The broader health care sector is rapidly looking like a case of mismanaged expectations. Although it was bracing for a Hillary Clinton victory, the industry was pleasantly surprised when Donald Trump pulled out the upset. A day after the general election, the benchmark Health Care SPDR (ETF) (NYSEARCA:XLV) jumped to a 3.5% gain. For the year, the XLV is up over 9%. Backed by promises of less-burdensome regulations, health care and pharmacy stocks apparently took solace in their wallets.
But whatever goodwill President Trump engendered is starting to fade quickly. The administration has not been a popular one with controversy after controversy. And now, the pledge to “repeal and replace” the Affordable Care Act hit a snag.
Just days after the GOP proposed the new “American Health Care Act,” it received sharp criticism, especially from moderate Republicans. Senator Rand Paul was particularly vocal in his criticism, dubbing it as “nothing more than a revamped federal entitlement program.”
As a result of the pronounced backlash, several pharmacy stocks saw their upside momentum halted. Chaos in politics, especially as a result of a convoluted health care system, does no favors for the broader industry. But within this rising upheaval, new questions are asked about the necessity of skyrocketing drug prices. In particular, pharmacy benefit managers are under the crosshairs.
Pharmacy benefit managers, or PBMs, are a little known and little regarded industry within an industry. Originally starting off as payment processors, they have evolved into entities that can decide “which drugs insurers cover, what they cost and how much pharmacies are reimbursed for them,” according to USA Today. At first, they probably served a viable purpose. Now, however, many people and institutions are out for their head.
That spells big trouble for pharmacy stocks that promote or are leveraged towards the PBM business. These service providers have responded that pharmaceuticals are mostly responsible for rising drug prices. The PBM, they argue, is just trying to manage a bad situation.
Even if true, PBMs have a tough public relations battle. The accusation that they are leaches of an overweight bureaucracy is very convincing. Furthermore, several companies have reduced their health care costs substantially by cutting out the major PBMs.
No matter what, this battle will turn ugly for pharmacy stocks exposed to this business. Here are three names you should avoid.