From Hillary Clinton to Bernie Sanders, politicians brought up the issue of price-gouging by pharmaceutical companies. Many have been reacting to complaints by constituents or potential constituents. Politicians have taken a particular interest in HCV providers, Gilead GILD and AbbVie ABBV. Earlier this week, New York Attorney General Eric Schneiderman threw a shot across the bow with his investigation of health insurers' coverage of HCV restrictions:

The New York state attorney general has asked 16 health insurance companies for information on their coverage of hepatitis C treatments, amid concerns that some companies are restricting coverage of the expensive medications, according to a person familiar with the investigation.

Attorney General Eric Schneiderman's office has issued subpoenas to the health insurers, including Anthem Inc. ANTM, Aetna Inc. AET and EmblemHealth Inc., requesting documents explaining how they make decisions on who to cover or not, said the person, who declined to be identified because the matter wasn't public.

Since pharmacy benefit managers like Express Scripts ESRX and CVS CVS prompted a pricing war between AbbVie and Gilead, HCV prices have fallen considerably. The bull case suggests that prices have come down to the point where average citizens can now afford an HCV regimen. Market chatter also suggests that those with the most acute cases of HCV are first in line to receive treatment. My read on Schneiderman's investigation is that these claims may not be the case.

The Situation

Schneiderman Could Put HCV Access In Insurers' Baliliwick ...

What amount of discounts on HCV regimens are and who actually receives them remain murky. In January, Massachusetts Attorney General Maura Healey threatened to sue Gilead because its high prices potentially represented unfair trade practices; while federal prisons received discounts on HCV drugs, Healey's state prisons did not. For consumers, access to HCV treatment could be determined by how hard-nosed one's insurer is on restricting high-priced medications.

Schneiderman's inquiry implies that certain insurers are potentially benefiting from restricting access to high-priced drugs. An analyst from Piper Jaffrey applauded the AG's move:

We published a note on February 1 following a call we hosted with an attorney who specializes in unfair business case laws. Based on that discussion, we speculated that the insurers denying access to HCV drugs might be the ones in violation of these rules. The move by the NY Attorney General might shift the focus onto the role of payors in limiting access to care ...

On one hand it may be unfair to encumber the healthcare system with such large upfront costs, but on the other hand, we think GILD should be entitled to reap the rewards of its breakthrough HCV franchise.

GILD is extremely popular among analysts and hedge funds. It is not surprising that an analyst would find a way to make this dilemma a positive for Gilead. Over two years after Gilead launched its blockbuster HCV regimen insurers have been holding back sales and no one pointed it out until now? Is that what we are to believe?

That said, more access to HCV treatments could potentially increase insurers' payout ratios and drive down earnings - at least that's my interpretation. That point has not been lost on certain insurers:

"We feel the Attorney General's subpoena is overly broad and does not take into account evolving guidance related to these new therapeutic classes of drugs. Moreover, it does not take into consideration the impact of excessive and unsupported pricing of these drugs - which has a negative impact on affordability of coverage."

... But It Might Not Fall Gilead's Way

Publicly-traded health insurers have shareholders to answer to just like Gilead does. Higher pay outs for HCV drugs could potentially hurt their bottom lines and their share prices. My personal opinion is that any push back from Schneiderman could prompt insurers to push back on Gilead, AbbVie, et. al. First of all, there are more insurers than there are providers. Secondly, PBMs like Express Scripts and CVS and single-payer programs in Europe have proven that large buyers of HCV drugs can wield enough power to spur drug makers to cut prices.

Lastly, insurers might now have the court of public opinion on their side. Accusations of price-gouging by Turing Pharmaceuticals and Valeant (NYSE:VRX) have dominated news cycles and even prompted hearings by a Senate Special Committee. After all the happy talk about discounts provided by drug makers, there remains a wide disparity in HCV prices in the U.S. and other developed countries:

Gilead's Q4 2015 revenue per HCV start in the U.S. and Europe was about $73 thousand and $28 thousand, respectively. The Q4 metric might have been skewed by the sharp decline in VA sales which are heavily discounted. However, Q3 revenue per start in the U.S. was over 75% more than that for Europe. Bulls suggest the disparity in budgets in certain European countries warrant lower prices, yet I am on record that the U.S. economy is also suffering; nonetheless, it could give insurers the necessary cover to volley the pricing dilemma back into Gilead's court.

Conclusion

I believe the NY AG investigation is a backdoor way of garnering steeper HCV discounts and making the drugs more affordable. Whether insurers incur higher benefit pay outs or spur drug makers to cut costs, either way consumers could ultimately benefit. I suspect the latter will occur. GILD remains a sell.