What Republican Control Could Mean for Managed Care Organizations

As Republicans assume control of the federal electable bodies, potential regulatory changes for managed care organizations have come into focus.

Shares of MCOs have sunk since early December on this regulatory risk, especially considering the negative public sentiment that came to light after the fatal shooting of a UnitedHealth UNH executive.

While we see some potential pros around increased outsourcing in government programs, regulators appear emboldened by the negative industry sentiment, which we think creates more potential risk than benefits. However, we think our Morningstar Uncertainty Ratings already consider realistic risks and that MCO shares appear undervalued relative to those risks.

What Changes Could the Republican Government Make?

Although Republicans will have control of the presidency, the Senate, and the House, we think they will still be constrained to using the budget reconciliation process to make policy changes, which limits the opportunity for more significant changes to the US healthcare system.

The budget reconciliation process enables the Senate to pass bills by achieving a simple majority, rather than being subject to the limitations of a 60-vote threshold. We think that Republicans could use this process to adjust parts of the Affordable Care Act, for example.

Particularly, they may pursue a reduction in federal funding for the Medicaid expansion population, especially since that would be a positive for the federal government’s budget. We also think they could pursue increased regulation of the pharmacy benefit management business, since support for such changes appear to be bipartisan.

Potential changes like that could create both pros and cons for MCOs, but the cons will likely outweigh the pros. On a probability-weighted basis, we estimate that the changing of the guard creates a mid-single-digit headwind to operating profits for the medical insurance and PBM arms of the MCOs we cover.

Republican Policy Changes: Pros for MCOs

Republicans typically want to reduce the role of government in Americans’ lives, and one way they could do that would be to create incentives that lead to private insurers playing a bigger role in administering care in the US healthcare system.

This would continue the trend of outsourcing in key government programs to private insurance companies, such as in Medicaid (for low-income individuals) and Medicare (for senior citizens).

For example, state governments (who administer Medicaid) currently outsource more Medicaid programs to the managed care industry, with nearly three fourths of enrollees and about 60% of spending managed by the private insurance industry. While we suspect this trend will continue, some industry players think that state governments may increasingly outsource the management of this program to private insurers if Republicans seek to reduce federal spending on the program by increasing potential state government liabilities in the process.

We also think that Dr. Mehmet Oz, Donald Trump’s nominee for the leader of the Centers for Medicare & Medicaid Services, may look to incentivize the use of Medicare Advantage plans further in the senior population. He could aim to do so by changing the current default in Medicare from traditional plans to private insurance-run Medicare Advantage plans, or by other means. We think this change could be made relatively easily with limited budgetary concerns either through the budget reconciliation process or even an administrative order, the latter of which may not even require Congressional approval.

With the potential increase to the Medicare Advantage population, we think the fixed costs as a percentage of sales needed to serve that population would decline mildly for MCOs. This would create the potential for minor Medicare Advantage-related profit growth.

We also think Republicans gaining control of the federal electable bodies could positively influence profitability in this end market, as scrutiny over risk versus the traditional Medicare population may decline a bit relative to recent Democrat control.

Republican Policy Changes: Cons for MCOs

Because the Affordable Care Act remains popular, we do not think Republicans would want to fully dismantle the law. However, they could try to pull back the Act’s influence primarily by reducing federal funding for Medicaid expansion and by letting recently implemented subsidies for the individual exchanges expire, as currently scheduled at the end of 2025.

• Medicaid: Reduced Funding for Expansion. The ACA expanded Medicaid to all individuals up to 138% of the federal poverty level; currently, about 24% of all Medicaid members and 20% of Medicaid spending is related to this expansion. We think Republicans may try to reduce the federal government’s funding of this expansion from the current 90% of expenditures to the rest of the Medicaid program’s income per capita-based rates that can range from 50% to 83% in any given year. This type of change would put pressure on states and territories to take on that financial liability or allow their state’s Medicaid population to shrink materially.
• Medicaid: Work Requirements. RepublicanDuring the covid pandemic, Democrats passed bills that created subsidies to eliminate affordability concerns associated with individual exchanges. These subsidies enabled about 4 million people to gain coverage. If Republicans allow these subsidies to expire at the end of 2025, the CBO estimates that nearly a quarter of the exchange population will no longer be able to afford their plans, which would be likely to cut into the profits of MCOs with significant exposure to individual exchanges.
• Individual Exchanges: Lower Subsidies. During the covid pandemic, Democrats passed bills that created subsidies to eliminate affordability concerns associated with individual exchanges. These subsidies enabled about 4 million people to gain coverage. If Republicans allow these subsidies to expire at the end of 2025, the CBO estimates that nearly a fourth of the exchange population will no longer be able to afford their plans, which would be likely to cut into the profits of MCOs with significant exposure to individual exchanges.
• Elimination of PBM Industry. In December, Trump asserted a desire to eliminate the PBM industry, but we suspect that opinion may not fully reflect the value that the PBM industry provides to the US healthcare system. Overall, we question if all PBM-related functions (including claims processing, formulary management, and more) would fully be eliminated as well.
• International Reference Pricing for Drugs. In his previous presidential term, Trump tried to introduce international reference pricing to reduce biopharmaceutical pricing in the US through Medicare. If this effort is successful in the new administration, the elimination of PBMs that negotiate drug prices could cut into MCO profitability significantly. However, we see only a 10% probability of such a regulation being enacted.
• Dispensing Asset Separation. In December 2024, a bipartisan effort to separate insurers from their biopharmaceutical dispensing businesses was introduced. If this bill gains traction, we suspect it could pass in 2025, which would mean MCOs would have until 2028 to either sell or spin off these assets. This could create two risks: that the MCOs could lose synergies by separating from drug dispensing assets and that shareholders would not see substantive value from a spinoff.
• Increased Transparency. Although they have not seen success yet, legislators are working to increase PBM transparency by eliminating rebate and spread-based pricing. By our estimates, even the most concentrated MCO in the PBM space (Cigna CI) only faces a low-single-digit profit headwind, if legislation in this vein were enacted.
• Duplicative Veteran and Medicare Spending. The Wall Street Journal recently highlighted a practice in which the government makes duplicative outlays for veteran care through both Medicare Advantage and Veterans Affairs. If Republicans make efforts to eliminate these duplicative payments, it could affect industry players, though we expect it would only be a low-single-digit effect.

What Republican Policy Changes Could Mean for MCO Shares

Although we think the MCO industry faces more potential risk than benefits, large margins of safety surround all the MCO shares that we cover and more than account for each company’s probability-weighted regulatory risks. In fact, shares largely appear to discount the full regulatory risk scenario shown below, despite the low probability surrounding that scenario.

This article was compiled by Emelia Fredlick.