![Mark Cuban’s Cost Plus Drugs partners with Blue Shield Mark Cuban’s Cost Plus Drugs partners with Blue Shield](https://i0.wp.com/content.fortune.com/wp-content/uploads/2023/08/GettyImages-1247280687-e1692315895774.jpg?fit=%2C&ssl=1)
Shares of CVS Health plummeted after Blue Shield of California, one of the largest health insurers in the state, said it would abandon the company’s Caremark unit as its primary pharmacy benefits manager.
The not-for-profit insurer said Thursday it expects to save as much as $500 million a year by switching to a string of companies including Amazon.com Inc and billionaire Mark Cuban. It’s the biggest win yet for newcomers trying to upend the existing prescription benefits system, and if it works, it could provide a blueprint for other insurers and employers to follow.
Paul Markovich, chief executive of Blue Shield of California, said the goal is to change incentives for prescription benefit managers, distributors and pharmacies. “When we sell more and more expensive drugs, they get more revenue and more profit,” he said in an interview. “We just have to start thinking about the system again.”
News of the high-profile experiment sent shares of dominant PBMs sharply lower: CVS shares were down 8.1% through Thursday’s close, the most since October, while rival Cigna Group was down 6.4%.
The Wall Street Journal reported the change earlier.
Blue Shield may face the challenge of replacing one PBM service provider with five vendors, some of which have conflicts of interest. “We doubt the approach is sophisticated enough to be practical, but it’s worth keeping an eye on,” Bloomberg Intelligence analysts Jonathan Palmer and Jordan Dahan said in a note.
The insurer won’t be ditching CVS entirely either, as Caremark will continue to handle more expensive specialty drugs, a lucrative and growing PBM market.
dig newcomers
Companies that provide health benefits have long complained about their lack of visibility into drug costs and charges paid by drug middlemen. The California insurer’s move will test whether it can assemble an alternative supply chain that includes new entrants to the pharma benefits business as well as established suppliers.
Pharmacy benefit managers and pharmacy chains have been spooked by retail giant Amazon’s greater penetration of the drug supply chain, which will offer home drug delivery.Mark Cuban’s cost plus drug company will provide low-cost medicines, and Abarka Health Blue Shield of California said it will process drug claims.
The program will also rely on primary therapyis a pharmacy benefit manager run by the Blue Cross Blue Shield scheme group that negotiates savings with drug manufacturers.
Using the services of several new companies to provide drug benefits could be challenging, but if the regional health insurer succeeds, others could follow, Evercore ISI analysts said.
Some were more skeptical. TD Cowen analyst Charles Rhyee wrote that the sell-off “overstated” the impact of the decision, adding: “We don’t think the BSCA decision will have a long-term impact on the PBM model.”
CVS confirmed its earnings guidance for 2023 and said some of the contract losses would have an “immaterial impact” on the company’s long-term outlook.
Broken Incentives
Blue Shield of California, which spends about $4 billion a year on drugs, estimates it could save 10% to 15% through the new model, Markovich said. Some of the savings will come from removing incentives that favor high-cost drugs over cheaper alternatives.
For example, he said insurers had a hard time getting CVS to cover a less expensive version of a prostate cancer drug called abiraterone, which cuts prices From ~$3,000 to $160. “They refused initially and continued to refuse” for several months, he said. “It’s like pulling teeth to make this happen.”
CVS gets generics through existing joint ventures, and the drugs must meet certain criteria, company representatives said in an email. Some health plans that invested in a new generic drug maker called CivicaScript are trying to distribute the products through outside pharmacies, and CVS is working with them to do that, the representative said. Blue Shield of California is participating in CivicaScript.
Markovich said the insurer’s 7,500 employees will be the first to see the new arrangement in 2024, and it will be available to some customers who may be interested. The change will take effect across the entire spectrum of commercial and government health plans through 2025.
profit impact
Evercore analysts estimate the loss could shave 2 to 6 cents off CVS’ earnings per share in 2025. About half of the insurer’s annual drug spend is likely to be retained by CVS in its specialty pharma business, they said.
“We look forward to providing care to Blue Shield of California members who require complex specialty medications, as we have for nearly two decades,” a CVS spokesperson said in an email.
Markovich said CVS could be a strong contender if Blue Shield wants to continue with a traditional PBM, but said the company’s goal is to make broader changes.
“This problem is a systemic problem,” he said. “All pharmacy benefit managers work in this system in this way, they have no financial interest in changing it.”
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