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ETFs to Shine as Trump Tosses Drug Rebate Curb Plan

Sweta Jaiswal, FRM

The Trump administration recently faced another setback in its effort to lower prescription drug prices. Recently, a federal judge overturned an administrative ruling requiring drug manufacturers to reveal list prices of medicines in television commercials. This time, the Trump administration had to drop the key proposal to block rebates and discounts from drug makers. This is considered a hard blow to Trump’s election campaign propaganda to bring down drug prices.

Responding to the news, shares of a few pharmacy benefit managers like Cigna Corporation CI, UnitedHealth Group UNH and CVS Health CVS rose 9.2%, 5.5% and 4.7%, respectively.

Proposed Rule at a Glance

The proposed rule, which was considered one of the most effective tools up Trump administration’s sleeve to control prescription drug prices, required drug makers to block discounts and rebates to pharmacy benefit managers or directly to insurers for getting the drug included in a list or formulary of drugs covered by health plans. The rule rather aimed at providing pharmacy benefit managers a flat fee and pass on the benefits to consumers.

Why Was it Dropped?

It was argued by pharmacy benefit managers that manufacturers kept the price high intentionally and it was a sheer requisite to have middlemen to negotiate discounts to control the cost of drugs. Moreover, administration and congressional budget analysts opposed the proposed rule saying that if rebates are blocked, drug makers will keep most of the savings instead of passing them onto end users.

It was argued that insurance premiums and government spending will rise in the absence of middlemen. In fact, White House Domestic Policy Council Director Joe Grogan argued that there might have been a rise in Medicare premiums just ahead of the 2020 elections, if the rule was implemented. Moreover, the rule would have resulted in savings for only 30% of Medicare Part D enrollees who spend substantially on medication. The Congressional Budget Office projected that the rule would cost $177 billion through 2029.

ETFs to Consider

Against this backdrop we discuss certain ETFs that can benefit from the latest decision:

iShares U.S. Healthcare Providers ETF IHF

The fund tracks investment results that correspond generally to the price and yield performance of Dow Jones U.S. Select Healthcare Providers Index (read: ETFs to Win After Soft May Jobs Data). The fund consists of 47 holdings in its basket. Pharmacy benefit managers and health insurers make most of the top 10 holdings. Accordingly, IHF gained 3.8% on Jul 11 following the dropping of key proposal by the Trump administration.

AUM: $898.8 million

Expense Ratio: 0.43%

YTD Return: 8.6%

iShares Evolved U.S. Healthcare Staples ETF IEHS

This actively managed fund seeks to provide access to U.S. companies with healthcare staples exposure. The fund consists of 160 holdings in its basket. United Health Group weighing 11.06% makes the top holding of the fund. IEHS gained 1.5% on Jul 11 following the dropping of key proposal by the Trump administration.

AUM: $7.4 million

Expense Ratio: 0.18%

YTD Return: 14.3%

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iShares U.S. Healthcare Providers ETF (IHF): ETF Research Reports
 
Cigna Corporation (CI) : Free Stock Analysis Report
 
UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
iShares Evolved U.S. Healthcare Staples ETF (IEHS): ETF Research Reports
 
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