The Patient Protection and Affordable Care Act (PPACA) is expected to boost the number of insured individuals entering the healthcare system and have a significant impact on a number of related industries.
LOS ANGELES — Apr. 13, 2010 — The Patient Protection and Affordable Care Act (PPACA) is expected to boost the number of insured individuals entering the healthcare system and have a significant impact on a number of related industries. Industry research firm IBISWorld identified five industries affected by the newly enacted legislation:
The potential gain of millions of new customers through increased healthcare coverage and Medicare and Medicaid benefits is expected to bolster sales throughout the next five years, bringing the average revenue growth rate to 2.0 percent annually, a total of $227.4 billion in 2015.
“When the Health Insurance Exchange (a marketplace for health insurance that will offer a choice of plans, establish common rules regarding the pricing of insurance and provide information to help consumers understand the options available to them) begins in 2014, sales are expected to jump 4.1 percent,” said Sophia Snyder, industry analyst with IBISWorld. “An estimated 32 million uninsured Americans will become insured and people with prescription drug coverage have a 75 percent higher drug utilization rate.”
Despite higher sales potential, profits will likely take a small hit; the industry agreed to pay out $84.8 billion in taxes and discounts over the next ten years to fill the Medicare coverage gap. Additionally, generics, which command a lower margin, will continue to dominate the market as the government aims to cut costs.
Pharmacies and Drug Stores
The Pharmacy and Drug Store industry will benefit from an increase in sales volume as more people gain insurance coverage for prescription drugs. More insured individuals will mean a boost in demand for prescription drugs, as occurred in 2006 when the Medicare Part D benefit was introduced.
Pharmacies will also experience increased traffic in their in-store clinics, which have stagnated at around 1,200 outlets. According to government data and estimates from the Associated Press, five million people live in areas designated as having a shortage of primary care physicians. Given the inadequate supply of primary care, millions of the newly insured are expected to flock to these retail clinic services. The number of in-store clinics is forecast to grow by around 5.0 percent per year from 2010 through 2012; growth is expected to top 10 percent annually in 2013 and 2014. As a result, industry sales should increase by an average of 2.6 percent annually through 2015.
“Although sales will pick up, profits are expected to come under pressure, as reform aims to reduce costs and the newly insured will have the advantage of third-party bargaining power,” explained Snyder. “As a result, the overall profit margin is expected to fall to 3.5 percent of revenue, down from 3.8 percent in 2010.”
Rivalry among pharmacies is also increasing as a result of price pressures. Currently, the top three players account for an estimated 70 percent of total sales, but in the next five years, the number of enterprises will decline by an average rate of 2.1 percent annually as the largest players continue to force the smaller ones out of business.
Medical Device Makers
This industry will face an estimated $20 billion in new taxes over the next ten years under the new legislation, causing many small companies that have yet to make a profit to lay off employees, cut R&D budgets or merge with larger players. Consolidation will also be spurred by the reform’s implementation of effectiveness research, that is, studies on which medical devices work best; smaller manufacturers may not have the resources to rebut studies that question a product’s value. As a result, the industry is expected to consolidate to 9,200 operators during the five years to 2015.
“Profits will decline as a result of the new taxes and sales growth will slow to 2.9 percent on average per year through 2015,” said Snyder.
Substance Abuse and Mental Health Facilities
PPACA requires all health plans to meet certain standards and cover mental health and substance abuse services on par with physical illnesses, thereby increasing demand in this industry. Revenue growth will increase by 4.1 percent on average per year for the next five years, up from 2.7 percent during the five years to 2010.
Expanded Medicaid coverage will help a wide range of individuals with unmet mental health and substance needs gain access to industry services. Snyder states, “The number of people who have severe mental illness and substance abuse problems and who are covered by Medicaid is expected to more than double with the reform, so companies that serve a high percentage of Medicaid patients will likely experience a surge in sales.” However, reimbursement through government programs could come under pressure if state and federal budget pressures continue to mount, squeezing profit margins.
The healthcare legislation includes a list of changes to nursing services for seniors and the disabled, including an infusion of federal funding to help state programs provide more care through home- and community-based settings, which, presumably, will result in a reduction in nursing home care. The industry is expected to experience lower demand, which will be moderately offset by an increase in the number of insured. Overall, sales are expected to grow by 1.5 percent on average per year through 2015, reaching $109.5 billion. This is slightly lower than the previous five-year average growth rate of 1.7 percent annually.
Snyder estimates that profits should remain healthy due to improved government reimbursement rates in the industry: “Recognizing the disparity between Medicare and Medicaid reimbursement rates, the reform bill establishes supplemental payments to nursing facilities with high percentages of Medicare and Medicaid residents.”
About IBISWorld, Inc.
Recognized as the nation’s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every U.S. industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information visit www.ibisworld.com or call 1-800-330-3772.
Source: IBISWorld, Inc