Drug stocks surge after US says cost panel will wait until 2017

Drug and biotechnology stocks surged yesterday after the US government said a cost-cutting mechanism created under Obamacare, known as the Independent Payment Advisory Board, or IPAB, will likely be triggered in 2017, not this year as some investors had feared.

Bloomberg, 22 June 2016

Investors had been watching nervously for news of the determination, concerned that it could trigger this year and set in motion reductions in Medicare payments to biotech and pharmaceutical companies, as well as other healthcare firms. Medicare is the federal health insurance programme for people who are 65 or older. The Nasdaq Biotechnology Index of 189 stocks had fallen for 11 of the past 12 trading days as of Tuesday's close.

The biotech index rose as much as 2.7 percent for the biggest intraday gain in more than a month, and the broader Standard & Poor's 500 Health Care Index of 56 stocks was up 1.4 percent. The 2017 initiation of the IPAB leaves the next administration elected in November to deal with what controversially was known as "death panels" during negotiation of the Patient Protection and Affordable Care Act because of mainly Republican claims the cost-cutting would lead to rationing of care.

The IPAB is a 15-member panel that would be appointed by the President and has broad authority to propose cuts to payments made through Medicare. Its proposals could affect drug makers, biotechnology companies, hospitals and insurers, with some restrictions. Congress, which has typically controlled many aspects of Medicare's payments through legislation, has limited oversight of the IPAB, which was set up specifically to make reductions to US health spending, at a distance from lawmakers and lobbyists.

Once appointed, the board proposes cuts to Medicare payments that will bring Medicare back under target levels that are based on rates of consumer inflation and US gross domestic product.
Those cuts are then sent to the President and Congress for fast-track consideration, though it is not clear how the IPAB's operations would fare in the face of what could be strong opposition or a legislature determined to fight its conclusions. Lawmakers on both sides of the aisle have expressed concern, and House Speaker Paul Ryan would abolish the board in his proposed healthcare overhaul. Investors will have to wait until next year to see if the panel is triggered. If the rate of US health spending slows, it may not be.