Cigna Doesn't Expect Big Blow From Trump's Drug-Rebate Overhaul

(Bloomberg) -- A plan unveiled by the Trump administration to lower drug costs by banning some payments to middlemen could alter the way prescription medications are bought and sold, but some companies don’t expect big changes for now.

Cigna Corp. Chief Executive Officer David Cordani said the Trump proposal won’t affect the health insurer’s newly acquired pharmacy-benefits business.

Even if rebates were to disappear broadly, Cordani said the Trump plan wouldn’t affect Cigna’s profit margins, as the company already offers a variety of payment models for its health plan and employer clients. The business “is not oriented” around whether rebates stay or go, he said.

“We are not sitting in a situation where we are trying to preserve the status quo in any aspect of our business,” Cordani said in an interview.

Nevertheless, regulators say that changing the government’s stance will eventually lead to changes in the broader health-care marketplace. President Donald Trump’s top health official said he thinks that private health plans will follow the government’s lead.

“We believe it will change the course of conduct in the commercial space,” Health and Human Services Secretary Alex Azar said at an event in Washington on Friday.

Sliding Shares

Cigna shares declined after the health insurer forecast weaker-than-expected earnings for 2019. The company offered the outlook in its first earnings report since closing its $68 billion purchase of pharmacy-benefits manager Express Scripts in December.

Shares were down about 1.9 percent in New York at 11:24 a.m., paring some earlier losses.

The Express Scripts deal gave Cigna a large in-house manager of drug plans to rival similar businesses run by UnitedHealth Group Inc. and CVS Health Corp., which has bought health insurer Aetna Inc.

By owning a division that bargains with drugmakers on prices, insurers hope to hold down their costs. PBMs negotiate discounts on prescription drugs in exchange for placing medications on their lists of approved therapies for plan members. But critics say that the savings aren’t always shared with patients.

Trump administration officials targeted the rebates PBMs collect from drug manufacturers. Azar called them “a hidden system of kickbacks to middlemen” in announcing a plan to ban them from federal health programs late Thursday.

The proposal would rein in ten of billions of dollars in rebates that drugmakers pay to PBMs who manage Medicare and Medicaid prescription-drug plans. The move stands to upend how a large part of the prescription-drug market functions.

The changes are “potentially devastating to the current pharma ecosystem,” said Eric Coldwell, an analyst with Baird Equity Research. “The U.S. health-care system is a sand castle and the tide is coming in.”

Some of Cigna’s PBM rivals have been moving away from relying on rebates from drugmakers.

UnitedHealth Group’s OptumRx unit planned to begin passing rebates directly to customers at the point of sale this year, company executives have said. The move was expected to affect 9 million members, saving each eligible member about $150 annually, OptumRx CEO John Prince said on an earnings call in November.

An OptumRx spokesman didn’t immediately respond to a question about how the proposed rebate rule would affect the business.

Health insurer Anthem Inc. is terminating its contract with Express Scripts in March after a high-profile feud over drug fees. To replace Express Scripts, Anthem is building its own PBM, has laid out a strategy that doesn’t rely on rebates.

“We’re not building this based on a rebate model, but we are building it based on a net lowest cost value model,” Anthem CEO Gail Boudreaux told analysts in July. “We want to ensure that everything that gets implemented really does result in lower cost for consumers.”

Cordani said Cigna’s Express Scripts unit would likewise be resilient to the federal changes.

“The proposed rebate rule will not have a meaningful impact on our growth and earnings trajectory,” he said on a call with analysts. Cordani said the proposal applies to Medicare Advantage and Medicare Part D drug plans, not commercial drug plans purchased by private employers and individuals.

Shared Rebates

Cordani said about half of all Express Scripts clients select models in which rebates are passed through to customers.

Earlier, Cigna offered a tepid view on its profit expectations for the coming year. The Bloomfield, Connecticut-based company projected 2019 adjusted operating earnings per share of $16 to $16.50, trailing the average Wall Street estimate of $16.57. Cigna posted fourth-quarter results that were somewhat stronger than forecast.

The Trump proposal on rebates isn’t final and will be subject to a 60-day comment period.

Pharmacy-benefit managers have blamed drugmakers for high prescription costs. CVS said in a statement Thursday that the companies “are the last line of defense for the consumer.” The industry trade group, the Pharmaceutical Care Management Association, said that it was reviewing the proposed rule.

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