A seismic shakeup in the realm of pharmacy benefits manager (PBM) services, declared by California Blue Shield, reverberated through the healthcare industry on Thursday, triggering a steep decline in various healthcare stocks. While the initial response from the market was one of apprehension, analysts contend that the magnitude of the announcement’s impact might be less dire than it seemed.
The industry giants, CVS (CVS) and Cigna (CI), both holding substantial portions of Blues contracts, bore the brunt of the disruption, witnessing market capitalization losses of $7 billion and $5 billion, respectively, on Thursday. Simultaneously, stocks of prominent drug distributors, including McKesson (MCK), AmerisourceBergen (ABC), and Cardinal Health (CAH), experienced declines exceeding 2%.
Despite the market’s knee-jerk reaction, experts argue that the unveiled changes might not hold as much consequence as initially assumed. UBS analyst Kevin Caliendo remarked, “Thursday was a unique ‘perfect storm’ of news that likely had a bigger impact on sentiment than it will in setting precedent,” labeling the Thursday selloff as “nonsensical.”
In a decisive move, the Blues insurer, a steward for approximately 5 million California members and boasting a staggering $24 billion in yearly revenue, opted to dismantle its PBM service, allocating segments to disruptors such as Mark Cuban’s Cost Plus Drugs and e-commerce titan Amazon (AMZN). As per Blue Shield’s assertions, this strategic shift is projected to yield annual medication savings of $500 million.
Under this novel arrangement, Cost Plus will oversee generics, while Amazon will venture into the domain of mail-order prescriptions. Abarca Health, headquartered in Miami, will oversee claims, while Prime Therapeutics, a PBM jointly owned by 19 blues plans and featuring notable partners like Walgreens (WBA) and Cigna’s Express Scripts, will spearhead drug pricing negotiations.
This transformation will commence in 2024 when Blue Shield’s longstanding contract with CVS, which has persisted since 2021, reaches its culmination. Notably, CVS will retain its foothold in the most lucrative sector, specializing in specialty pharmacy. This factor, analysts assert, is pivotal in delineating why the announcement is not an unmitigated setback for the primary PBMs – CVS, Cigna, and United Health Group (UNH).
Lisa Gill, an analyst at JPMorgan, acknowledged the shadow of Amazon’s influence but contended that the announcement accentuates the value of legacy PBMs and the limitations inherent in newer models. Gill highlighted that generics account for only 15% of drug spending despite their higher volume, and specialty drugs continue to surge in cost, proving challenging for significant employers.
Furthermore, concerns about Amazon’s share of the new arrangement are dampened by the fact that mail-order prescriptions have yet to supersede in-person pickups, even with the observed spike during the pandemic.
This isn’t the first instance of an insurer embarking on such a path. Goldman Sachs analysts underscored the mixed historical track record of health plans in segregating or in-sourcing PBM functions, indicating that this move by a prominent health plan will sustain attention on PBM economics and potential legislative changes.
Craig Garthwaite, a healthcare economist and director of the Program on Healthcare at Northwestern University’s Kellogg School, raised skepticism about Blue Shield’s projected $500 million annual savings, casting doubt on the notion that PBMs were reaping excessive profits. He emphasized that CVS’s retention of the specialty pharmacy sector underscores the crucial role played by the Big 3 PBMs.
The announcement has elicited enthusiasm among healthcare industry observers, as it sets a precedent that other Blues and employer plans might emulate. UBS’s Caliendo expressed agreement with the perceived riskiness of the consortium hired by Blue Shield, but also highlighted the possibility of an evolving trend towards ‘unbundling’ PBM contracting.
In the wake of the ground-shaking transformation in pharmacy benefits manager (PBM) services announced by California Blue Shield, which sent shockwaves across the healthcare industry and prompted a significant slump in healthcare stocks on Thursday, the prevailing sentiment of trepidation in the market seems to be giving way to a more measured perspective.
As the industry grapples with the aftershocks of this significant development, it remains to be seen how these changes will shape the landscape of pharmacy benefits management in the coming years.
Source: Yahoo Finance
