CVS Hears Trump, But Don't Count on Lower Drug Prices

(Bloomberg Opinion) -- CVS Health Corp. appears to be tired of waiting for the government to impose changes to its business model.

The company announced a new pricing model for its pharmacy benefit management services Wednesday morning. It will pass on 100 percent of discounts from drugmakers to clients that choose this plan and guarantee a certain net cost for prescriptions. The plan pre-empts possible Trump administration regulation and may assuage industry critics. 

This is arguably a positive shift toward transparency from a big benefit manager and could represent an opportunity to lower spending. But there’s a real chance this won’t change the drug-pricing status quo all that much. 

The White House has been an active critic of PBMs, which negotiate drug discounts on behalf of employers and health plans, arguing that they have distorted the drug-pricing system.

Drugmakers pay rebates than can amount to more than 50 percent of a drug’s sticker price to secure favorable coverage on PBM drug lists, and critics contend that firms like CVS keep an excessive slice of those undisclosed payments. The administration has been working on a rule that could end that practice. 

This isn’t the first pre-emptive shift by the industry. In November, giant Express Scripts Holding Co. announced a drug list that favors drugs with lower sticker prices, and it is offering a separate plan with fewer markups to certain clients. That list includes just a few drugs; this CVS plan will cover all medicines for all commercial clients. 

Instead of retaining some portion of rebates as compensation, CVS will pass through every cent to employers who choose this model. It’s not as if CVS won’t make money some other way. Many employers may prefer the old model unless the administration follows through on its regulatory threats.

Price predictability and transparency are great; so is not having to send a big extra check to a PBM.

The administration is particularly focused on the fact that drugmaker discounts don’t always make their way to patients, especially those with high-deductible plans. This plan gives employers the option to pass rebates directly to consumers. They will still have no obligation to do so, and many employers like being able to use rebate checks from PBMs as they wish. 

CVS will take on the risk for price increases and shifts in prescription under this new model. This potentially provides CVS an extra incentive to favor less expensive medicines instead of pushing patients toward those that provide the biggest rebates. 

But the impact of that shift will depend on how many clients adopt this new model and on the structure of the contracts they negotiate with CVS. And CVS is unlikely to take on risk for free.

This pricing model will be a good fit for a post-rebate world if the Trump administration decides to make changes, and it’s smart of CVS to prepare. Before anyone gets too excited, though, they need to wait to see if there’s actually a tangible impact on drug spending or PBM margins at CVS. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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