A White House proposal to lower drug prices sent some managed care stocks into a "relief rally" in recent days, according to one analyst that covers the industry.
Insurers with captive pharmacy benefit managers saw their stocks rise after President Donald Trump's recently released plan showed little evidence that regulators would interfere with companies' operations.
The S&P 500 lost 0.11% to 2,720.13 for the week, while the SNL U.S. Insurance Index rose 1.07% to 1,005.74.
Trump's drug pricing proposal is a "very modest one," BMO Capital Markets Matthew Borsch said, that will probably not have material impact on pushing Pharmacy benefit managers, or PBMs, and their parent insurers to bring down their prices. The analyst characterized the week's rise for managed care stocks as a "relief rally," rather than a trend that would continue into the future.
Borsch said investors feared Trump's campaign rhetoric to use the White House to bully PBMs into submission. When the proposal was announced May 11, those fears were calmed, he said.
"Trump had previously, during the campaign, threatened that he was going to cut up the middlemen and slash prices," Borsch said. "And obviously that's not what he did."
Trump laid out his plan in four strategies that include improving competition by preventing drug manufacturers from exploiting regulatory processes and reforming Medicare Part D to give insurers more power to negotiate with manufacturers.
"It's not clear if the proposal going forward is going to give new abilities or capabilities to [insurers]," Borsch said in an interview. "It could be that as the regulation gets further refined, there could be some opportunities."
PBMs, are middlemen-like companies that negotiate drug prices among manufacturers, pharmacies and insurers that cover drug benefits. Two of the country's biggest four pharmacy benefit managers are owned by health insurers.
UnitedHealth Group Inc. which owns OptumRx, the third-largest PBM by revenue, saw its shares jump nearly 4% during the week. Humana, which owns the fourth-largest PBM in the country with its Humana Pharmacy Inc. unit, gained 3.20%.
The largest PBMs in the U.S., CVS Health Corp. and Express Scripts Holding Co., are in current merger talks with insurers Aetna Inc. and Cigna Corp., respectively. Shares of Aetna and Cigna rose 3.78% and 4.59%, respectively.
Borsch said he heard from Cigna President and CEO David Cordani at a recent investor day that he was "committed" to the $67 billion deal with Express Scripts and that Cordani was "adamant" that it would receive regulatory approval.
Molina Healthcare Inc., which does not own a PBM like its peers, also saw its stock rally as the news lifted the entire health insurance sector, Borsch said. The BMO analyst suggested that investors had been unsure that the company would host an investor day amid a restructuring plan and noted that a key Medicaid contract was rejected by Florida regulators. Molina, which recently announced it would go through with an investor day, saw its shares rise almost 5% during the week.
"On the margin, if you were worried about Molina, you're maybe a little bit relieved," Borsch said, referring to the investor day announcement.