President Donald Trump signed an executive order yesterday, aimed at greater price disclosure of services provided by hospitals. This executive order, targeted at reforming healthcare, forms one of Trump’s main political agenda, as he goes for re-election in 2020.
What the Executive Order States
Trump’s executive order calls for hospital and health insurance companies to make information public based on their negotiated rates. Hospitals are required to disclose to patients upfront, all the costs to be charged for routine services and medical procedures. It also requires patients to be informed about out-of-pocket costs like deductibles and copays for many procedures.
The news pulled down the stocks of major health insurers UnitedHealth Group Inc. UNH, Humana Inc. HUM, Cigna Corp. CI and Anthem Inc. ANTM by 1.05%, 1.08%, 0.43% and 1.1%, respectively.
Hospital stocks such as Community Health Systems and Tenet Healthcare were down 5.17% and 2.57%, respectively.
The Health Care Select Sector SPDR Fund was down 0.52% in yesterday’s trading. Year to date, however, the fund has gained 10% compared with the S&P 500 Index’s rise of 0.3%.
What is Pinching Healthcare Providers?
The obscurity in healthcare pricing system is what is allowing hospitals and insurers to reap huge profits, while adding little value to the quality of service provided. The delivery of healthcare in the United States is provided by a closed network, with pharmaceutical companies at the nodal point, running all the way down to hospitals. In between, wholesalers, pharmacy benefit managers and insurers retain their share of profits and pass on the cost to the final consumers or patients, thus making the entire process rather expensive.
Hospitals in the United States get reimbursed for their services for many sources such as government for medicare and medcaid among others, and from private health insurers. While the reimbursement provided for government services is available to public, what is received from private insurers is confidential.
Contracts between hospitals and insurers have been in question for long. Key hospital systems use many shady terms that bind insurers to include them in every plan and prohibit the use of less-expensive healthcare options. Deal terms also go to the extent of masking prices from customers, limited audit of claims and adding extra fee among others.
Participants from the healthcare industry defended the order by saying that the contractual agreements between hospitals and insurers are proprietary and should remain under wraps.
Managed care attempts to direct and control the use of hospital services and obtain discounts from established gross charges. The health insurance industry reacted to the executive order by saying that any such law, if formed, would be of little help in bringing down costs, as hospitals which are providing discounts on their services will be forced to raise prices to match the top-tier facilities.
Will It Serve the Purpose?
Industry participants are of the view that unveiling proprietary rates charged by hospitals might lead to an opposite effect. Due to different rates charged by different hospitals, the one offering low rates will be lured to increase their rates to match its competitor, which will in turn reduce competition and increase cost for patients.
Will the Pain be Felt Soon?
The executive order to be metamorphosed into law will have to pass through the rule-making process, which might take time running from many months to even years. This means that there will be no immediate change in the industry.
Nevertheless, even a little hint of impending discomfort is enough to shoo away investors from the already heavily regulated industry.
Among the stocks mentioned above, Anthem carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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