Health Care Stocks Plunge: Policy Uncertainty and Regulatory Scrutiny Weigh Heavy

The health care sector experienced a significant downturn late in the afternoon, with stocks falling sharply due to a combination of policy uncertainties and regulatory scrutiny. The decline was particularly pronounced for companies involved in pharmacy benefit management (PBMs), as new bipartisan legislation threatened to disrupt their business models. This legislation, sponsored by Senators Elizabeth Warren and Josh Hawley, aims to force companies owning health insurers or PBMs to divest their pharmacy businesses within three years. The move is seen as a response to yearslong scrutiny from Congress and the Federal Trade Commission over allegations that PBMs inflate drug costs for patients to boost their profits.



The impact of this legislation was immediate and severe. Shares of major health-care companies like unitedhealth group, cigna, and cvs health fell nearly 5% on Wednesday. These companies operate three of the nation's largest private health insurers and PBMs. The stock reaction on Wednesday appeared to be in response to new bipartisan legislation that aims to break up PBMs, which was first reported by The Wall Street Journal. PBMs have faced yearslong scrutiny from Congress and the Federal Trade Commission over allegations they inflate drug costs for patients to boost their profits.

The declining stocks include UnitedHealth Group, Cigna and CVS Health, which operate three of the nation's largest private health insurers and drug supply chain middlemen called pharmacy benefit managers, or PBMs. They also own pharmacy businesses. Shares of all three companies closed at least 5% lower.

The share moves also come as insurance companies and their practices face heightened public criticism following the fatal shooting of Brian Thompson, the CEO of UnitedHealth Group's insurance arm, last week. Health stocks had already fallen in the days after Thompson's killing.

The broader market, however, showed resilience. The S&P 500 index surged 1.9% on the same day, indicating that the broader market was performing well despite the specific challenges faced by the health care sector. This disparity highlights the sector-specific risks and uncertainties that health care companies are currently navigating, which are not affecting the broader market to the same extent.



The recent policy changes and regulatory uncertainties have had a significant impact on the performance of health care stocks. For instance, in 2024, health care stocks underperformed due to various policy headwinds. One of the key issues was inadequate reimbursement rates for Medicare Advantage policies, which affected health insurers that administer these plans. The Centers for Medicare and Medicaid Services (CMS) issued government reimbursement rates that disappointed insurers and investors, leading to a significant drop in stock prices for companies like Humana Inc. (HUM), which saw its stock plummet 43.1% in 2024. This was exacerbated by the CMS's decision to cut its star rating on a large Medicare Advantage plan, which further reduced government rebates and cut into profits.

The upcoming change in administration is expected to bring about new policies that could either alleviate or exacerbate these issues. For example, a Trump administration is likely to push for more favorable rates and less scrutiny with its Medicare Advantage policies, which could be beneficial for companies like Humana. However, there are concerns that the enhanced subsidies provided to those getting health insurance through Affordable Care Act exchanges might be allowed to expire in 2025, which could negatively impact hospital operators and vaccine makers. This uncertainty has led to a mixed reaction in the market, with stocks of Medicare Advantage plan providers surging while those of hospital operators and vaccine makers taking a hit.

Additionally, the introduction of bipartisan legislation aimed at breaking up pharmacy benefit managers (PBMs) has also impacted the performance of health care stocks. Companies like UnitedHealth Group, Cigna, and CVS Health, which operate large PBMs, saw their shares fall by as much as 5% due to concerns over potential changes to their business models. This legislation, sponsored by Senators Elizabeth Warren and Josh Hawley, aims to force companies owning health insurers or PBMs to divest their pharmacy businesses within three years, which could significantly alter the landscape of the health care sector.

In summary, recent policy changes and regulatory uncertainties have created a volatile environment for health care stocks. The upcoming administration's policies, particularly regarding Medicare Advantage reimbursement rates and PBM regulations, will play a crucial role in determining the future performance of these stocks. Investors will need to closely monitor these developments and adjust their strategies accordingly to navigate the challenges and opportunities in the health care sector.

Ask Aime: What impact will the bipartisan legislation targeting pharmacy benefit managers have on the health care sector?