UnitedHealth Stock Falls as Lawmakers Eye Insurers, PBMs

Minnetonka, United Sates - August 13, 2015: UnitedHealth Group headquarters building. HealthPartners is an integrated, nonprofit health care provider.

(Image credit: Getty Images)

UnitedHealth Group (UNH) stock is continuing its drawdown Thursday after lawmakers introduced a bipartisan bill aimed at prohibiting the joint ownership of pharmacy benefit managers (PBMs) and pharmacies.

The bill, the Patients Before Monopolies (PBM) Act, was introduced by Senators Elizabeth Warren, D-Mass., and Josh Hawley, R-Mo., and Representatives Diana Harshbarger, R-Tenn., and Jake Auchincloss, D-Mass. The act would prohibit the parent company of a PBM or an insurer from owning a pharmacy business and would require that the business in violation of the bill, if passed, would have to divest its pharmacy business within three years.

"Over the past decade, pharmacy benefit managers – the middlemen between pharmacies and insurance companies – have morphed into large healthcare conglomerates that exercise control over every link in the prescription drug delivery chain," the lawmakers said in a joint press release.

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"Today, the largest healthcare conglomerates each own a PBM – which pay for pharmacy services – as well as the pharmacy chains that provide those services. This inherent conflict of interest results in higher drug costs for patients and fewer independent pharmacies, but bigger profits for the corporate healthcare giants," the add.

UnitedHealth's PBM, Optum Rx, is the second-largest pharmacy benefits manager in the United States with a 20.8% market share. This falls just behind CVS Health's (CVS) Caremark unit with a 21.3% market share, according to Fierce Healthcare.

"We would expect passage of this proposed bill as uncertain, and would likely be part of a broader PBM reform which might also be linked to a drug pricing bill," says Bernstein analyst Lance Wilkes. "We would expect this type of legislation to more likely be evaluated in the next two years, and would see PBM reforms such as prohibiting retail spread and retained rebates in favor of administrative fees, as likely to be included in this type of reform."

Is UnitedHealth stock a buy, sell or hold?

UnitedHealth shares were up more than 18% on a total return basis (price change plus dividends) for the year to date in mid-November, but have nearly erased this gain following the fatal shooting of the CEO of its insurance unit. Indeed, the healthcare stock is clinging to a 2.9% lead at last check.

Still, Wall Street remains bullish on Dow Jones stock. According to S&P Global Market Intelligence, the average analyst target price for UNH stock is $636.20, representing implied upside of about 20% to current levels. Additionally, the consensus recommendation is Strong Buy.

Financial services firm Argus Research is one of those with a Buy rating on UNH and recently raised its price target on the large-cap stock to $670 from $600.

"Despite an outlook for 2025 from Buy-rated UnitedHealth Group that fell short of the Street’s expectations, we believe the long-term growth engines for UnitedHealth remain intact," wrote Argus Research analyst David Toung in a December 4 note. "Management acknowledges that the outlook is conservative, leaving room for outperformance, in our view. The company has numerous levers to pull to improve operating margins over the next 12 months."

Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.