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COVID testing costs, hospitalization to drop as treatments enter market: Analyst

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Lisa Gill, head of J.P. Morgan's Healthcare Services Team covering Managed Care & Facilities, joins Yahoo Finance to discuss the patents and pricing behind upcoming COVID-19 treatments, including Pfizer's pill, as options become more widespread and mainstream.

Video Transcript

EMILY MCCORMICK: We're sticking with the topic of the drug makers with our next guest. Lisa Gill is head of JP Morgan's Healthcare Services Team, and she joins us now. Lisa, thank you so much for being here. I want to pick it up where Anjalee was talking about in terms of the Build Back Better plan. Now one of the areas, of course, that is still being negotiated is on curbing prescription drug costs. I'm wondering what you see as the most likely outcome of these debates in Washington right now and what companies are going to be impacted by that.

LISA GILL: Sure, well, first off, thank you for having me this morning. Second, you know, a lot of times what ends up passing the-- I'm sorry-- passes through Congress doesn't necessarily make it through the Senate bill. So we'll watch it closely. As it's laid out right now, they're talking about negotiating price on 10 drugs in 2023 that'll impact 2025. However, it'll be drugs that have already lost their patent protection.

So remember that a traditional drug loses patent protection after nine years. A biotech drug loses patent protection after 12 years. They're also talking about a maximum out of pocket cost of $2,000 per Medicare beneficiary and $35 per month for insulin. So if all of that stays in place, the question is, what happens with the pharmaceutical manufacturers, right? So it's really the manufacturers they're going to negotiate directly with.

So if you think about how Medicare works today, it's a PBM or a Pharmacy Benefit Manager that is negotiating price on behalf of those Medicare recipients. So for those 10 drugs-- and they talked about them being the highest price drugs, things like oncology treatments in the physician office or even some over-the-counter type of products that you pick up at the pharmacy. So it's really hard to say exactly which companies will be impacted without seeing all the full details.

But, you know, as I think about the companies I follow on the services side, one, if you think about the PBMs, could they be impacted in some way, I think it's somewhat of a positive when you start to cap out of pocket cost around the senior, which means that they're more likely to take their medications. And then, secondly, when we think about insulin, it's been a hot topic for a long time, where our costs here in the US are materially higher than other places around the world. So, you know, again, I think it could help to increase utilization of really important pharmaceuticals if we see that both of those provisions stay in place.

JULIE HYMAN: And Lisa, to be clear, as you said you don't cover the drugmakers themselves. You cover pharmacy benefit managers and also many of the insurance companies. There has been a trend over the past-- I'll call it a decade, right, where we've seen a little bit of a consolidation and a breaking down of some of the lines between those different types of businesses, right? CVS is one example there where you have now the integration of the pharmacy benefit manager there. How has that worked out so far? And do you think we're going to see more of that type of integration?

LISA GILL: Well, we really see that integration from a PBM perspective behind us at this point, right? So CVS bought Caremark in 2007. However, you saw UnitedHealthcare buy a smaller company called Catamaran in 2015. And you saw Cigna buy Express Scripts in 2018. So between Caremark, Optum RX, and Express Scripts, they control over 80% of the PBM market. And they're each now owned by a large insurance company.

And so what I think you're seeing is that over the last several years, really, these large managed care companies becoming diversified health care services companies as they look to lower costs. And, you know, the things that we have talked about in our research are cost, quality, and convenience. So who will win at the end of the day is going to be the entities that can bring you the health care you need in a convenient manner and a low cost environment.

EMILY MCCORMICK: And on the topic of cost, of course, CVS being one of the companies impacted by this, is just with the COVID cases we've been seeing over the past year even, still seeing in these quarterly earnings results the rising cost of care in these companies' insurance units. So who do you think is best positioned here to manage through some of these costs since they are likely to continue well into next year?

LISA GILL: Well, I mean, you know, in your last segment, you talked about the most recent drugs that are coming to market that will really lower the amount of hospitalizations. So if we think about the COVID costs, some of the biggest components of the COVID cost are, obviously, hospitalization. So if now if you can cut hospitalization by 89% for the new Pfizer drug, that's going to lower your overall cost when we think about COVID.

Secondly, testing. So testing is-- CVS called this out in their most recent quarter that a third of their COVID costs were for testing. And I agree that we need to continue to have testing. However, under the emergency use authorization for testing, the amount that managed care companies are charged today, they're getting charged $100 for the actual test. And then if a physician is the one that administers the COVID test, it's another 100 plus dollars. So they're paying over $200 for a COVID test.

So I think as we move forward, you'll see lower costs when we think about lab, hopefully less hospitalization as we have new treatments come to the marketplace. And we'll get back to more normalization when we think about utilization for managed care and health care services in general.

JULIE HYMAN: So it sounds like, Lisa, what you're saying is that market forces are going to push the cost of testing down, or is it just that demand is going to fall for testing?

LISA GILL: I don't necessarily think demand will necessarily fall for testing. Obviously, a lot of employers have in place either you're vaccinated or you're going to be tested. I think people are going to continue to be tested. But I think that the pricing by the government-- so remember that that emergency pricing is in place until January. I find it hard to believe that the government is going to, again, renew that pricing for another 90 days.

So I would think that come January-- and remember that the managed care companies are following government pricing. So if the government comes back-- and traditionally, when COVID tests first came to the market, they were reimbursed at $50. It got shifted to $100. The average price of a requisite, which is a lab test, is just over $42 in the US. It just doesn't make a lot of sense that a COVID test is over $100.

EMILY MCCORMICK: Lisa, shifting gears just a little bit, of course, we've been tracking the labor market data very closely. And of course, with the labor force participation rate still depressed here, the great resignation still in the headlines, are you seeing an impact on health care companies with less enrollment on employer sponsored plans?

LISA GILL: No, we're not seeing an impact from that perspective. We did anticipate that perhaps we would. We are seeing at the labor shortage, though, on the other side, right, more of, one, you saw CVS and Walgreens raise their minimum wage to $15 an hour across the country due to labor shortages.

You saw this-- I follow the drug distributors. McKesson came out and said that they also had to pay one-time bonuses to people to get employees in place in their channels. You've also seen this on the nursing side of things, right? We have a nursing shortage in the US. So we're seeing it more from that side, rather than less beneficiaries from a managed care perspective.

EMILY MCCORMICK: All right, we'll leave it there. Lisa Gill, head of JP Morgan's Healthcare Services Team, thank you so much for joining us.