Healthcare Services: Medicaid and PBMs Still Under Fire in Updated Regulatory Moves

On May 11 and 12, Republicans revealed updated regulatory stances that included plans to lower drug prices and pull back on Medicaid spending by about $715 billion over the next 10 years versus $880 billion expected previously.

Why it matters: In early trading, top-tier Medicaid insurer Elevance and healthcare service providers like HCA and Tenet rose in the low single digits, as the potential Medicaid changes look better than feared. However, PBM-focused firms like Cigna and CVS fell.

• On May 11, Republican House members revealed a proposed bill that looks likely to cut Medicaid spending less than the initial goal, which may moderately buoy the profits of Medicaid-reliant service providers and managed care organizations.
• On May 12, President Donald Trump signed an order to lower US drug prices, which could eliminate a key function that PBMs provide to clients, as the government looks likely to undertake drug price negotiations or set prices to lower, most-favored-nation levels.

The bottom line: We are keeping our fair value estimates intact for now, as Congress still needs to vote on Medicaid cuts, which are controversial even in Republican districts. Also, few details are known about how drug pricing negotiations would actually work, including how broadly they could reach.

• If Medicaid legislation passes, we would see the most risk at no-moat Centene, a Medicaid and individual exchange plan provider that faces a high-single-digit fair value cut under this bill, plus the potential expiration of individual exchange subsidies.
• Narrow-moat Cigna faces the most downside risk if the US government starts negotiating drug prices, which is currently a key PBM function. It remains to be seen how broadly this order could reach beyond government programs, though, and service bundling may protect PBMs somewhat.