Author Topic: CVS - CVS Health Corporation  (Read 40033 times)

fisch777

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Re: CVS - CVS Health Corporation
« Reply #20 on: November 28, 2016, 08:10:53 AM »
As an anecdote, I just got letter from my PBM (Prime via BCBS) stating that I can no longer use the CVS I've been using for 6 years and must switch all Rx to a "preferred" pharmacy (i.e., in network), which includes a tiny neighborhood pharmacy (zero scale/negotiating power) and, you guessed it, Walgreens.


KCLarkin

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Re: CVS - CVS Health Corporation
« Reply #21 on: November 29, 2016, 10:05:11 AM »
CVS returns fire:
http://www.unitedhealthgroup.com/Newsroom/Articles/Feed/Optum/2016/1129CVSPharmacy.aspx

Looks like this allows OptumRX patients to get their 90-day prescriptions filled at CVS retail pharmacies. On the one hand, this looks to negate the advantage that WBA gained in its own deal with OptumRX. On the other hand, it negates slightly the advantage that CVS Caremark has with it's Maintenance Choice program.

Interesting times...

H/T @bluegrasscap

ABM

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Re: CVS - CVS Health Corporation
« Reply #22 on: November 29, 2016, 10:42:27 PM »
Good points KC. 

I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy. 

CVS in their most recent Q discloses this trend in a muddled way but it is there.  Payors/PBMs are after the spread the retailers earn on the drugs dispensed, especially on generic, which if this catches steam it could be a big challenge for CVS & WBA. 


As MCOs & PBMs have scaled, in the face of runaway growth in drug spend, they are increasingly searching for innovative ways to minimize spend.  We all know about the rise in mail prescription fills that has been successful in recent years.   ESRX is now filling 28% of all scrips by mail.  This bypasses the pharmacy channel and lowers overall costs in the transaction chain for payors and consumers .  Curiously, CVS's Caremark, only fills 18% of its scrips through the mail despite rivaling ESRX in scale. 

There is also the movement to the "90 day" fill but of course even though it is good for Caremark is is bad for CVS retail as it reduces foot traffic that is critical to support the "front store" retail.  The inherent conflict of interests are growing and their counterparts including competitors and customers know this.

Given the scaled customer concentration and bargaining advantage this delivers, WBA may realize that it is futile to resist this trend and is proactively ceding margin to secure exclusive access to these networks which will provide guaranteed traffic levels to its front store operations.  In other words, being a first mover hoping to reap the benefits while CVS is tied up trying to figure out how they can optimize the relationship between their PBM & retail operations to better appease customers.  I do not expect Caremark  to lobby on behalf of clients to follow the emerging trend as it may prove catastrophic for the CVS retail side.  I am aware of the ABC/WBA tieup and this will not happen over night night but it is important to note that ABC is the largest specialty distributor in the game and the supply chain operates largely outside the traditional channels. 

I haven't even touched specialty which we can leave for the next post but there is one more thing worth mentioning.

There is increasing activity by payors/PBMs to buy direct from producers.  This has the potential to disrupt the wholesaler business as they are forced to accept another fee-for-service arrangement.  Put simply, the PBM will buy the drug from Pfizer pay CAH to deliver it to the pharmacy where the pBM will pay the pharmacy a dispensing fee for the service. 

This is not mumbo jumbo as I have heard as much from some of the big players in the ecosystem and they are all trying to protect their profit pool but it is hard when you are up against the Goliaths of the world and battling on a sinking ships of sorts. 

MCK went through this transition in the mid 2000's (on its own volition) after a period flat to falling drug prices causing losses on inventory balances held.  At the time, they decided to shift to a fee-for-service model that while deliver lower overall margins required much less capital investment ultimately driving higher overall capital returns. Unfortunately, CVS has a ball & chain in the way of its brick & mortar retail business and so may not be as flexible as MCK was at the time. 

Btw, the Citi Analyst predicted much of this conundrum back in 2014 as detailed in the WBA initiation report.  Great primer on the retail sector.  I will post it if anyone's interested. 

Bonus read for those that want a helpful primer on pharma supply chain [url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf[/url]
« Last Edit: November 29, 2016, 10:56:29 PM by ABM »

KCLarkin

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Re: CVS - CVS Health Corporation
« Reply #23 on: November 30, 2016, 06:43:04 AM »
I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy.

Thanks for the great details.

The interesting dynamic is that this needs the cooperation of either CVS or Walgreen's. I don't think any PBM can compete without at least one of the national chains.

Walgreen's needs the retail pharmacy margin. So from a Game Theory perspective, Walgreen's was unlikely to blink first.

CVS owns a major PBM so it can be agnostic to whether the profit goes to the PBM or the pharmacy. But it didn't have an incentive to move aggressively.

But with the new "Boots" beauty strategy, Walgreen's has a new strategic option. It can trade pharmacy profit for beauty profit. So the PBM's now have more leverage.

For CVS, the disaster scenario would be both lost market share and compressed margins. This happens if CVS is unable or unwilling to bid aggressively for preferred networks.

The likely outcome is that CVS will respond aggressively. Market share will stabilize and retail pharmacy margins will fall. In this scenario, Walgreen's makes up for lost margin with it's beauty products and CVS compensates with its PBM. The OptumRX deal suggests that CVS plans to fight back.

--
Some more background on the OptumRX deal (h/t @bluegrasscap)
http://www.drugchannels.net/2016/11/cvs-changes-direction-with-surprise.html?m=1
« Last Edit: November 30, 2016, 06:47:51 AM by KCLarkin »

ABM

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Re: CVS - CVS Health Corporation
« Reply #24 on: November 30, 2016, 07:47:33 AM »
I think of WBA as a bit more aggressive in their strategy to play disruptor and may be willing to adapt full fee for service model while wagering that its front store business is strong enough to carry off the business in the US.  I believe CVS is telling us that any compression on retail margins or loss of customer traffic could have an outsized impact on retail segment as the pharmacy is a critical driver of store traffic that generates front store sales. 

On your point about profits just being shifted between segments, I would disagree to an extent as the return profiles are very different in the PBM business vs. the retail given the retails capital intensity. They need a certain level of margin output to support those capital dollars invested in working capital and fixed assets.  If they were to sacrifice margin dollars in lieu of producing them at the PBM I am not sure how positive that can be for overall company capital returns. 

Further, WBA is run by an owner operator with billions at stake while CVS CEO owns a neglible amount of stock. 

Did you guys see the near $200 million open market purchase by WBA CEO a couple of weeks back?

https://www.sec.gov/Archives/edgar/data/1618921/000155468716000006/xslF345X03/primary_doc.xml

I have followed and owned CVS for years but I am quickly becoming a fan of the man that runs WBA. 

KCLarkin

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Re: CVS - CVS Health Corporation
« Reply #25 on: November 30, 2016, 08:38:37 AM »
Quote
I have followed and owned CVS for years but I am quickly becoming a fan of the man that runs WBA.

CVS is a cigar butt investment for me. But WBA is very intriguing too. Pessina is 74. Not as old as Buffett or John Malone but not ideal for a jockey bet.

DooDiligence

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Re: CVS - CVS Health Corporation
« Reply #26 on: December 10, 2016, 04:25:57 AM »
Good points KC. 

I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy. 

CVS in their most recent Q discloses this trend in a muddled way but it is there.  Payors/PBMs are after the spread the retailers earn on the drugs dispensed, especially on generic, which if this catches steam it could be a big challenge for CVS & WBA. 


As MCOs & PBMs have scaled, in the face of runaway growth in drug spend, they are increasingly searching for innovative ways to minimize spend.  We all know about the rise in mail prescription fills that has been successful in recent years.   ESRX is now filling 28% of all scrips by mail.  This bypasses the pharmacy channel and lowers overall costs in the transaction chain for payors and consumers .  Curiously, CVS's Caremark, only fills 18% of its scrips through the mail despite rivaling ESRX in scale. 

There is also the movement to the "90 day" fill but of course even though it is good for Caremark is is bad for CVS retail as it reduces foot traffic that is critical to support the "front store" retail.  The inherent conflict of interests are growing and their counterparts including competitors and customers know this.

Given the scaled customer concentration and bargaining advantage this delivers, WBA may realize that it is futile to resist this trend and is proactively ceding margin to secure exclusive access to these networks which will provide guaranteed traffic levels to its front store operations.  In other words, being a first mover hoping to reap the benefits while CVS is tied up trying to figure out how they can optimize the relationship between their PBM & retail operations to better appease customers.  I do not expect Caremark  to lobby on behalf of clients to follow the emerging trend as it may prove catastrophic for the CVS retail side.  I am aware of the ABC/WBA tieup and this will not happen over night night but it is important to note that ABC is the largest specialty distributor in the game and the supply chain operates largely outside the traditional channels. 

I haven't even touched specialty which we can leave for the next post but there is one more thing worth mentioning.

There is increasing activity by payors/PBMs to buy direct from producers.  This has the potential to disrupt the wholesaler business as they are forced to accept another fee-for-service arrangement.  Put simply, the PBM will buy the drug from Pfizer pay CAH to deliver it to the pharmacy where the pBM will pay the pharmacy a dispensing fee for the service. 

This is not mumbo jumbo as I have heard as much from some of the big players in the ecosystem and they are all trying to protect their profit pool but it is hard when you are up against the Goliaths of the world and battling on a sinking ships of sorts. 

MCK went through this transition in the mid 2000's (on its own volition) after a period flat to falling drug prices causing losses on inventory balances held.  At the time, they decided to shift to a fee-for-service model that while deliver lower overall margins required much less capital investment ultimately driving higher overall capital returns. Unfortunately, CVS has a ball & chain in the way of its brick & mortar retail business and so may not be as flexible as MCK was at the time. 

Btw, the Citi Analyst predicted much of this conundrum back in 2014 as detailed in the WBA initiation report.  Great primer on the retail sector.  I will post it if anyone's interested. 

Bonus read for those that want a helpful primer on pharma supply chain [url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf[/url]

Thanks for the link & the commentary.

Before I read this, I didn't really understand enough about PBM's & the other industry players/payers to confidently choose a company to invest in.

After reading, I understand well enough to know that there's too many moving parts (I'll stick to the upstream end...)

Pharma manufacturers fortunes may wax & wane but survivability seems more assured.
« Last Edit: December 10, 2016, 04:29:03 AM by DooDiligence »
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DooDiligence

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Re: CVS - CVS Health Corporation
« Reply #27 on: January 11, 2017, 06:32:09 AM »
CVS is no longer part of the Blue Cross Blue Shield preferred pharmacy network.

CVS will continue to accept Blue Cross Blue Shield Medicare Part D plans.

CVS says any customer who still has questions should bring their prescription card to their CVS for assistance.
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ABM

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Re: CVS - CVS Health Corporation
« Reply #28 on: January 28, 2017, 02:03:52 PM »
Since my last post, I have learned that CVS is the largest plan provider/sponsor for LIS Medicare Part D enrollees.  These represent 30% of Part D members but about 66% of total Part D spending.  ESRX has a neglible level of Part D members as a plan sponsor. 

This is what the companies refer to as "direct" or when they are not acting as only the PBM.  They are taking some insurance risk on the revenue. 

I raise this point b/c it is becoming clear that the incentive structure for Part D, in its current form, benefits the MCOs/PBMs at the expense of Medicare and the individuals.  The increasing levels of rebates protect profits while simultaneously shifting more of the ultimate drug cost to the individuals and Medicare. 

It is complicated to explain the nuances but you can see Medpac report from June 2015 for more details. See link http://www.medpac.gov/-documents-/reports

Excerpt from 2015 Medpac report
"One commenter pointed out that the rebates sponsors receive from manufacturers for all brand-name drugs dispensed to enrollees who reach Part Dís catastrophic threshold (including rebates in the coverage gap phase) can more than offset plansí 15 percent share of payments for spending that exceeds the Part D catastrophic threshold. Thus, requiring plans to pay a share larger than 15 percent could provide greater incentive for sponsors to negotiate larger rebates with manufacturers or design formularies in ways that encourage greater use of lower cost drugs."

As Part D spends $73B/yr or ~25% of total US net drug spend using tax payer funds, I can see how any shenanigans by the suppliers (e.g. PBM/MCOs) will be leveraged and politicized by opponents to the existing model. 

There is no question that drug companies are raising gross/list prices to offset the higher rebates they must provide network customers (e.g. PBMs).  This allows them to recapture some revenue at the point-of-sale (e.g. retail pharmacy) from the individual as their co-payment/coinsurance is calculated based on the list price and not the net price received by the PBM/MCO.  Further compounding the matter is the shift to higher deductible plans in the commercial market that is forcing individuals to absorb more of this "gross pricing" increases at point-of-sale. 

This is how yesterday's WSJ report cites insulin shots costing Joe from wherever $400 last month and $600 this month in out-of-pocket expense at the pharmacy while at the same time PBMs are promoting drug inflation for their clients tracking the 3% level in 2016.  It is because the PBM only consider the plan spend by their customers and not total drug (which includes what the individuals pay out of pocket). 

Excerpt from Jan 2017 JPM Healthcare Conference
ESRX CEO
"Quite frankly, there is no question in my mind that the reason that our clients today have a 3.9% drug trend is because we exist and we have created that competition in classes where there are multiple agents that could take care of a patient and I'm not going to apologize for that and I know our industry is not going to apologize for that."

Excerpt from CVS investor day Dec 2016
CVS CEO
"One of the hallmarks of this value proposition, it lies in our ability to help clients more effectively manage their pharmacy spend, and we continue to deliver on this goal with our clients realizing only a 3.3% increase in their pharmacy spend through September of this year."


ABM

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Re: CVS - CVS Health Corporation
« Reply #29 on: January 30, 2017, 05:23:45 PM »
Lawsuit filed today against Lilly, Sanofi, and Novo for price collusion on insulin drugs and surprises they name PBM as accessories to the conspiracy but they are not defendants name in the lawsuit.  Worth the read for background on supply chain

https://static01.nyt.com/science/01-30-17_Insulin_Class_Action_Complaint_Hagens_Berman.PDF