The usually business friendly Trump administration is not as amicably positioned for pharmacy benefit managers (PBMs) like CVS Health Corp. (CVS) .
Shares of the pharmacy, retail, and healthcare giant are slumping after its pre-market earnings report provided much weaker guidance than was expected.
A large degree of deceleration was noted in both PBM and long term care in the company's report.
"In Retail/LTC and PBM, we expect our greatest level of year-over-year deterioration in Q1," the company reported, while still holding out hope for pick-up in the latter half of the year.
The pressure on PBM specifically could intensify if proposals from the Department of Health and Human Services (HHS) are enacted.
Reading the Regulation
According to the department's "American Patients First" proposal, released shortly after the State of the Union address earlier this month, it argues for a new "safe harbor" for prescription drug discounts offered directly to patients, as well as fixed fee service arrangements between drug manufacturers and PBMs would be created.
Under the proposed rule, prescription drug rebates, that are estimated to constitute up to 30% of the list price of drugs, may be passed on directly to patients in order to make transactions more transparent and streamlined.
"This proposal has the potential to be the most significant change in how Americans' drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need," HHS Secretary Alex Azar said in a statement announcing the proposal.
The rule would offer prescription drug discounts directly to patients, as well as fixed fee service arrangements between drug manufacturers and PBMs.
If enacted, the deal would crush the preferred drug status offered to drug manufacturers in exchange for kickbacks to PBMs. The "kickback" rebates offered to PBMs provide a significant revenue stream to these providers, like CVS, especially for higher end drugs.
The rule could promote some bipartisan support as well.
Drug pricing has been a major platform for leading Democrats like Representative Elijah Cummings of Maryland and recently announced Democratic presidential candidate Bernie Sanders, though the aforementioned senators have narrowed their focus far more to manufacturers than the Trump administration has.
Erin Taylor, a health economist at the RAND Corporation, told the Pew Trusts that the largest PBMs - [UnitedHealth Group's (UNH) ] OptumRx, [Cigna (CIG) owned] Express Scripts and CVS Caremark, are "practically oligopolists" with power that rivals that of the drug companies.
"They are the elephants going up against the gorillas, because they have so many covered lives," Taylor said in the research report. "The concern has arisen that the PBMs are getting too big a piece of the pie and contributing to high prices."
Considering a PBM like CVS has $47 billion up for renewal in 2019 in its PBM business, a clamp on this income is a key issue to follow in 2019 as the proposal is considered.
Rebuke of Regulation
The proposed rule provoked a strong reaction from CVS CEO Larry Merlo on Wednesday morning.
"We see the rebate rule taking us backwards, not forwards," Merlo told analysts. "A small percentage of seniors may net out favorably...but as many as 70 percent of beneficiaries are going to be worse off."
"We're certainly weighing in during the comment period with our concerns with the rebate rule, but more importantly what we believe the appropriate solutions are to address the root cause," he added.
Still, CFO Eva Boratto said that the company is well positioned to deal with the shifting regulatory environment.
"It is clear that the PBM industry is in the middle of an environmental change given the dialogue around rebate," she acknowledged. "However, it is also clear that the PBM brings tremendous savings and value to the clients we serve. The importance of size, scale and customer relationship will continue to be paramount, and we remain focused on delivering the value our clients expect."
The company has also worked to increase transparency independently, anticipating governmental requirements for the company.
This begins with the creation of a a new PBM contracting model that will maintain guaranteed costs and offer 100% of rebates to customers and seek to reduce costs overall.
Further, executive VP of pharmacy services and supply chain Kevin Hourican was bullish on the Aetna integration's ability to mitigate regulatory and pricing impacts with the scale that Boratto cited.
"By owning a large insurer and owning the largest PBM, we can lead that change by structuring a contracting relationship that if we can lower overall health care costs, we can take some of the burden off the annual reimbursement reform," he noted. "Where that will come from is the last thing I'll say is we can prove through technology and clinical care programs that we can improve medication adherence."
The rule, which would go into effect in 2020 if approved, was not optimistically observed by Merlo in terms of voter acceptance either.
He estimated the total cost of the legislation to the taxpayer at $200 billion over 10 years and would likely lead to many seniors leaving Medicare Part D coverage. He noted that this high cost signifies the proposal is not likely the best solution to bring forward.
As the presidential campaign season picks up and healthcare costs and drug pricing remains the number one issue in the mind of voters according to the Henry J. Kaiser Family Foundation, the progress of the proposal and the pushback from PBMs will be a pivotal issue to follow.