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Healthcare Stocks in Focus on Regulatory and Political Risk

Sapna Bagaria

The healthcare sector is once again experiencing jitters from regulatory and political risk, something that the sector has been exposed to for the past nine years or so, since the historic Affordable Care Act came into existence.

This time, the healthcare space is facing political risk from Bernie Sanders, one of the presidential candidates, on his proposal to implement the Medicare-for-All bill, and regulatory risk emanating from Health and Human Services Secretary pertaining to prescription drug rebates for the Medicare Part D program.

Regulatory Developments Concerning Healthcare Players

Medicare-for-All

Sanders’s Medicare-for-All bill is a single national plan which will be looked after and funded by the Federal government. The bill aims to provide a single government-run plan that would guarantee coverage for all and replace the current job-based and individual private health insurance system. The plan would have minimal copays and do away entirely with premiums and deductibles.

Market participants are of the opinion that this bill is of concern to Medicare Advantage heavyweights like UnitedHealth Group, Humana, WellCare Health Plans as the Medicare-for-All policy might replace and to a large extent, eliminate the private health insurance plans offered by these players thus draining their businesses.  

Also, other healthcare industries such as pharmaceuticals and hospitals would be hugely impacted, since the government, as a single payer system, would get substantial negotiating power with drug companies and hospitals. Drug companies are fearful of the discounts that they will have to provide to the government or face consequences. Hospital companies might also suffer from lower reimbursement offered by the government on Medicare or Medicaid business, thus affecting their overall revenues.  

Drug Price Rebates

Another concern for health insurers and pharmacy benefit managers is the probable decline in drug price rebates to be received from the pharmaceutical companies, after these have come under intense pressure from the government to lower down the stubbornly high drug prices.

The government is eager to change the way drug price rebates are passed on to the patients, by making these directly available against the existing system in which pharmacy benefit managers first get the rebates from the drug companies and then pass it on to the patients.

The current arrangement allows pharmacy benefit managers pocket a substantial chunk of rebates thus the final benefit to customers is miniscule. This disarrangement has received immense criticism from the policy makers and the government is vowed on upending the same.

Players in the pharmacy benefit management business fear that the direct flow of rebates in the form of discount from drug companies to customers will eliminate their role, thus eating into their revenues.

Healthcare Stocks Down

Following these news, in the last trading day, players like UnitedHealth Group Inc. UNH, Anthem Inc. ANTM, Centene Corp. CNC, Humana Inc. HUM Cigna, Molina Healthcare shed 4.3%, 4.1%, 3.7%, 2.2%, 2.5% and 2.6% respectively. Also the S&P 500 Managed Care Index fell 4%, reaching its lowest level since January this year.

Owing primarily to policy uncertainties, returns from the healthcare sector has overall lagged the S&P so far this year. While the HealthCare Select Sector SPDR Fund ETF (XLV) has  declined 1.23% so far this year, the S&P 500 has gained 15%.

Near Term Likelihood

Market participants are of the opinion that Medicare-for-All will not be easy to implement. The plans entail huge burden on already constrained Federal budget deficit.

Also, Trump’s proposed regulatory change would end the practice of PBM rebates in the Medicare and Medicaid programs as of Jan 1, 2020.
Even though the healthcare sector may not see any near-term implication from these issues, the negative sentiments building up to the news are enough to shake up the industry.

Among the companies mentioned above, Anthem carries a Zacks Rank #2 (Buy) and Centene has a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

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