Bipartisan legislation targeting pharmacy benefit managers (PBMs) introduced in the House and Senate could cut CVS Health (CVS) operating earnings in half, Deutsche Bank analyst George Hill wrote in a Thursday note. CVS stock slumped fell for the fourth-straight session early Friday, sinking to its lowest level since December 2012. UnitedHealth (UNH) and Cigna (CI), which also own major PBMs, have also been under pressure.
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.
↑
X
How Nvidia Is Injecting AI Into The Health Care Industry
PBM Reform ‘Widely Supported’
New legislation introduced Wednesday 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 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.
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.
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.
CVS, UNH, CI Stock Action
CVS stock fell 2.1% to 48.54 early Friday, after sliding 6.15% on Wednesday, as the PBM legislation was introduced, and 4.2% on Thursday. 2013. CVS has tumbled 18.9% this month. Cigna and UNH, which both lost more than 5% on Wednesday and 3% on Thursday, stabilized early Friday.
Still, Cigna has lost 16.3% in December and UnitedHealth 15.3%.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
YOU MIGHT ALSO LIKE:
Join IBD Live Each Morning For Stock Tips Before The Open
These Are The Best 5 Stocks To Buy And Watch Now
IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today
