacy.
They looked at the 41 anti-cancer drugs, covering 45 indications (an indication is evidence to initiate treatment of a disease), approved in the U.S. between Jan. 1, 2009, and Dec. 31, 2013. They examined how many of those indications had been approved by regulatory agencies equivalent to the U.S. Food & Drug Administration in the U.K., France, Australia, and Canada. They also examined how many of these drugs were covered by the Medicare program in the U.S. and by government health insurance in the other countries.
Here is what they found:
What is the effect of limiting access to effective and safe cancer drugs? The answer is beyond the scope of the study, but earlier research gives some clues. For instance, in November 2014, a large international study of cancer survival rates called CONCORD 2 was published in The Lancet. The survival results for five common cancers in seven countries, as related by the U.S. Centers for Disease Control, found the U.S. performing best by far.
The study looked at proportion of patients with different kinds of cancers surviving at least five years. The United States was number-one out of the seven countries for three of the five cancers (breast, colon, and prostate), second in lung cancer, and sixth in childhood leukemia. No other country came close to that record.
The U.K., for example, ranked last among the seven countries in every category but one. Japan led for lung cancer but finished sixth for breast and prostate and last for childhood leukemia.
Here is a table with some of the results….
It is sensible to conclude that at least one reason for these higher survival rates is greater access to the best anti-cancer pharmaceutical treatments. A broader conclusion is that smart spending on health care can produce better results.
Elevating Primary Care
But then again, we have a lot to learn from European health systems. The surgeon Atul Gawande is also one of America’s best writers of non-fiction. His recent piece in The New Yorker, “The Heroism of Incremental Care,” celebrates the role that primary physicians and nurse practitioners can play in keeping people healthy and holding down costs. As the subhead puts it: “We devote vast resources to intensive, one-off procedures, while starving the kind of steady, intimate care that often helps people more.”
Gawande gives vivid examples of how primary-care doctors, working closely with patients, can diagnose and treat difficult diseases that are immune to heroic intervention. He thinks primary care is the future: “The more capacity we develop to monitor the body and the brain for signs of future breakdown and to correct course along the way – to deliver ‘precision medicine,’ as the lingo goes – the greater the difference health care can make in people’s lives, as well in reducing future costs.”
Costs are what this newsletter is all about. Gawande cites a compensation survey that shows that the five highest-paid specialties in medicine – orthopedics, cardiology, dermatology, gastroenterology, and radiology – “have an average income of four hundred thousand dollars a year.” He writes, “All are interventionists: they make most of their income on defined minutes- to hours-long procedures…and then move on. (One clear indicator: the starting income for cardiologists who perform invasive procedures is twice that of cardiologists who mainly provide preventive, longitudinal care.)”
The lowest-paid specialties are pediatrics, rheumatology, family medicine, internal medicine, and the like – at about half that of the highest. “All are incrementalists – they produce value by improving people’s lives over extended periods of time, typically months to years.”
If we devoted more resources to these incrementalists, then it’s likely that the high costs of intervention could be lowered. Gawande uses hypertension as an example. Some 30% of Americans have high blood pressure, but “only half are adequately treated.” The resultcan be stroke, heart attack, or kidney disease.
Gawande spoke to Asaf Bitton, a highly regarded internist who said that primary care “is the medical profession that has the greatest over-all impact, including lower mortality and better health, not to mention lower medical costs.” Europe seems to understand this much better than we do. Bitton referred to a study in Spain that focused on strengthening primary care in various regions and found that mortality rates fell there. Also, “Medicare plans that increased co-payments for primary-care visits – and thereby reduced such visits – saw increased hospitalization rates.”
Some primary care – diagnosis and intervention – needs physicians. But management of the disease, which in many cases is just as important, can be performed by medical assistants with less training. And often done a lot better. Follow-up to be sure the patient is compliant, which can simply mean a phone call or an email, is a low-cost way to prevent a stroke, which leads to an expensive hospital stay and rehabilitation.
The Cost Burden of Smoking
In addition to new drug discoveries, perhaps the best news in health care in recent years has been the decline in smoking. But a study in the new issue of the journal Tobacco Control finds that health-care costs due to tobacco – and economic losses due to smoking’s effects (for example, productivity at work) – are still very high. Globally, tobacco is the cause of 5.7% of health expenditures and its total costs represent 1.8% of the world’s GDP.
The U.S. figures aren’t easy to find in the study, but the table is here. The researchers calculate that U.S. health costs due to smoking were $203 billion in 2012 (that’s about two-thirds of the cost of all the pharmaceuticals used in this country), or 7.4% of all health costs. Total costs represent 3.2% of GDP. An estimated 15% of Americans smoke, compared with 42% a half-century ago. But there are enough smokers to have a huge impact on health-care costs.
The study -- by Mark Goodchild, Nigar Nargis, and Edouard Tursan d’Espaignet – is further evidence that, if we truly want to bend the cost curve, we need to focus on changing behaviors.
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