Takeaway: We are removing UNH from the short side of Investing Ideas today.

Editor's Note: Below is an institutional research note written by Health Policy analyst Emily Evans and Healthcare analyst Tom Tobin.

Takeaway: Good news for MCOs...for now; removing UNH short, sticking with ANTM long

Recently the White House told reporters they were withdrawing the rebate rule for Medicare Part D. The rule change was a major headwind for the MCOs and its withdrawal is good news, especially for those that have an in-house PBM, for now. For pharma, the shift in policy is very, very bad news.

We had highlighted a significant delay or withdrawal of the rule as a risk to the UNH short because it was so hotly debated at the White House. There was a 6 month delay in its initial release with the president finally backing Sec. Azar, the strongest advocate for the policy. That did not stop policy advisor Joe Grogan, a budget hawk, from lobbying against the effort and its $177 billion price tag. In the end, the president made the decision to withdraw the bill and focus on other, more direct efforts to bring down drug prices.

The news is welcome for the PBM industry but they are hardly out of the woods. In fact, congressional action may yield a much worse result than any regulatory change, from their perspective. Drug price policy legislation making its way through the committee process and a priority of both the chairman of Senate Finance, Sen. Chuck Grassley, and the chairman of Senate HELP, Sen. Lamar Alexander, includes:

  • Requirement that 100% rebates generated on behalf of commercial plans are passed through to sponsor or employer
  • Prohibition on spread pricing
  • Required reporting by PBMs to plan sponsors or employer groups on amount of rebates, total spending and drug utilization

At the White House, the focus has turned to more direct efforts to reduce drug prices, which is where things could get very dicey for pharma. With the president's announcement on Friday of a "most favored nation status" for Medicare via executive order, he has reset the baseline with quasi-negotiation. It will be up to Congress to moderate this fairly radical approach and that may just be the point.

Sen. Grassley and others have expressed opposition to anything that smells of negotiation. House legislative efforts have made direct negotiation a priority. One of the sticking points over Senate Finance legislation is a provision offered by Senator Wyden that requires rebates in Medicare Part D if price increases exceed a threshold amount. This impasse has to be broken and the withdrawal of the rebate rule coupled with the White House's proclivity for executive action creates an urgency to act. That action is very likely to include significant restrictions on drug price inflation, in one form or another. Even if the rebate system remains in Medicare, the fuel that drives it - ever increasing drug prices - will be diminished. 

Finally, the OIG in issuing the rebate rule reminded us that two practices are not covered by existing safe harbor; quid pro quo agreements for rebates in return for formulary placement and using rebates in Medicare to subsidize premiums in other lines of business. Given the public airing of PBM practices, enforcement risk is higher now than it was before the debate began.

As we wait and see if the White House strategy will work, we are removing short UNH. ANTM remains a long as the advantage they have in developing a PBM in a new era is probably more valuable than ever.