Yesterday, the Trump administration announced that it has pulled back its proposed rebate ban on pharmacy benefit managers (PBMs). Notably, PBMs act middle man between drug makers and health insurers, negotiating with the former to make drugs available at lower prices for the latter and grabbing part of the benefit in between.
The Rebate Ban Plan
The rebate ban was intended at passing down the benefit of negotiated drug prices among drug makers and PBMs and drug distributors to patients so as to make prescription drugs affordable.
One of the mainstays of Trump's political agenda has been to redo the health care system in America, which is one of the costliest in the world and is weighing on federal budgets.
The administration has been cracking down on drug manufacturers to lower drug prices. Health insurers and pharmacy benefit managers came under intense criticism from employers, Congress and the Trump administration. Soon, PBM's share of rebates turned into a nationwide controversy. Thus, the rebate ban appeared one of the ways of achieving the goal of lowering drug cost.
Why the Reversal?
The highly promoted rebate ban proposal reached a dead-end after the nonpartisan Congressional Budget Office estimated that the plan would weigh on the federal budget by over $177 billion over the 10 years and that there would be no certainty on the main goal to control manufacturer drug prices.
The administration, however, clarified that although this measure would be repealed, other ways and means will be applied to control drug prices.
Health Insurers Rejoice
While the news was taken negatively by drug manufacturers, it was a clear positive for health insurers as they will continue getting drugs at lower prices. PBMs initial role post the formation of the Affordable Care Act was to help manage prescription claims for insures for Medicare Part D plans. But over time, PBMs have evolved to play an extended role in drug supply chain by taking care of functions such as formulary management, drug utilization review, determining which pharmacies are in-network and how much those pharmacies will receive in reimbursement. They thus became more important carriers for insurers.
In recent years, health insurers have gone further to integrate PBM functionality into their businesses, with an aim of forward integration across the supply chain network. While some of them resorted to acquiring PBM companies, some others have developed their in-house PBMs.
Insurers like UnitedHealth Group Inc. UNH , Anthem Inc. ANTM and Humana Inc. HUM have their own in-house PBMs named Optum Rx, IngenioRx, and Humana Pharmacy Solutions, respectively. Notably, UnitedHealth also acquired a PBM company, Catamaran, back in 2015, which further expanded its PBM capabilities.
Cigna Corp. CI recently acquired the nation's leading PBM, Express Scripts, which now contributes more than 60% of the company's combined revenues.
Since most the leading insurers are also playing the role of a PBM, their stocks surged on the news. Cigna, UnitedHealth, Humana, Anthem each saw their stock price gain 9.24%, 5.53%, 4.58% and 5.54%, respectively.
Big players in fact came under the pressure of rebate plan and announced that they would pass some of the pharmacy discounts they get from drug manufacturers. This news thus removes a dark cloud hanging over the health insurance industry.
This news came as a relief against the backdrop of regulatory noise in the industry, which led to a decline in the Zacks Medical-HMO industry, comprising health insurers which lagged the broader S&P 500 Index, year to date.
Recently, Trump declared an executive order to disclose hospital pricing of products and services to patients as well as contracts between insurers and hospitals. Also, a debate was held in the United States Courts of Appeals in front of a three-member panel on the constitutionality of the ACA, which was declared as unconstitutional in December 2018.
It is most likely that the case would go to Supreme Court, but if ACA is rendered unconstitutional, health insurers would suffer a major blow as they have greatly gained from an increase in business volumes since the passage of the act in 2010. Moreover, presidential candidate Joe Biden's Medicare-for-All proposal has also been disturbing health insurers since the plan aims to replace private health insurance by a single government-controlled health plan.
Winners Till Now
The health insurance space is heavily regulated. Yet, over time, the players have accustomed themselves to frequent jerks caused by political and regulatory issues. Health insurers have nevertheless come a long way, building a formidable business by diversifying into different revenue lines, managing costs and keeping together a solid balance sheet.
This is also revealed by the Zacks Medical HMO Industry' gain of 430% since the passage of the ACA to date. The Zacks S&P composite has grown 161% in the said period.
Among the companies mentioned above UnitedHealth carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Cigna Corporation (CI): Free Stock Analysis Report UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report Anthem, Inc. (ANTM): Free Stock Analysis Report Humana Inc. (HUM): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research