President-elect Donald Trump's threat Monday to "knock out" pharmacy benefit managers to hold down prescription drug prices helped send CVS Health, Cigna, and UnitedHealth Group to another session of sharp losses for the managed care group.
Yet Congress is hardly waiting on Trump to attack the group. The association representing pharmacy benefit managers, or PBMs, said Monday that the massive continuing resolution being cobbled together to extend government funding may include a measure that would fundamentally restrict a key avenue of industry profitability.
Separately, a bipartisan group in the House and Senate introduced legislation last week that would force pharmacy benefit managers to divest their pharmacy-dispensing businesses within three years.
Delinking PBM Profits And Drug Prices
PBMs are the middlemen tasked by health insurers to manage prescription benefits, including what medicines are covered for any diagnosis and what price customers pay, which may vary depending on whether plan members get their prescriptions filled at preferred pharmacies.
CVS, Cigna and UnitedHealth own the three major pharmacy benefit managers in Caremark, Express Scripts and Optum.
The continuing resolution, which needs to be approved by Dec. 20 to avoid a government shutdown, may include a measure that would delink drug industry payments, or rebates, to PBMs from listed drug prices under Medicare, according to the Pharmaceutical Care Management Association. Supporters of the measure say that the linkage leads PBMs to steer drug plan members to high-priced drugs that are associated with higher rebates. Under the proposed reform, PBM compensation would instead come from flat fees.
The PCMA argues that this restriction on PBM practices weakens their negotiating power and bolsters profits of pharmaceutical companies, while raising Medicare Part D premiums for seniors.
PBM Reform 'Widely Supported'
New legislation introduced last Wednesday by Sens. Elizabeth Warren, D-Mass., and Josh Hawley, R-Mo., that would force health insurers to divest their pharmacy businesses could cut CVS operating earnings in half, Deutsche Bank analyst George Hill wrote in a Thursday note. Companion legislation was introduced in the House by Reps. Jake Auchincloss, D-Mass., and Diana Harshbarger, R-Tenn.
"As a life-long pharmacist, I know first-hand how unchecked PBM consolidation and vertical integration have allowed these shadowy middlemen to self-deal and manipulate the system in ways that are driving up drug costs, limiting patient choices, and putting the financial screws to independent community pharmacies," Harshbarger said in a joint news release.
Hill wrote that "PBM reform is clearly widely supported by both Democrats and Republicans," who are trying to lay the groundwork for passage next year. However, he added that there are many uncertainties about the bill, including its legality.
The new legislation, cleverly named the Patients Before Monopolies (PBM) Act, would likely force CVS to split its retail pharmacy business, as well as its mail and specialty pharmacy services, from its Caremark PBM. "We estimate CVS could lose over 50% of its consolidated operating earnings," Hill wrote.
The risk is high for Cigna, as well, with the potential loss of its mail and specialty business that contributes 40% of operating earnings, Hill wrote. The risk to UNH earnings "is not material," amounting to less than $200 million of $30 billion in operating earnings.
Rainstorm For Health Insurance Stocks
The recent rout in managed-care stocks began on Dec. 5, the day after the assassination of UnitedHealthcare CEO Brian Thompson in midtown Manhattan unleashed a torrent of online criticism of health insurance industry practices. "Sentiment is as bad as it's ever been" toward managed-care industry stocks, Hill wrote, in a note titled "Where It Never Stops Raining."
Sentiment turned almost overnight. CVS stock had surged 11% and UNH 5% on Nov. 6, as investors bet that the Republican electoral sweep would mean lighter regulation for the group. The reality looks a lot different five weeks later. "Investors are now forced to contemplate multiple regulatory or legislative headwinds in both the core MCO (managed care organization) and PBM spaces," Hill wrote. On top of that, Elon Musk's Department of Government Efficiency program will likely target health care spending as a source of budget savings.
CVS, UNH, CI Stock Action
CVS stock tumbled 5.6% to 46.60 on Monday, hitting a new 12-year low. UNH slid 4.2% and Cigna 3.1%. For the month, CVS stock has now tumbled 22.1%, Cigna 19.1% and UNH 18.3%.
