Note to readers: On Thursday, IBD published a new article focused on the potential impact of PBM legislation.
Wall Street has begun assessing whether UnitedHealth Group and managed-care rivals will face a tougher operating environment after the horrific murder of its UnitedHealthcare insurance division CEO Brian Thompson. The answer may well be yes, based on signals from Capitol Hill. A bipartisan group may be revving up a new push to break apart health insurers and prescription benefit management firms, The Wall Street Journal reported.
UNH stock tumbled anew in Wednesday stock market action, undercutting the lows from last week's biggest weekly percentage drop since the Covid lockdown in March 2020. UnitedHealth owns Optum Rx, one of three major PBMs. CVS Health and Cigna also slid, reflecting their ownership of the two others, Caremark and Express Scripts.
PBM Legislation Introduced
The WSJ reported that a bill sponsored by Sens. Elizabeth Warren, D-Mass., and Josh Hawley, R-Mo., would force health insurers to divest their pharmacy businesses within three years. Companion legislation was set to be introduced in the House. The breadth of the legislation isn't yet clear. The WSJ article said it would cut off "a major source of revenue for the companies."
Warren is quoted as saying the bill "will untangle" conflicts of interest by reining in PBMs, the middlemen between insurers and drug makers.
Bloomberg said it would require UnitedHealth, CVS and Cigna to "shed drug-dispensing operations that have become profit centers for the vertically integrated conglomerates."
The wording that the legislation would force the companies to divest "pharmacies" and "drug-dispensing operations" sounds more like it would force divestment of the retail pharmacy business, rather than the PBM business. That would be an issue for CVS, but much less so for UNH and Cigna.
However, the implication of "profit centers" is that the PBM business might have to be cut loose.
UNH, CVS, CI
UNH stock slid 5.6% to 533.40 on Wednesday and has now tumbled more than 15% from its record high on Nov. 11. UNH and the managed-care industry group had surged on Nov. 6 on prospects for lighter regulation after the election of Donald Trump and a GOP Congress.
CVS sank 6.15%, hitting its lowest level since May 2019. Cigna slid 5.6% to a 10-month low. Other managed-care stocks sidestepped the brunt of the selling, with Elevance Health off 1.1%, while Centene bounced back from early losses, finishing 0.3% higher. .
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UnitedHealth stock had recovered somewhat on Monday and Tuesday after getting a vote of confidence from Jefferies analyst David Windley in a Monday morning note. The modest rebound came as authorities arrested Luigi Mangione, 26, in Altoona, Penn., in connection with Thompson's shooting.
Windley tactfully broached the awkward question of whether Thompson's targeted assassination, which unleashed a torrent of online criticism of health insurance industry practices, might provoke a regulatory response.
The "shooting was chilling, and the social media reaction was inhumane," Windley wrote. The title of his note on UNH investor day: "Respectfully Providing Update, Thoughts on Recent Correction."
A masked man shot Thompson multiple times in midtown Manhattan at 6:46 a.m. on Wednesday. Reports of his death first came out around 9 a.m., after which UNH cut short its investor day presentation.
Despite the tragedy, UNH stock rose 0.9% on Wednesday, as investors seemed to react favorably to the company's new earnings outlook for 2025 and updated outlook for 2024 that were issued after Tuesday's market close. In Windley's view, the 2025 guidance wasn't rally material. He noted a 150-basis-point year-over-year rise in the medical loss ratio, or benefits paid as a percentage of premiums. "Equally, the -10% move Thurs/Friday also seems unjustified," he wrote.
Windley reiterated a buy rating while trimming his UNH stock price target to 635 from 643. The target implied 16% upside from Friday's close of 556.29.
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Prior Authorization, Utilization Management Draw Scrutiny
Windley suggested that the sell-off in UNH shares, which included UnitedHealthcare rivals was tied to "fear of regulatory crackdown on MCO (managed care organization) cost controls." The sell-off also included Humana, Elevance Health and Centene. In his view, such concern "seems to forget the US' healthcare cost problem, and the gov't spending austerity we seem to be moving into."
UnitedHealth, he adds, "would be able to reprice for regulatory changes over time." The implication is that while restricting cost controls might pinch managed care profits, it would lead also to cost-shifting. If senior Medicare Advantage members become more costly based on regulatory changes, that might put upward pressure on government costs as well.
The cost-control strategy that's come into focus is the requirement that plan members get prior authorization (PA) from their insurer before getting a medical procedure or drug. The insurer often decides authorization based on utilization management (UM) analysis, which is meant to keep patients from getting treatments that are unnecessary or ineffective for their condition.
"Even before any snowballing public scrutiny" of prior authorization and utilization management, Windley infers that UNH was "planning to back off PA/UM levers that are being pulled in 2024." As a result, he expects UNH earnings per share will slip to 10% in 2026 from its long-range target of 13%, to 16%.
