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Healthcare Stocks in Focus on Price Transparency Rule

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On Nov 15, the Centers for Medicare & Medicaid Services ("CMS") issued two rules, pursuant to President Trump's Executive Order on Improving Price and Quality Transparency in American Healthcare.

What Are the Rules?

One of the rules requires hospitals to make prices for healthcare services available online beginning 2021. Hospitals will display prices for shoppable services as a total package in an easy-to-read, consumer-friendly format. Hospitals are also required to make publicly available the negotiated rates they charge insurers for medical services and prescription drugs.

The other one is a proposal that requires insurance companies offering group and individual coverage to provide cost estimates to enrollees up front, so as to enable patients to take an informed decision about their healthcare spending. It requires insurers to make public their negotiated rates with in-network providers and expected payments to out-of-network providers.

Reasons Driving the Rule

At present, a complex billing structure, resulting in bills from multiple providers, makes it difficult for patients to understand the real price and value of care provided to them.

Both the final and the proposed rule aim at making healthcare prices more transparent than ever before. The premise behind the rules is to lift the veil put into place by health insurers and hospitals, under which these players partner among themselves to provide healthcare services at inflated prices.

Per the government, this systematic inefficiency has enriched industry giants at the expense of patients. This is also evident from the fact that despite an increase in the cost of healthcare in the United States, the healthcare outcomes of the patients remains at low levels. Also, the government projects healthcare spending to consume almost 20% of the economy by 2027, one of the reasons being lack of transparency in pricing.

These rules are expected to foster greater competition among hospitals and insurers, thus bringing down the healthcare cost and improving its quality.

Initial Resistance

When the rules were proposed earlier this year, they met with great resistance from hospitals, insurers and other industry bodies that called this was a wrong approach to price transparency. The bodies also called for a reversal of course by the administration.

American Hospital Association stated that mandating the disclosure of negotiated rates between insurers and hospitals is a wrong approach. This would limit the choices available to patients in the private market and fuel anticompetitive behavior among commercial health insurers in a highly concentrated insurance industry.

Stocks Rise

Nevertheless, the final rules got a different reaction from the same players that were initially against them. Stocks of hospital and insurers players rose on doubts related to how the rules would be enforced. Also, the rules were less strict than anticipated. For instance, a maximum fine of $300 per day for failing to provide adequate price transparency by a hospital is perceived as low.

Also, a rule encouraging shopping for low-cost insurance is likely to be a positive for insurers. This might lead people to shop at lower prices, thus reducing the cost for insurers and adding to their bottom line.

Shares of health insurers UnitedHealth Group Inc. (UNH - Free Report) , Anthem Inc. (ANTM - Free Report) , Humana Inc. (HUM - Free Report) and Centene Corp. (CNC - Free Report) gained 5.3%, 5.6%, 5.5% and 5.3%, respectively. Hospital companies Tenet Healthcare Corp. (THC - Free Report) and HCA Healthcare Inc. (HCA - Free Report) , Universal Health Services, Inc. (UHS - Free Report) rose 3.6%, 2.6% and 2.2%, respectively.

Year to date, the Zacks Health Insurance industry and the Hospital industry have risen 9.9% and 14.5%, respectively, compared with the  Zacks S&P 500 composite’s gain of 23.3%.

Among the stocks mentioned above, HCA Healthcare and Tenet Healthcare carry 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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