The US Congress’ bid to reshape health insurance holds many perils for the biopharma sector, but perhaps none is more significant than a proposed reduction in Medicaid funding that would see enrollment in the program for low-income and disabled people drop by 15 million over the next decade.

Since Medicaid expansions authorized under the Affordable Care Act (ACA) have been implemented, Medicaid has been the fastest-growing buyer of prescription drugs in the US, with an annual growth rate of 21% between 2013 and 2015. Companies heavily involved in HIV treatment, like Gilead Sciences (NASDAQ:GILD) and Glaxosmithkline (NYSE:GSK), are at particular risk from the cuts, as Medicaid accounts for a significant chunk of global sales (see tables below).

The saving grace, at least for now, is that the proposed changes would not take effect until 2020, beyond the horizon of most pharma sector investors. Should the law be enacted, any effect on share prices would probably not manifest until the cuts begin having a direct impact on company earnings.

Contracting the expansion

The ACA, also known as Obamacare, allows state-based Medicaid programs beginning in 2014 to expand enrollment to families with incomes of up to 138% of the federal poverty level, or $42,435 this year for a family of four. The federal government has paid for all of the costs of the expansion, ramping down to 90% beginning in 2020.

So far, 32 states have expanded coverage. According to the US Census Bureau, that had resulted in an enrollment increase of 7.5 million between 2013 and 2015. Over the same period, the number of uninsured Americans dropped by 12.8 million.

There was a concomitant rise in Medicaid prescription drug spending over the same period: between 2013 and 2015, the last date for which full data are available, it jumped from $22.4bn to $31.8bn, according to the Centers for Medicare and Medicaid Services (CMS). Nearly all of that came from federal contributions, which rose from $12.4bn to $21.1bn over that period, a 32% annual increase.

US prescription drug spending by payer ($bn)
2008 2009 2010 2011 2012 2013 2014 2015 Annual growth rate, 2008-12 Annual growth rate, 2013-15
Private health insurance 110 116 116 117 113 114 128 140 1% 11%
Medicare 51 55 59 63 68 74 85 94 7% 13%
Medicaid 19 20 20 21 22 22 28 32 4% 21%
Medicaid federal 11 14 14 13 12 12 18 21 2% 32%
Medicaid state 8 7 7 8 10 10 10 11 6% 5%
Total* 241 253 253 259 259 265 298 325 2% 11%
*Includes other government programs and third-party payers. Source: CMS.

By comparison, total national prescription drug spending rose 11% annually, as did private health insurance spending, while Medicare drug spending went up 13%.

The Medicaid rise represents an initial cohort of newly enrolled beneficiaries, of course, and matching that short-term growth rate would be dependent on either raising the income ceiling or some of the 18 other states expanding coverage – the pro-universal coverage advocacy group Families USA estimates that 6.2 million more people could qualify.

Nevertheless, the numbers underscore the potential for Medicaid prescription drug spending to go into reverse should congressional proposals to replace the ACA become law. The most prominent proposal in the US Senate, which almost came to a vote earlier this month, would impose caps on federal Medicaid contributions to a patient’s care, with growth rates pegged to inflation. States would also have an option to receive their federal assistance in the form of annual grants.

HIV in jeopardy?

A look at big spending on individual drugs shows some companies at greater risk than others. Gilead and Glaxo, for example, which have staked at least a portion of their future on HIV, have heavier Medicaid exposures than many.

Of 50 drugs with either high total or per-prescription spending in 2015, the last year for which CMS provides Medicaid drug spending data, 10 were for HIV. This should not be too surprising – because of the ACA, the share of patients receiving care for HIV who were covered by Medicaid rose from 36% in 2012 to 42% in 2014, according to the Kaiser Family Foundation.

Medicaid spending on HIV drugs, 2015 ($m)
Drug Company Medicaid spending US sales
Truvada Gilead Sciences 736 2,057
Atripla Gilead Sciences 603 2,222
Stribild Gilead Sciences 455 1,476
Prezista Johnson & Johnson 334 1,064
Complera Gilead Sciences 313 796
Reyataz Bristol-Myers Squibb 233 591
Isentress Merck & Co 231 797
Triumeq Glaxosmithkline 198 779
Tivicay Glaxosmithkline 192 594
Total 3,295 6,097
Sources: CMS, EvaluatePharma.

In states that expanded coverage to 138% of the federal poverty level, 51% of HIV patients were covered by Medicaid.

The unique exposure of Gilead’s HIV franchise to Medicaid spending was called out early by Leerink analyst Geoffrey Porges. When the House of Representatives was debating its version of ACA replacement legislation in April, he pointed out that Medicaid cost constraints could cause states to reach first for generic alternatives to Gilead’s single-tablet regimens.

For Gilead, the future is increasingly tied to its HIV franchise, which will see its new bictegravir and tenofovir alafenamide-based regimens go up against Glaxo’s dolutegravir pills, which likewise are forecast to be its two biggest sellers in 2022 (Gilead and Glaxo’s HIV battle intensifies, February 14, 2017).

These risks will, of course, only be realized if Congress is successful in passing this legislation, which is looking a little less certain than it was just weeks ago. And even if Medicaid expansions are repealed in law, funding would not shrink for more than two years.

Wise lobbyists know that when it becomes obvious that Congress wants to tighten a federal funding stream it is best to push those reductions into the future. Government control changes frequently and cuts can be undone – and this is clearly what pharma executives and investors alike are betting on when it comes to Medicaid.

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Fastest-Growing U.S. Drug Spender Medicaid In Danger Of Cuts