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The 2026 Midterms: Why This Is a Coverage Election for Healthcare Investors · WTR Small-Cap Spotlight

• 0:01
  SPEAKER_00: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_00: I'm your host, Tim Gerdeman, co-founder of Water Tower Research.
• 0:08
  SPEAKER_00: In today's podcast episode, I'm joined by Tommy Barletta, co-founder and managing partner of Aldous Institutional.
• 0:15
  SPEAKER_00: Tommy operates on the crossroads between financial markets, policy, and politics.
• 0:20
  SPEAKER_00: Tommy has a bachelor's degree from Wake Forest and Politics and an MBA from Georgetown.
• 0:26
  SPEAKER_00: Aldous Institutional is an independent research provider that leverages decades of policy expertise with Washington and Wall Street relationships to provide clients with actionable ideas and insightful events.
• 0:40
  SPEAKER_00: Their platform combines timely, moderated small group events with key stakeholders and policymakers with market commentary on DC-driven catalyst.
• 0:50
  SPEAKER_00: This differentiated approach and their extensive experience at the crossroads of markets and policy are vital for clients navigating both macro and issue-specific catalyst.
• 1:01
  SPEAKER_00: Given the imminent midterm elections in the U.S., I thought it would be timely to have Tommy share his views of likely outcomes and subsequent impacts on policies that could impact both institutional and retail investors moving forward.
• 1:14
  SPEAKER_00: Tommy, it was rather serendipitous that you and I randomly met in Miami Beach weeks ago at a brokerage firm biotech event luncheon.
• 1:21
  SPEAKER_00: Welcome to today's podcast and thank you for joining to share your insights with our audience.
• 1:27
  SPEAKER_01: Tim, thank you so much for having me and for having us.
• 1:30
  SPEAKER_01: And again, as you mentioned, great to reconnect.
• 1:33
  SPEAKER_01: Uh albeit the last time we spoke was a bit warmer and the and the weather was a bit nicer, but always happy to chat um about you know kind of the intersection of healthcare policy uh markets and of course this election that is now uh six days away.
• 1:44
  SPEAKER_00: Touche on the weather uh arbitrage.
• 1:47
  SPEAKER_00: So uh Tommy, affordability and cost of living issues reportedly define the 2026 midterms.
• 1:53
  SPEAKER_00: Polling points to Democrats taking the House and even potentially taking the Senate, and a first 100 days agenda centered on helping voters afford rising health care costs.
• 2:04
  SPEAKER_00: Can you please expand on these topics for our listeners with an eye toward how the outcome will impact Wall Street and investors, beginning with the likely election outcome?
• 2:13
  SPEAKER_01: Sure, Tim.
• 2:14
  SPEAKER_01: It's a great place to start.
• 2:15
  SPEAKER_01: So, uh, you know, for those on the line, since the passage of the one big beautiful bill or OBBB as it's referred to commonly in Washington, and the emergence of the kind of blue wave thesis, right, of Democrats winning the House and the Senate, this election has been really closely watched by uh, you know, healthcare investors, especially those levered to hospitals, managed care and services, right?
• 2:36
  SPEAKER_01: All of the sectors that were negatively impacted by what is nearly a trillion dollars of cuts in the OBB to the healthcare space.
• 2:44
  SPEAKER_01: And so as we think about affordability being a key theme, as you mentioned, and and healthcare affordability being tied really closely to that, you know, this has become in some ways a healthcare election, and the outcome is very much a coverage election, right?
• 2:58
  SPEAKER_01: What would the outcomes be in the next two years that would change uh the outlook for increased coverage?
• 3:03
  SPEAKER_01: And that has a lot of read-through, of course, into some of the sector impact.
• 3:07
  SPEAKER_01: To do a bit of the scenario analysis, you know, we can just talk about the House and Senate, right?
• 3:11
  SPEAKER_01: The House, uh I, you know, we have fielded very few questions about the outlook for the House uh, you know, in the past couple months, you know, pretty much consensus that it flipped.
• 3:19
  SPEAKER_01: We'll be looking at a Speaker Jeffries um, you know, very likely in in January.
• 3:24
  SPEAKER_01: And I think the question is how hard, how hard do they run up the score?
• 3:27
  SPEAKER_01: Is it 220, 230?
• 3:29
  SPEAKER_01: But I think the important point there is it's going to be a very functional and cohesive House majority.
• 3:34
  SPEAKER_01: I think Jeffries has done a good job of kind of gathering all the folks together.
• 3:37
  SPEAKER_01: They've done a number of uh kind of working groups on the healthcare side to kind of bring consensus across the party as they think about what the agenda is both for 2026, 2027, and obviously a look ahead to 2028.
• 3:49
  SPEAKER_01: The Senate's more interesting, of course, right?
• 3:51
  SPEAKER_01: I think the that's really where the blue wave kind of turned from maybe some pickups to, hey, you know, we could have uh, you know, leader, leader Schumer um after the election.
• 4:01
  SPEAKER_01: You know, I think as far as outcomes, you've got a wide range.
• 4:04
  SPEAKER_01: You've got some folks out there saying like Nate Silver up as high as in the 70s, I think, uh prediction markets in the 60s.
• 4:10
  SPEAKER_01: You know, we're probably closer to 50-50 with a slight lean towards uh, you know, Democrats probably uh, you know, win the win the majority, but I think it's important to stress that you know that's the likely outcome, but the tails could be pretty wide, right?
• 4:23
  SPEAKER_01: You could very much see a scenario where um, you know, Republicans hang on to the majority, right?
• 4:28
  SPEAKER_01: You could see a scenario where Democrats get a slight majority, or the bottom falls out and Republicans, you know, are looking or Democrats are looking at you know kind of low to mid-50s seats, right?
• 4:37
  SPEAKER_01: So let's just go through that a bit.
• 4:39
  SPEAKER_01: So I think uh Georgia and North Carolina are gone, right?
• 4:42
  SPEAKER_01: I think if you look at the the polling and the spend, uh, you know, I think the consensus is, you know, a Democratic senator in in North Carolina and John Ossoff hanging on in Georgia.
• 4:52
  SPEAKER_01: I think there's been a lot of coverage in the news about the kind of Midwest, uh farm belt states, Iowa, Nebraska, uh Kansas even.
• 5:01
  SPEAKER_01: You know, I think that's in the kind of tail scenario.
• 5:03
  SPEAKER_01: If those go down, they're gonna all go together, and and then you have really the bottom falling out for Republicans.
• 5:08
  SPEAKER_01: So what leaves us with like, you know, Maine, Ohio, Texas, and potentially Alaska as as potential flips.
• 5:15
  SPEAKER_01: And, you know, the polling data is is is you know better for Democrats, but I think you we're kind of faced with the same uh uh challenges that we've seen of the last elections, right?
• 5:26
  SPEAKER_01: Are the underrepresented people who don't pick up the phone, are they under underrepresented polling, do they turn out?
• 5:31
  SPEAKER_01: Is Democratic enthusiasm enough to push Democrats above that like kind of 47%?
• 5:37
  SPEAKER_01: Or are there a bunch of Trump voters who will be encouraged to come out in the midterms, which traditionally they underperform if you look at governors' races last year in New Jersey and Virginia, um, and hand the Senate control over to Democrats?
• 5:49
  SPEAKER_01: But I think to kind of put a point on it, Tim, you know, house flipping and slight lean towards Democrats gaining uh, you know, control of the Senate.
• 5:57
  SPEAKER_00: Really dynamic and wildly nuanced.
• 5:59
  SPEAKER_00: Um so moving on, Tommy, what companies are likely to be the winners and the losers resulting from your predicted election outcome?
• 6:06
  SPEAKER_01: Yeah, sure, Tim.
• 6:07
  SPEAKER_01: So I I think as I mentioned, this is this election is all about uh the OBB and coverage.
• 6:13
  SPEAKER_01: I'll touch on pharma in a bit because it's worth talking about as as we think about next year and potential risks.
• 6:19
  SPEAKER_01: But at the end of the day, if we see a blue wave, the sentiment for hospitals is going to be vastly improved, right?
• 6:25
  SPEAKER_01: You're gonna, there's lots of discussion of what do we delay in the OBB?
• 6:28
  SPEAKER_01: Do the tax credits come back, et cetera, et cetera.
• 6:30
  SPEAKER_01: Now, the challenge for the space is do you have to endure several more challenging quarters of operational issues, right?
• 6:36
  SPEAKER_01: Which we saw HCA talk about uh yesterday, October 27th, um, before you get policy relief, but that's where the sentiment's gonna be.
• 6:44
  SPEAKER_01: Similarly, for those exchange-levered insurers, I think you'll see a bit of an uplift over some optimism on pushback to uh some of the OBB provisions or re-re-reintroducing a version of those enhanced freedom tax credits that expired at the start of 2025.
• 6:59
  SPEAKER_01: But again, you could see a very challenging start to the year from a coverage perspective, from an enrollment perspective, um, which you didn't see this year, because I think some people were hanging on thinking that the credits are going to be extended.
• 7:09
  SPEAKER_01: So I think it's like positive sentiment, but the execution and the timing is crucial.
• 7:14
  SPEAKER_01: Um, I think as far as like sectors that have a bit to be kind of kind of concerned about, and not necessarily losers, Medicare Advantage is one, right?
• 7:22
  SPEAKER_01: I think we'll talk about this in a moment.
• 7:23
  SPEAKER_01: The administration still has a lot of leverage to pull.
• 7:25
  SPEAKER_01: Um, you know, to the extent there's pay fors, Medicare Advantage is probably on the list of paying for other priorities.
• 7:31
  SPEAKER_01: So something to be mindful of.
• 7:33
  SPEAKER_01: But at the end of the day, um, you know, it's it's I put it more in the middle column there.
• 7:38
  SPEAKER_01: I think pharma is interesting, right?
• 7:40
  SPEAKER_01: I think if you look back like a year or two years ago, we were worried about MFN deals, uh uh the HHS secretary banning GLP ones and all those pricing concerns.
• 7:50
  SPEAKER_01: Well, the industry's done a fabulous job of engaging Washington, and so I think some of that, they're they're kind of will be somewhat untouched by the election outcome.
• 7:57
  SPEAKER_01: But I just wanted to note how much the picture's changed, especially now that we have effectively a more functioning FDA, which is crucial for both large cap but as well as uh, you know, kind of medium and small cap there.
• 8:08
  SPEAKER_01: On the kind of negative side for pharma, I do think there's going to be a bit of headline risk, especially as Democrats take back the majority on oversight, bringing in the CEOs of Lilly and Pfizer and folks who signed MFN deals and pulling up in front of Congress to talk about the terms, why weren't they disclosed, right?
• 8:26
  SPEAKER_01: It's all part of the Democratic strategy to expose some of the issues and some of their concerns with the Trump administration agenda, but it's going to be using companies to make that point.
• 8:34
  SPEAKER_01: So I'd be concerned there.
• 8:36
  SPEAKER_01: The other thing from like a more of a generalist perspective is I think you'll hear a lot of Trump deal making, you know, that kind of thesis.
• 8:42
  SPEAKER_01: And he's the president, he's very unpredictable.
• 8:45
  SPEAKER_01: So I wouldn't rule that out entirely.
• 8:47
  SPEAKER_01: But I think some people might default to, well, Democrats agree with drug pricing, Trump agrees to drug pricing.
• 8:52
  SPEAKER_01: Is there something to be had there?
• 8:53
  SPEAKER_01: So I could see some concern in the pharma space about that, but I don't think that's that that's a real risk that's going to play out over the course of the next uh two years.
• 9:02
  SPEAKER_00: Those are fascinating data points that our institutional and retail investor uh listener base will love to process.
• 9:09
  SPEAKER_00: So, regardless of the election outcome, obviously Trump remains in office for two more years.
• 9:14
  SPEAKER_00: What can we expect, Tommy?
• 9:16
  SPEAKER_01: Of course.
• 9:16
  SPEAKER_01: So I mentioned this earlier.
• 9:17
  SPEAKER_01: Uh Medicare Advantage is still something that the administration is very focused on.
• 9:21
  SPEAKER_01: They have control over many of the policy levers to shape the future of the program.
• 9:25
  SPEAKER_01: Whether it's the stars, which uh are subject to a lot of litigation, um, but you know, changes in stars drove uh significant uh, you know, kind of out outperformance by Humana.
• 9:35
  SPEAKER_01: Um they were a big beneficiary of the recent um their internal improvements uh drove some you know improvements in their star ratings, which is important for payment.
• 9:43
  SPEAKER_01: Um, but I think the administration still has some things that they want to do, whether it's on risk adjustment, whether it's on stars, whether it's testing additional models, to kind of get the program to a better place.
• 9:52
  SPEAKER_01: I think that's an area where, again, they control many of the policy levers.
• 9:55
  SPEAKER_01: So that's an area where having them in power, having them run HHS and CMS is important.
• 10:00
  SPEAKER_01: Waste, fraud, and abuse.
• 10:02
  SPEAKER_01: The administration feels very strongly that that is a core issue.
• 10:06
  SPEAKER_01: Um they've leaned into into the election, right?
• 10:08
  SPEAKER_01: And you've seen a number of press releases about uh removing folks from the exchanges that may not have been qualified.
• 10:13
  SPEAKER_01: I think that continues.
• 10:14
  SPEAKER_01: That probably has more read-through for, I'll say subsectors, you know, potentially uh clinical laboratories, durable medical equipment, um, you know, uh home-based home care providers levered to the Medicaid program, right?
• 10:27
  SPEAKER_01: Again, that's an area where the administration has a lot of authority.
• 10:30
  SPEAKER_01: Um and then I'd say lastly, you know, it's it's kind of a smaller one, but but very large companies involved is is kidney care and dialysis.
• 10:37
  SPEAKER_01: The administration last week rolled out a pretty significant um plan to improve kidney care.
• 10:42
  SPEAKER_01: Um, and there are a number of things that kind of were pointed at uh the competitive nature of having two large dialysis organizations.
• 10:49
  SPEAKER_01: And so that's something that I think they're focused on.
• 10:51
  SPEAKER_01: It dovetails nicely with um the Make America Healthy again agenda.
• 10:55
  SPEAKER_01: And there are a number of folks from Trump kind of 1.0 who they spent a lot of time, Alex Azar spent a lot of time on this topic, who are kind of holdovers and still involved and they could push that forward.
• 11:03
  SPEAKER_01: So again, more of a smaller on a relative basis to Humana and Managed Care, but um something that we're watching very closely as well.
• 11:12
  SPEAKER_00: Okay, thank you for that.
• 11:13
  SPEAKER_00: Um can you speak to expectations surrounding the future of Medicare for all and follow that by discussing the pharma industry and likely DC drug price policies ahead?
• 11:23
  SPEAKER_01: Absolutely.
• 11:24
  SPEAKER_01: So, you know, the blue wave uh was accompanied by uh enthusiasm, but also concern that um, you know, you see um Mr.
• 11:34
  SPEAKER_01: Al Said in Michigan win his race, and then you have the the kind of proof point that moving further to the left politically is advantageous for Democrats.
• 11:42
  SPEAKER_01: And if they perform really well, well, that signals a more leftward turn of a candidate in the 2028 presidential election, right?
• 11:49
  SPEAKER_01: I don't think anyone was under the impression that if there's a blue wave, that we're gonna enact Medicare for all in the next two years.
• 11:55
  SPEAKER_01: But I think the concern and markets' discounting mechanisms were concerned about, you know, nominee AOC versus like Andy Bashir in Kentucky, right?
• 12:04
  SPEAKER_01: Like the leftward wing would win out.
• 12:06
  SPEAKER_01: And so that prompted a lot of concern, a lot of you know client focus on what does Medicare for all look like?
• 12:12
  SPEAKER_01: Is that gonna be the central pillar of the uh of for the Democratic Party?
• 12:15
  SPEAKER_01: Again, the primary start in 2027.
• 12:18
  SPEAKER_01: So it's literally the day after the election, we're gonna be talking about the Democratic primary.
• 12:21
  SPEAKER_01: But I I think the details are really important.
• 12:23
  SPEAKER_01: I mentioned earlier uh Hakeem Jeffries brought together some Democratic leaders, including uh Congresswoman AOC, to discuss kind of options for expanding coverage.
• 12:34
  SPEAKER_01: The discussion has been a lot about universal coverage, not universal care, which I think is an important distinction and offers some um potential positivity for managed care.
• 12:45
  SPEAKER_01: Like at the end of the day, the last time Democrats did a coverage expansion, it relied heavily on managed care companies.
• 12:51
  SPEAKER_01: And I think maybe different this time, but I have a hard time believing we're gonna see the end of uh you know managed care as part of a democratic strategy to increase um coverage.
• 13:03
  SPEAKER_01: Two other things I'll note there.
• 13:04
  SPEAKER_01: One, I think as a near-term win, you can see Democrats focusing a lot on expanding coverage to vision, hearing, and dental, right?
• 13:10
  SPEAKER_01: That's not covered currently under the Medicare program in limited spaces for hearing aids.
• 13:14
  SPEAKER_01: I think that's something where if you want to talk about a Trump deal making, like does he get together with like Elizabeth Warren and Bernie Sanders and talk about giving something to seniors, fits very nicely with giving folks$90 checks.
• 13:24
  SPEAKER_01: So that's something I will keep an eye on near-term, that is kind of a bridge.
• 13:27
  SPEAKER_01: The second topic that's getting a little more run, and again, low likelihood of coming across the finish line, but I would watch in the context of this Medicare for all conversation is um lowering the Medicare age, right?
• 13:39
  SPEAKER_01: That obviously comes with a lot of policy, you know, kind of puts and takes, but it's something that maybe is like a middle ground and says, hey, more people can get into the program.
• 13:48
  SPEAKER_01: And yes, it costs money, but maybe there's some benefits there.
• 13:50
  SPEAKER_01: So something kind of to watch that's beneath that big headline, like, you know, Democrats are coming for your healthcare, et cetera.
• 13:56
  SPEAKER_01: On the pharma pricing side, you know, as I said, I I go back to when uh the CEO of Lilly uh went down to Mar-a-Lago right after the the the 2024 elections, right?
• 14:07
  SPEAKER_01: That pharma has performed incredibly well and navigated this environment politically very astutely, right?
• 14:12
  SPEAKER_01: The MFN deals, I think, are largely not events, um, and you know, is specific to Lily and Novo.
• 14:19
  SPEAKER_01: We've got a federally mandated coverage of of GLP ones, which I don't think is ending um this demo is going on for two years, it's not it's not ending.
• 14:26
  SPEAKER_01: I can't imagine we're taking things away from seniors.
• 14:28
  SPEAKER_01: Um I think there will be some concern about or conversation about expansion of the IRA, right?
• 14:33
  SPEAKER_01: The Inflation Reduction Act.
• 14:35
  SPEAKER_01: Um, I think there'll be some concern about back to your question about what the Trump administration can do, how do they handle the Part B drugs that are coming as part of the negotiation?
• 14:42
  SPEAKER_01: But I I I think in some sense, we kind of know what the potential outcomes are for IRA.
• 14:47
  SPEAKER_01: There's nothing new.
• 14:48
  SPEAKER_01: And so and I think a lot of investors are comfortable with kind of like the program works, we know how it does, it's predictable, we can model that, um, you know, et cetera, et cetera.
• 14:57
  SPEAKER_00: Great.
• 14:58
  SPEAKER_00: Uh, this has been awesome, Tommy.
• 14:59
  SPEAKER_00: Um, wrapping up, what are investors wanting you to watch most closely in DC in the weeks and months ahead, out of curiosity?
• 15:07
  SPEAKER_01: Absolutely.
• 15:07
  SPEAKER_01: And thanks for the question, Tim, and the time today.
• 15:10
  SPEAKER_01: So uh first and foremost, as I mentioned, as soon as the election's over, we're gonna be focused on uh funding the federal government past December 11th.
• 15:18
  SPEAKER_01: So threshold issue, there's a kind of key question in there whether we do like a short-term punt, which would which would lead to like a March catalyst again, or something where that's the clear-the-deck thesis, where everyone wants to start fresh, Democrats don't want to be dealing with a spending fight or shut down in the early part of their tenure, so push things out until September of 2027.
• 15:38
  SPEAKER_01: I think that's really the outlook there is really TBD and truly depends on the election and the posture of the president.
• 15:43
  SPEAKER_01: In addition, there's been conversations about, you know, during the lame doc when Republicans still control level levers of power, increasing the debt limit.
• 15:52
  SPEAKER_01: The thesis being, hey, let's do something on the debt limit before we have to negotiate with Democrats and, you know, and maybe do waste fraud and abuse, cutting spending, et cetera, et cetera.
• 16:00
  SPEAKER_01: You hear Ron Johnson, who's the the chairman of the budget committee, talk about that a lot.
• 16:04
  SPEAKER_01: I think it's a great idea, but I think you've got a lot of attendance issues in both the House and Senate that's going to make that very challenging to execute.
• 16:10
  SPEAKER_01: But something we're keeping an eye on because if the debt limit is taken care of, that removes a catalyst for um action on those OBB repeal replace provisions, right?
• 16:20
  SPEAKER_01: Congress doesn't do anything unless there's a deadline.
• 16:22
  SPEAKER_01: So you if you're kind of bullish on that outcome, you want to see deadlines in 27.
• 16:26
  SPEAKER_01: The other thing I think that that you know kind of ebbs and flows, but is is getting more and more conversation, the status of US-China relations as it pertains to biotech.
• 16:35
  SPEAKER_01: You we had um the Coins Act last week, which I think most investors were comfortable with the outcome.
• 16:39
  SPEAKER_01: Um, but that's something where I think you got to be cognizant or aware that that's an area where there's bipartisan consensus, the concern about the rise of the Chinese biotech sector.
• 16:48
  SPEAKER_01: And while, again, the proposed rule last week seemed to be uh, you know, kind of a non-event, I think it's an area where folks are are are constantly kind of concerned that that could be a kind of a tail risk given the amount of relationships we have between U.S.
• 17:01
  SPEAKER_01: biotech and and uh the the companies in in China.
• 17:06
  SPEAKER_00: Great.
• 17:06
  SPEAKER_00: Well, thank you, Tommy uh Barletta from Aldis Institutional for joining us today.
• 17:10
  SPEAKER_00: I was kind of laughing as you were speaking, thinking about the days when I used to be a Wall Street analyst.
• 17:14
  SPEAKER_00: I always prided myself on giving actionable ideas.
• 17:17
  SPEAKER_00: I think investors will get at least a dozen or two dozen actionable ideas just from what you said in about 20 minutes time.
• 17:23
  SPEAKER_00: So this has been awesome, and thank you for your time.
• 17:26
  SPEAKER_00: Thank you again, Tim.
• 17:27
  SPEAKER_00: Always appreciate the opportunity.
• 17:31
  SPEAKER_00: Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 17:47
  SPEAKER_00: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 17:52
  SPEAKER_00: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.