Bipartisan legislation targeting pharmacy benefit managers (PBMs) introduced in the House and Senate could cut CVS Health (CVS) operating earnings in half, Deutsche Bank analyst George Hill wrote in a Thursday note. CVS stock slumped to its lowest level since early 2013. UnitedHealth (UNH) and Cigna (CI), which also own major PBMs, were also lower.

PBMs are the middlemen tasked by health insurers to manage prescription benefits, including what medicines are covered for any diagnosis and what price customers pay, which may vary depending on whether plan members get their prescriptions filled at preferred pharmacies.

PBM Reform 'Widely Supported'

New legislation introduced Wednesday by Sens. Elizabeth Warren, D-Mass., and Josh Hawley, R-Mo., would force health insurers to divest their pharmacy businesses within three years. Companion legislation was introduced in the House by Reps. Jake Auchincloss, D-Mass., and Diana Harshbarger, R-Tenn.

"As a life-long pharmacist, I know first-hand how unchecked PBM consolidation and vertical integration have allowed these shadowy middlemen to self-deal and manipulate the system in ways that are driving up drug costs, limiting patient choices, and putting the financial screws to independent community pharmacies," Harshbarger said in a joint news release.

Hill wrote that "PBM reform is clearly widely supported by both Democrats and Republicans," who are trying to lay the groundwork for passage next year. However, he added that there are many uncertainties about the bill, including its legality.

Rainstorm For Health Insurance Stocks

The recent rout in managed-care stocks began on Dec. 5, the day after the assassination of UnitedHealthcare CEO Brian Thompson in midtown Manhattan unleashed a torrent of online criticism of health insurance industry practices. "Sentiment is as bad as it's ever been" toward managed-care industry stocks, Hill wrote, in a note titled "Where It Never Stops Raining."

Sentiment turned almost overnight. CVS stock had surged 11% and UNH 5% on Nov. 6, as investors bet that the Republican electoral sweep would mean lighter regulation for the group. The reality looks a lot different five weeks later. "Investors are now forced to contemplate multiple regulatory or legislative headwinds in both the core MCO (managed care organization) and PBM spaces," Hill wrote. On top of that, Elon Musk's Department of Government Efficiency program will likely target health care spending as a source of budget savings.

The new legislation, cleverly named the Patients Before Monopolies (PBM) Act, would likely force CVS to split its retail pharmacy business, as well as its mail and specialty pharmacy services, from its Caremark PBM. "We estimate CVS could lose over 50% of its consolidated operating earnings," Hill wrote.

The risk is high for Cigna, as well, with the potential loss of its mail and specialty business that contributes 40% of operating earnings, Hill wrote. The risk to UNH earnings "is not material," amounting to less than $200 million of $30 billion in operating earnings.

CVS, UNH, CI Stock Action

CVS stock fell 2.6% to 50.42 on Thursday afternoon, hitting lows not seen since February 2013. Cigna lost 2.5% to a 52-week low. UNH stock fell 2.3% to a five-month low. All three stocks lost more than 5% on Wednesday, as the legislation was introduced. UNH has fallen 14.7% this month, Cigna has shed 15.1% and CVS 15.7%.

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