A disruption to the healthcare industry might sound like a red flag, but it’s been a long time coming. The Pharmacy Benefit Managers (PBM) are finally starting to get hit where it hurts, but it’s not by the Senate.
The first significant blow to the largest PBM, CVS, came from recent competitors Amazon and a Startup. As the ethically applaudable event continues to unfold, what impact has it had on CVS stock, and how will the healthcare industry continue to unfold?
What is CVS?
To understand what could happen, the basis for what is going on must first be established.
What is CVS? CVS (Consumer Value Store) provides healthcare and retail pharmacy services nationally.
What makes them a PBM? CVS is the parent company of Caremark, the most prominent Pharmacy Benefit Manager, that handles prescription drugs for insurance companies, employers, and organizations.
What should I know about PBMs? PBMs have been criticized for significantly raising the prices of prescription drugs through rebates and other means.
What Happened to CVS? New players in the pharmaceutical world inspired Blue Shield of California to drop CVS for more convenient, wallet-friendly, and transparent options.
What does the Data say?
To see what happened, let’s look at the activity of the three largest Pharmacy Benefit Managers, CVS, Cigna, and UnitedHealth Group.
Below is the graph backtesting CVS, CI, and UNG over a 10-year period. It clearly shows some impressive numbers on the part of CI and UNG. Despite the backlash, it makes sense why PBMs keep doing what they’re doing, and it makes them money.
The time graph below shows the success of Cigna and UNG in beating the market. However, CVS had sporadic success with several devastating years.
If you analyze only the last year, the graph below shows CVS declining compared to its fellow PBM companies.
To eliminate confusion, CVS vs. just the S&P 500 is the most obvious indicator of a decline seen below. There is no denying that CVS has struggled over the past year.
What was reported to the SEC? The August 2nd report for Quarter 2 states CVS experienced a total revenues increase of 10.3% (despite its Net income decreasing), an operating income decrease of 30.7% because the company adjusted operating income down by 10.4%, interest expense increased by 17.7%, and EPS dropped by $0.41.
The operating income decrease makes sense because CVS has branched out into newer business ventures to combat competitors and invest in new opportunities in a changing market. At the beginning of the month, after firing over 5,000 employees, CVS announced future plans. Then it struggled more than ever in the stocks last week.
As stated earlier, Blue Shield of California announced a plan to drop CVS, causing the company’s stock to lower by 10%. The new competitors? Amazon and Mark Cuban’s startup, Cost Plus Drugs!
Why the switch? The announcement states, “The current pharmacy care system rewards some stakeholders for selling more drugs at higher costs. Blue Shield is seeking to transform the system into a value-based model that provides members with the medications they need at a more affordable cost.”
While Amazon Pharmacy provides free and quick delivery services, with Cuban’s company reducing prices to a corrupt model, it seems an intelligent approach for the insurance company! The ethical way to provide medicine might have a chance against the current giants dominating the industry.
What was the reply to Blue Shield of California? Released on SEC, CVS states, “The financial impact associated with the partial termination of the Blue Shield of California contract is not expected to have an impact to our previously issued 2023 guidance and is expected to have an immaterial impact on our longer-term outlook. CVS Caremark remains the leading pharmacy benefit manager in the United States, serving more Americans and more health plans today than any of our competitors.”
CVS definitely gave off casual vibes following the report, but the stocks didn’t. The decision shows that insurers are fed up with the Pharmacy Benefit Managers model and are not invincible.
Who knows what the future holds? But Blue Shield of California was CVS’s largest insurer in California. Now, it opens the door for other insurers to do the same, with competitors waiting to step up.
As the Pharmacy Benefit Manager model continues to feel pressure from patients, rising prices, and investigations from the Federal Trade Commission, all the new competitors such as Amazon, Walmart, startups, and consumers are all looking for the moment the topple.
Keep an eye on CVS, Cigna, and UnitedHealth Group, as the leaders of PBM might fear competitors more than ever.