The News:

Healthcare stocks swooned again last week after President Donald Trump on Thursday slammed the pharmaceutical industry for high prices of prescription drugs and vowed to allow US states to buy medicines from other countries if they cost less.

Trump, who campaigned on a platform to reduce drug prices for US consumers, has taken few concrete steps to lower medication costs since taking office in 2017, and has so far largely relied on personal talks with company executives and industry promises to voluntarily roll back prices or limit price hikes. At a White House event on hospital billing, the Republican president criticized drug companies for what he said were unfair practices that gave other countries better deals than the US.

“We may allow states to buy drugs in other countries if we can buy them for…a substantially less price,” Trump said. “The drug companies have treated us very, very unfairly.”

Most other developed nations directly or indirectly negotiate drug pricing with companies, and in some cases may deny access to medicines they deem too expensive, while pricing in the US is left to the free market and set by the drugmakers. It was not immediately clear how Trump’s administration would move to import medicines from abroad.

Elsewhere, Congress isn’t making much headway in finding a solution to the problem of soaring prescription drug prices, but lawmakers from both parties are tinkering on the edges with legislation that aims to increase competition among drugmakers, says Rachel Bluth at Kaiser Health News. A comprehensive piece of drug-pricing legislation is a high priority for Senate Finance Committee Chairman Chuck Grassley (R-IA) and Sen. Ron Wyden (D-OR). And it could be introduced by mid-June, according to congressional staff.

But while that is hashed out, a slate of options to reform drug patents is working its way through the Senate Judiciary Committee, which had a hearing last Tuesday featuring academics, patient advocates and a representative from the pharmaceutical industry. Their mission: to increase competition without decreasing innovation in the industry.

“I think we’re dangerously close to building a bipartisanship consensus around change,” Sen. Dick Durbin (D-IL) said during the hearing.

The four proposed bills share a common goal: avoiding some of the thorny issues around drug pricing, like whether the government will set drug prices or negotiate with manufacturers on what federal programs will pay.

The Trump administration’s legal challenge to former President Barack Obama’s signature health insurance law–the Affordable Care Act–and Sen. Bernie Sanders’ new “Medicare for All” bill also are weighing on the industry’s shares, said CNBC.

The XLV, an ETF that tracks the healthcare industry’s biggest companies, was down 1.4%% for the week as of close, Friday. The biggest declines were from Mylan PLC, down  a whopping 21% on the week. Humana slid 2%, Johnson & Johnson fell 3%, Sanofi dropped 6%, CVS lost 3%, Abbott gave up 3%, Becton Dickinson stumbled 5%, and Cardinal Health lost 4%.

Ana Gupte, senior healthcare services analyst at SVB Leerink and a KOL, said the recent healthcare sell-off is mostly driven by the proposed legislative changes to the PBMs’ business model, which are paid so-called rebates by Big Pharma for getting their drugs covered by private and public insurance plans, like Medicare. These so-called backdoor deals are suspected by lawmakers of increasing drug costs for patients. It is “very likely” lawmakers [will] force drug companies to give those rebates to consumers instead, starting as early as next year, Gupte said.

Fast-forwarding to today, Monday, June 13, 2019, trade wars rattled financial markets again, with stocks sinking for the fifth time in six sessions since China’s defiance of Trump’s warning not to retaliate for his imposition of higher tariffs Friday escalated the skirmish. The XLV plummeted another 1.9% Monday despite the tariff broadsides not really expected to adversely affect the health sector all that much.

Steve’s Take:

After observing the American healthcare system from Wall Street’s perspective for over 45 years, I do understand how “uncertainty” is what really weighs on the hearts and minds of investors. And adding to this ambiguity, the eruption in trade grenades between the US and China increases the possibility of a slowdown in global growth. In some analysts’ minds, this could dent the health-sector’s corporate profits.

Personally, Trump’s assertion that tariff wars are “easy to win,” doesn’t make much sense.

“China retaliating as fast as they did was a clear signal they’re not going to be pushed around,” said Samantha Azzarello, global market strategist for IPMorgan ETFs.

No surprise there.

But what’s come as a surprise to me is just how much worry has been stoked by Bernie Sanders’ Medicare for All proposal and the resulting impact on healthcare stocks, which has taken a sound thrashing the past month.

I look at all the European and Asian pharmaceutical companies–each of whose nations has their own “Medicare for All” healthcare system–and they are making money hand over fist. Tiny Switzerland’s Roche and Novartis occupy second and fourth place among the top revenue-generating firms. Germany’s Bayer has the fifth spot, England’s GlaxoSmithKline the sixth and Sanofi the eighth. Rounding out the top 20 are Israel’s Teva, Denmark’s Novo Nordisk and Japan’s Takeda.

So, why all the worry about US companies’ profit prospects if we do institute Sen. Sanders’ proposal? Can’t we borrow from the other rich nations’ healthcare systems to provide universal care while still preserving the health of our vastly profitable industry?

I believe the answer to my conundrum lies amidst the following factual notions.

Despite the passage of the Affordable Care Act in 2010, America remains an outlier in healthcare provision. It has some of the best hospitals in the world, but it is also the only large, rich country without universal health coverage. And healthcare costs can be financially devastating.

America never followed rich European and later East Asian countries in introducing universal coverage. Today 10% of Americans below retirement age are without insurance, though that group ranges from 6% to 17% in different states.

Many Republicans believe that health care is not a right but something people choose to buy (or not) in a marketplace.

As Jason Chaffetz, a Republican congressman, put it, “Americans have choices. And they’ve got to make a choice. And so maybe, rather than getting that new iPhone that they just love, and they want to go spend hundreds of dollars on that, maybe they should invest in their own health care.”

Perhaps more important, about half of Americans have their health insurance provided by their employers. This resulted from a quirk of history. During the second world war President Franklin Roosevelt froze Americans’ wages but allowed companies to increase workers’ benefits, which they wanted to do to alleviate labor shortages. The share of workers with health insurance increased from 10% in 1940 to nearly 30% in 1946. So now, America has a version of a problem seen the world over: voluntary insurance cannot ensure that everybody gets coverage.

The Affordable Care Act expanded Medicaid–the health-insurance system for the very poorest Americans–and subsidized slightly fewer poor ones to buy health insurance in statewide marketplaces. This cut the number of uninsured people from 44 million to 28 million, but still left a gap among people not poor enough to qualify for Medicaid but not rich enough to buy private insurance. Following a Supreme Court decision in 2012 that allowed states to opt out of expanding Medicaid, 18 did just that, leaving more people uninsured.

Last year the Republican-controlled Congress tried and failed to repeal Obamacare. At the same time the Democrats were buoyed by their successful opposition to the repeal. “The Affordable Care Act was never popular until the Republicans tried to abolish it,” says a former policy adviser to President Barack Obama. Today the standard view among Democrats is that the time has come to travel the last mile towards universal health care.

Polls for the Kaiser Family Foundation, a health think-tank, find that a slim majority of Americans now favor a “single-payer” system (usually meaning that government, rather than insurance companies, buys care from providers). This is an important shift. The next Democratic candidate for president will almost certainly campaign under the banner of universal health care.

Bottom Line:

The US healthcare industry comprises 20% of the entire economy. Yet we still haven’t implemented universal health care. Yes, there’s an obvious conundrum here in the US that on the one hand every American deserves healthcare, regardless of their means, while on the other, it’s okay, and even fiscally prudent, to allow companies to make enough profit to invest in new, better and hopefully cost-effective treatments. That probably won’t happen without the “capitalism” factor, though. Just ask Russia, and until recently, China.