RFK's confirmation sets Healthcare investors on a razor’s edge

What happened

Yesterday, the first of two hearing sessions to potentially crown RKF, Jr. as Head of  U.S. Department of Health and Human Service (HHS), the most prominent Federal department in the U.S. with a budget of $1.7tn last year, took place. This session is of importance for any investor in the healthcare space.

Impact on our Investment Case

Most of the talk was ad hominem attacks

From Sanders to Cassidy and other senators, the tone was combative. To cite a few example, in the controversy over his "Nazi Death Camps" remark, Kennedy denied comparing the CDC to Nazi death camps, only for Sen. Raphael Warnock to present a transcript proving he had made the comparison. Meanwhile, his cousin, Caroline Kennedy, accused him of hypocrisy on vaccines, calling him a “predator” who seeks “attention and power.” Adding to the scrutiny, Bernie Sanders questioned him about his affiliated organization selling “Unvaxxed, Unafraid” baby onesies. These attacks contributed to a chaotic and contentious discussion but mostly added a lot of noise covering the few signals investors were looking for.

Nonetheless, a few keypoints emerged.

Medicare, Medicaid and the ACA - uncertainty and error

• RFK Jr.'s claims about Medicaid were factually incorrect, raising concerns. When asked one of the day's most substantive questions, what reforms he would support for Medicaid and the Medicare-Medicaid dual-eligible population if appointed Secretary, Kennedy made a significant error. He claimed that Medicaid premiums and cost-sharing were too high, despite the fact that Medicaid beneficiaries do not pay premiums and rarely have copays. Under scrutiny from Sen. Bill Cassidy, it became evident that Kennedy did not fully understand the programs he would be responsible for overseeing as HHS Secretary.

Anecdotally, Kennedy mentioned that he is a Medicare Advantage member and satisfied with his coverage, adding that “Americans in general prefer to be on private insurance". At least this confirms our view that private healthcare plans will have a more prominent role under Trump. Regarding the ACA, when asked about enhanced advanced premium tax credits (eAPTCs), he acknowledged their expiration at the end of the year. However, when pressed on whether he would support their extension, he deferred, stating that it is up to Congress to decide. 

eAPTCs are refundable tax credits that help eligible individuals and families afford health insurance premiums. They have driven record enrollment in ACA marketplace plans and contributed to historically low uninsured rates. Biopharma and Medtech companies need high insurance coverage to expand.

At Atonra, this is one of our primary concerns. Medicare, Medicaid, and the Affordable Care Act (ACA) collectively provide coverage for 168mn Americans. Their significance cannot be overstated, especially for investors in the healthcare sector. Any uncertainty about future policy changes could lead generalist investors to remain on the sidelines.

On IRA drug pricing, no changes

• Kennedy mentioned a CMS statement (he called it an "order"...) issued earlier yesterday that President Trump will carry out the second round of the IRA drug negotiation program and will look for ways to make the process more transparent. 

Despite expectations that Republicans may repeal the Inflation Reduction Act (IRA), we noted before the election that we did not anticipate a major shift in course for the healthcare sector. While Republicans generally advocate for limiting government spending, they also recognize that CMS price negotiations serve as a cost-control mechanism. However, imposing a state-mandated price ceiling ultimately caps potential earnings for the biopharma industry.

Given these constraints, we maintain a strong bias toward companies focused on orphan diseases or those with long-lasting intellectual property (IP), both exempt from IRA negotiations.

On international drug price alignment and middlemen, a mixed picture for Biopharma

• Kennedy also mentioned that in a meeting with President Trump last week, he provided charts showing how much more the US pays for drugs than European countries and stated that he supports steps to equalize those costs "in principle." He also stated that he supports Sen. Grassley’s efforts to rein in pharmacy benefit managers (PBMs), which aligns with Trump’s comments on addressing pharmaceutical “middlemen.” 

Efforts to rein in PBMs could benefit big pharma and biotech by reducing the rebates paid to PBMs, and we have long been a proponent of that effort. However, aligning drug prices with those in other countries would negatively impact the industry overall.

On Telehealth and AI technology, positive news

• Kennedy said AI nurses who diagnose "as good as any doctor" can help provide care to rural America.

We have increased our exposure to two key themes in our healthcare strategies: AI and the broader digitalization of healthcare. Both are already demonstrating significant cost-saving potential.

Kennedy's Anti-vaccine stance is "softer", for now...

• As expected, a significant portion of the discussion focused on vaccines, given Kennedy's known anti-vaccine rhetoric. However, aside from Kennedy stating that he wanted “real data” before making any decisions, the issue remained largely unaddressed regarding concrete changes to the immunization plan. 

We remain underweight in vaccine stocks and intend to maintain this position at least until there is greater clarity on the sector's future direction. 

U.S. Healthcare direction is mostly uncertain

Despite RFK Jr.'s bold claims, such as "Make America Healthy Again," bringing "radical transparency" to HHS operations, and "cleaning up corruption", the actual healthcare policies of both him and the Trump administration remain uncertain. Even Kennedy’s appointment as HHS Secretary is not guaranteed. With Republicans holding 53 Senate seats, he can afford only three GOP defections before losing confirmation.

What has been done so far, even in the short term, has been a net negative:

• The U.S. withdrawal from the WHO is detrimental to both parties. For example, the WHO is a key provider of data and guidance on influenza outbreaks, such as the one currently affecting the U.S.
• Trump’s disruption of communication and a panel at the NIH is putting approximately $40 billion in lab and biomedical research funding at risk.

We continue to monitor political decisions closely and adjust our strategies accordingly.

Our Takeaway

Healthcare remains a highly political issue, and RFK Jr. is the most controversial of Trump’s picks. We hope the next hearing will clarify planned policy changes and concrete steps rather than the vague allusions that characterized the initial discussions. Further uncertainty would comfort generalist investors to stay out of healthcare despite attractive fundamentals and valuations. At the same time, specialists who can correctly identify value creation, stand to benefit. 

The U.S. healthcare system is in need of reform. At Atonra, we support players that can introduce cost-effective therapies that outperform the standard of care, ultimately reducing overall medical expenses.