Reform offers risk, opportunities for Lilly, WellPoint

Drugmakers like Eli Lilly and Co. and health insurers like WellPoint Inc. will gain millions of customers under legislation
passed by the House Sunday night that overhauls the nation’s health care industry. But firms in the industry also will
pay new fees to the government, and face stricter rules that may narrow profit margins and fuel mergers.

The bill that the House passed on a 220-211 vote Sunday night expands coverage to 32 million uninsured Americans, according
to Congressional number crunchers.

The revamp will cost $940 billion over 10 years, with industry fees and taxes helping defray the cost of adding to the ranks
of customers who can afford to pay their doctors, drugstores and hospitals. Because the legislation creates pressure to curb
medical costs, companies may merge as a way to lower expenses, said Paul H. Keckley, executive director of the Deloitte Center
for Health Solutions, a Washington-based research firm.

“You have some that are able to manage more efficiently and strategically and some that can’t,” Keckley
said. “You’ll see an acceleration of acquisitions.”

Investors in health care were cautiously optimistic in trading Monday. Lilly shares were trading late morning at $36.48,
up 33 cents on the day. WellPoint stock was at $65.18, up 11 cents.

“We continue to believe money will rotate back into health care stocks now that the uncertainty of ‘reform’
is lifted,” Charles Boorady, an analyst at Citigroup Inc. in New York, wrote in a report Monday.

Drugmakers, who took part early in negotiations with the Senate Finance Committee and the White House, may have the most
to gain. More health-care coverage “makes a difference in demand for drug products,” said John L. Sullivan, an
analyst at Leerink Swann & Co. in Boston. People won’t have to skip doses of medicines as frequently to save money,
he said.

And while the industry pays $28 billion in fees over nine years to help the elderly afford drugs, it avoided requirements
to have complicated pricing agreements with the government in Medicare, the program for the elderly and disabled, said Ramsey
Baghdadi, a researcher at the analysis firm Prevision Policy LLC in Washington, D.C., who specializes in pharmaceutical and
biotechnology policy.

For health insurers, the potential increase in customers will be tempered by subsidy cuts for custom Medicare Advantage plans
offered to the elderly, and the prospect of new regulations. The industry, through its trade group America’s Health
Insurance Plans, argued as recently as March 18 that the legislation won’t control costs and that people will still
wait until they’re sick to buy coverage.

Lilly and other players in biotechnology won 12 years of protection from generic medicines derived from proteins. The generics
industry, on the other hand, won a reprieve from a proposed ban on legal settlements where they receive payments from brand-name
manufacturers to delay introduction of the cheaper copies.

“The drug industry is probably a bit better off.,” Sullivan said. “And for managed care I think it’s
a function of what happens with the individual mandate and how easy or hard it is to keep healthy people in the insurance
pool.”

The Standard & Poor’s index of 51 health-care stocks has risen 5.1 percent from this year’s low on Feb. 8,
the day President Barack Obama announced he was inviting Democratic and Republican lawmakers to the White House to discuss
ways to get the overhaul through Congress. No Republicans voted for the measure Sunday.

The legislation requires Americans to get insurance, offering government aid and new purchasing exchanges to help. WellPoint
and other insurers would get millions of new policyholders, while being required to accept all customers, even with pre-existing
conditions.

It won’t be easy sailing for the insurance industry, said Matthew Borsch, an analyst with Goldman Sachs Group Inc.
in New York, in a research note March 18. The legislation “entails significant risks,” and the companies that
sell Medicare Advantage policies face subsidy cuts. America’s Health Insurance Plans, the Washington-based trade group,
says $200 billion will be carved from those plans.

Also, the 2014 date for the insurance exchanges to start “leaves three and a half years to work through, and potentially
modify, provisions that might undermine successful coverage expansion,” Borsch said.

Carl McDonald at Oppenheimer & Co. in New York sees that period fraught with risk.

“Much of what is included in the health reform bill is what is referred to as enabling legislation,” meaning
the Health and Human Services secretary works out the details, he said in a note dated March 17. That is Kathleen Sebelius,
who has “spent much of the past month trying to prove that managed care CEOs would deny a claim from their own mothers
in order to improve their quarterly financial performance.”

 

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