In a startling move that sent shockwaves through the healthcare industry, California Blue Shield announced a major shake-up in its pharmacy benefits manager (PBM) services on Thursday. This decision led to a significant drop in the stocks of prominent healthcare companies, including CVS and Cigna, who saw losses of $7 billion and $5 billion in market capitalization, respectively. Additionally, drug distributor giants McKesson, AmerisourceBergen, and Cardinal Health each experienced a more than 2% decline in their shares.
However, analysts are urging caution and emphasizing that the initial market reaction might have been overly pessimistic. UBS analyst Kevin Caliendo labeled Thursday’s sell-off as “nonsensical” and pointed out that the news might have had a more pronounced impact on investor sentiment than it will on actual industry precedent.
The sprawling Blues insurer, responsible for a sizable membership of around 5 million individuals in California and boasting a robust annual revenue of $24 billion, unveiled its plans to unbundle its PBM service. This entails allocating portions of its PBM operations to disruptors like Mark Cuban’s Cost Plus Drugs and the tech titan Amazon. The company predicts that this strategic shift will lead to annual savings of $500 million on medication expenses.
Under the new arrangement, Cost Plus Drugs will be tasked with overseeing generics, while Amazon will manage the mail-order pharmacy segment. Miami-based Abarca Health will handle claims processing, and Prime Therapeutics, a PBM co-owned by 19 Blues plans and featuring partners such as Walgreens and Cigna’s Express Scripts, will spearhead drug pricing negotiations.
The transformation is slated to take effect in 2024, following the expiration of Blue Shield’s existing contract with CVS, a partnership in place since 2021. Notably, CVS will continue to maintain control over the highly lucrative specialty pharmacy domain. Analysts emphasize that this retention of the most profitable segment is a key factor in tempering the potential negative impact of the announcement on major PBMs like CVS, Cigna, and United Health Group.
JPMorgan analyst Lisa Gill highlighted the potential influence of Amazon’s entry into the arena, indicating that while it might dampen sentiment towards existing PBMs, the decision of California Blue Shield underscores the enduring value of legacy PBM models. Gill noted that generics, although constituting a larger volume of drug spend, typically account for only 15% of total expenditures. She also highlighted the escalating costs of specialty drugs, exemplified by the recent surge in demand for branded weight loss medications like Novo Nordisk’s Wegovy and Ozempic, and Eli Lilly’s Mounjaro.
Amidst the industry buzz, concerns have been raised about the impact of the new arrangement on mail-order prescriptions versus in-person pickups, given the surge in mail-order demand during the pandemic. Analysts, however, suggest that Amazon’s share of the arrangement may not significantly alter the existing landscape.
The move by California Blue Shield isn’t the first of its kind, as health plans have previously attempted to restructure or internalize PBM functions. Goldman Sachs analysts indicated that such decisions prompt closer examination of PBM economics and legislative changes, but cautioned against disproportionate stock reactions relative to the actual implications.
Craig Garthwaite, a health economist from Northwestern University, questioned the estimated $500 million annual savings, suggesting that the figure might be an overestimation. He also argued that the retention of the specialty pharmacy business by CVS challenges the notion that PBMs are merely profiteering entities, highlighting their meaningful contributions to the healthcare ecosystem.
This transformation has garnered the attention of industry observers who foresee the possibility of other Blues and employer plans adopting similar strategies. UBS’s Caliendo acknowledged the perceived risk associated with Blue Shield’s chosen consortium, but also emphasized the potential for an evolving trend in PBM contracting, potentially leading to decreased overall profits from purchasing, rebates, and couponing. While the market’s initial reaction was one of turbulence, analysts and experts remain watchful, anticipating the unfolding implications of this pivotal shift in the PBM landscape.
Source: Yahoo News
