Whip This: The Politico-Economics of ACA Defunding

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Richard Evans / Scott Hinds / Ryan Baum

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum@ssrllc.com


November 14, 2016

Whip This: The Politico-Economics of ACA Defunding

  • House Republicans’ 239 – 242 seats mean that no more than 21 – 24 Republican members can vote against any measure that Democrats uniformly oppose – such as ACA defunding
  • We scored each Republican congressional district using the ratio of the percent of persons in the district who would lose their current health coverage (or potentially their healthcare job) in the event of ACA defunding to the member’s margin of victory. This ratio is more than 50% in 19 Republican districts, more than 33% in 51 districts, and more than 25% in 88 districts
  • We further sorted members (other than freshmen) by conservative voting scores, to identify Republican members for whom an ACA-defunding vote is most ideologically challenging. We then identified the 23 members with the most extreme combinations of high ratios of ACA dependent voters to margin of victory, and low conservative scores (i.e. high risk of losing their seat to an ACA defunding vote, and low willingness to take that risk). These 23 members have an average ratio of ACA dependent voters to margin of victory of 75%, and an average Conservative Review Liberty Score of 31% (on a 0 % – 100% scale)
  • It will be extremely challenging, though not impossible, to whip sufficient House Republican votes for a full defunding of ACA. And, if such a measure were passed, the cost to Republicans would very likely be loss of the House majority in mid-term elections
  • We doubt the Republicans are willing to sacrifice the House majority on a zero-sum (repeal, no replace) ACA defunding measure. Instead, we expect Republicans to use the very real threat of ACA defunding to force Democrats to a compromise on ACA modifications that include preserving expanded (Medicaid and subsidized HIM) coverage

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Republicans lack the Senate votes for ACA repeal under normal rules; as such any meaningful attack on the ACA must take place under budget reconciliation procedures that require only a simple Senate majority. Full repeal of the Affordable Care Act cannot be accomplished under these rules; reconciliation allows passage only of measures that are directly budget relevant. What’s more, the budget relevancy requirement can be applied at the level of sentences and phrases, meaning bills that reach the Senate floor under reconciliation rules are effectively line-item edited, such that elements of the bill lacking immediate budget relevance are eliminated in floor debate. This having been said, a measure eliminating the budget relevant elements of the ACA would be in order under reconciliation rules, could be passed with Republicans’ 51 – 52 votes, and would essentially kill the Act[1]

The House traditionally initiates budget measures, and would have to approve any reconciliation-based ACA defunding measure passed by the Senate. This raises the simple question of whether Republicans can whip sufficient House votes to support ACA defunding. Republicans hold 239 House seats to the Democrats’ 193, with 3 seats yet to be decided[2]. Republicans can afford to let between 21 and 24 members vote against the ACA measure, depending on how many of the 3 yet to be decided seats the Republicans ultimately win

To get a sense of how difficult an ACA defunding vote would be, we compared the percent of persons in each Republican Congressional district who would be disenfranchised by ACA defunding to the Republican member’s margin of victory in that same district. Specifically, we compared the percent of persons who have subsidized coverage on the HIMs[3], plus the percent of persons covered under the ACA-based Medicaid expansion, plus one-tenth[4] of the percentage of persons employed in healthcare jobs in the district, to the member’s margin of victory in the recent election. Results are provided on the x-axis of Exhibit 1. Members to the right of the x-axis have higher ratios of ACA-dependent voters to their margin of victory than members to the left of the x-axis; accordingly, the x-axis represents the relative risk to a member of voting to defund the ACA. The y-axis of Exhibit 1 shows members’ Conservative Review Liberty Score, which (for members with voting records) we use to represent members’ distribution along the ideological spectrum from more (top of y-axis) to less (bottom of y-axis) conservative. Thus the upper left of the graphic shows members who are more conservative and less at-risk, and the lower right of the graphic shows members who are less conservative and more at risk. We then looked at the distributions of member ideology, and district ACA relevance to determine which ACA-defunding votes could be most challenging for members to take. This identified the 23 members in the bottom-right quadrant of Exhibit 1, who are simultaneously (1) among the least conservative third of Republicans in the House; and (2) are in the most negatively affected third of Republican districts in the event of defunding. Exhibit 2 provides data by district, is ranked in descending order by ACA relevance (x-axis of Exhibit 1), and shows districts in the lower-right quadrant of Exhibit 1 in red

The House majority whip can only allow +/- 23 members to vote against an ACA defunding measure; we believe Exhibits 1 and 2 show that the last member who wants a pass but doesn’t get one faces an exceedingly difficult vote. Note that our identification of tough votes as a combined function of vote risk (x-axis) and ideology (y-axis) ignores a number of new and/or more conservative districts facing considerable vote risk (i.e. high ratio of people dis-enfranchised by an ACA-defunding to margin of victory; upper right quadrant of Exhibit 1). For example Issa (CA 49th) has a relatively conservative ideological score, but assuming his lead holds, will have won by a margin (2 percent) that is considerably less than the percent of persons who would be affected by ACA defunding.[5] LaMalfa (CA 1st) and Blum (IA 1st) also have conservative scores that keep them out of the lower-right quadrant of Exhibit 1, but very high ACA-relevance risk scores. Six new Republican members Tenney (NY 22nd), Fitzpatrick (PA 8th), Mast (FL 18th), Bergman (MI 1st), Bacon (NE 2nd), and Lewis (MN 2nd) all have no vote score – and thus no means of being positioned on the y-axis of Exhibit 1. However, each of these members are in districts where persons immediately affected by ACA defunding represent more than half of their margin of victory. Across all House Republicans, the ratio of ACA-dependent persons to margin of victory exceeds 50% for 19 districts, 33% for 51 districts, and 25% for 88 districts

It’s within the realm of possibility that the Republicans can whip enough House votes to defund the ACA – but if they do this without providing alternatives it is entirely likely they would lose their House majority in the mid-term election. To us, this implies that a straight zero-sum defunding of the ACA (defund with no replacement or alternative) is unlikely – simply because this outcome isn’t worth losing the House majority

We believe middle-ground (modify ACA or defund / replace) options are far more realistic. Republicans could use the very realistic threat of outright defunding to negotiate ACA changes, and we see this as the most likely path. Alternatively, Republicans could pass a defunding measure that is sufficiently post-dated (e.g. 2018 / 2019) to allow time for the passage of alternatives; however this path raises the risk that members will have to defend their defund vote before they can point to passage of an alternative, which brings nearly as much mid-term risk as a simple zero-sum vote to defund


  1. House and Senate Republicans passed just such an ACA-defunding measure under reconciliation in 2015 (HR 3762); the bill was vetoed by President Obama
  2. Louisiana’s 3rd district is also still to be decided, but will be won by one of two Republicans in a December 10 runoff
  3. Health Insurance Marketplaces
  4. Persons in the first two categories – those with subsidized HIM coverage or Medicaid coverage gained under the ACA expansion – all are affected by a measure to defund the ACA. Conversely we assume that only those persons who lose their healthcare jobs because of ACA defunding (we somewhat arbitrarily assume 10% loss) are directly affected by an ACA defunding measure
  5. Issa’s is one of the 3 remaining as-yet undecided races


©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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