What New Republican Policies Could Mean for Managed Care Organizations

While bills can be approved by a simple majority in the US House of Representatives, US Senate rules are more complicated. Opposing senators can filibuster, or stall a vote, on a bill unless it has the support of 60 senators, known as a supermajority. The exception to this filibuster rule for bills in the Senate is the budget reconciliation process, which requires only a simple majority. Republicans will have a simple majority of the Senate starting in 2025 and may be constrained to using this budget reconciliation process to make policy changes, including to healthcare policy.

Morningstar analysts think Republicans could use the budget reconciliation process to adjust parts of the Affordable Care Act, including reducing federal funding for the Medicaid expansion population, especially since that would be positive for the federal government's budget. We also see the potential for increased regulation of the pharmacy benefit management, or PBM, business, especially since support for such changes appears to be bipartisan.

This article is adapted from a recent report published by Morningstar Equity Research. The Managed Care Organizations Are Bracing for Policy Changes report is available to download for free.

Historically, Republicans embraced private industry to solve society's problems, rather than the federal government, and viewed healthcare as a "privilege" rather than a "right" for all Americans. Because of those generalized ideologies and stated views of key administrative officials, we expect managed care organizations (MCO) to face both potential pros—particularly in the potential for increased outsourcing in government programs like Medicare (for seniors aged 65 and over)—and potential cons—such as reduced spending on Medicaid (low-income individuals) and the individual exchanges, and increased regulation of the pharmacy benefit managers (PBM)—as Republicans come into power.

On a probability-weighted basis, we estimate that this changing of the guard creates a roughly mid-single-digit headwind to operating profits for the medical insurance and PBM arms of the managed care organizations we cover. We view Centene (related to its Medicaid and individual exchange exposure), Cigna (related to its PBM operations), and CVS (related to its PBM operations) as facing more operating profit risks than their MCO peers.

Republicans typically want to reduce the role of government in Americans' lives. One way to do that would be to create incentives that lead to private insurers playing a bigger role administering care in the US healthcare system. Doing so would merely continue the trend of outsourcing in key government programs—such as in Medicare (for senior citizens) and Medicaid (for low-income individuals)—to private insurance companies. For example, the private insurance industry now covers over half of all Medicare enrollees, up from about one quarter of that population in 2010.

Similarly, state governments—the administrators of the Medicaid program—continue to outsource more Medicaid programs to the managed care industry with nearly three quarters of enrollees and about 60% of spending managed by the private insurance industry. Some industry players even think that state governments may increasingly outsource the management of this program to private insurers, if Republicans seek to reduce federal spending on the program by increasing potential state government liabilities in the process.

States can typically save a material percentage (often in the low double digits) of their Medicaid budgets when they outsource the management of that program to a private insurer, which has been the key driver of this increased outsourcing trend in recent years. While fewer gains are possible on an enrollee basis in Medicaid than in Medicare, a big percentage of spending on more complex populations (about 40%) still could be outsourced to the MCOs in Medicaid.

During the pandemic in 2020, the nominated leader of the Centers for Medicaid and Medicaid Services (CMS), Dr. Mehmet Oz, co-authored an opinion piece in Forbes that advocated for Medicare Advantage (the private insurance alternative to traditional Medicare for seniors) to become the insurance program for the entire US population. While we see that potential change for the entire population as unlikely in the near term, we think CMS may consider incentivizing the use of Medicare Advantage plans further in the senior population, either by changing the current default in Medicare from traditional plans to private insurance-run Medicare Advantage plans or by other means. We think this change could be made relatively easily with limited budgetary concerns either through the budget reconciliation process or even an administrative order, the latter of which may not even require Congressional approval.

Based on recent policy papers, like Project 2025, we think Republicans will try to reduce spending in Medicaid (for low-income individuals) through direct budgetary cuts and through new rules, such as work requirements.

One of the Affordable Care Act's big accomplishments was expanding Medicaid to all individuals up to 138% of the federal poverty level while eliminating the previous dependent requirement in states that opted into the expansion program. Currently, about 24% of all Medicaid members and about 20% of all Medicaid spending is related to the ACA expansion, and we think Republicans may try to reduce the federal government's funding of that expansion from the current 90% of expenditures (with the balance paid by states) to the rest of the Medicaid program's income per capita-based rates that can range from 50% to 83% in any given year. A change like that would put pressure on states and territories to decide if they want to take on that additional financial liability. We suspect that the budget reconciliation process, which only requires a majority vote in the Senate, could be used to reduce federal funding for the expansion states, especially since this would be positive for the federal government's budget.

On the other end of the spectrum, this change would increase the financial liabilities of the Medicaid program's state partners. Exhibit 14, sourced from the Kaiser Family Foundation, highlights the 41 states plus the District of Columbia that have expanded their Medicaid populations through the Affordable Care Act's provision. By number, these states are split almost evenly between states that voted for Harris (Democrat) in the presidential election and states that voted for Trump (Republican). By population though, nearly two thirds of the Medicaid expansion population resides in states that voted Democrat in the presidential election.

Republicans and Democrats appear to agree that some practices of pharmacy benefit managers, or PBMs, are problematic and need to be regulated further, despite the value PBMs bring to the US healthcare system by keeping biopharmaceutical prices in check. For example, net drug prices have increased less than 0% annually on an inflation-adjusted basis since 2018.

In reference to the PBM industry in December 2024, President-elect Donald Trump even went on record stating that, "We are going to knockout the middleman. We’re going to get drug costs down at levels that nobody has ever seen before." That statement caused a big selloff in PBM-related shares in December 2024 and highlight a major risk that this industry is facing. Overall, we estimate about half of traditional PBM-related profits and about one quarter of its specialty pharmaceutical operations would be at risk if the drug price negotiation component of a PBM's value proposition was eliminated by regulators.

Without success yet, legislators are still trying to increase PBM transparency by eliminating rebate- and spread-based pricing. Since PBM customers use rebates and spreads instead of fees to compensate for PBM services, we think customers should be willing to replace those pricing mechanisms with fees to resolve most, if not all, of that risk for the industry. By our estimates, even the most concentrated MCO in the PBM space—Cigna—only faces a low-single-digit profit headwind, if legislation that eliminates rebate- and spread-based pricing were enacted.

There is a lot to unpack here. To get into the thick of it, download the free Managed Care Organizations are Bracing for Policy Changes report published by Morningstar Equity Research. It includes more in-depth commentary and analysis on every topic presented here and more.

The data evaluated in the report was generated in Morningstar Direct, a comprehensive application that helps asset and wealth managers build their assets and manage their portfolios. Start a free trial of Morningstar Direct today.