(Chris Devlin) #1

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FORTUNE.COM // JUNE.1.19


already soared to around 90%. Drugstores
are also suffering from a shift to “specialty”
drugs that cost $10,000-plus a year, treat
such complex diseases as rheumatoid ar-
thritis and hepatitis C, and are typically dis-
pensed at separate pharmacies or by mail.
But there are also significant changes
happening in the PBM, or pharmacy benefit
manager, world. And it’s a world where
CVS is a major player, thanks to its 2007
acquisition of Caremark, which has grown
fast under CVS’s ownership. Since 2012,
Caremark’s operating profits jumped by
75% to $4.7 billion, and consulting firm
Grand View Research predicts that the
PBM industry will double in size to $750
billion in revenues by 2026.
But Caremark and the PBM industry
face a major threat that could undermine
that forecast: proposed regulations that
would limit what they do best, hold down
drug prices. Caremark manages prescrip-
tion drug plans for insurers and HMOs
that pay for the drugs dispensed by phar-
macies. So, in effect, Caremark tortures its
own CVS drugstores, as well as the likes of
Walgreens, by directing the lion’s share of
their insurers’ members to the chains that
accept the lowest reimbursements.
Caremark has been extremely effective
in driving deep discounts for its sponsors,
a group that encompasses the premerger
Aetna and dozens of other big insurers
and HMOs, thereby putting pressure on
CVS’s retail margins. Here’s how it works:
Caremark establishes “formularies,” or
lists of preferred medications based on
cost, that your health plan agrees to
cover. The formularies guide physicians,
nurses, and hospitals to prescribe—and
patients to request—the least expensive
drugs in any category shown to be medi-
cally equivalent. CVS, for example, always
substitutes new generics identical to
branded names when they become avail-
able. The PBMs pit those me-too drugs
against one another, choosing the one
that offers the lowest net price.
In the past three years, CVS has secured
around $140 billion in rebates and held
net branded drug price increases in the
low single digits by wresting these bar-
gains. Last year it replaced Sanofi’s super-

hood clinics. The new CVS is focusing on where the money is:
managing chronic conditions. Between 50% and 60% of all adults
suffer from one or more of the top five: diabetes, hypertension,
cardiac disease, depression, and asthma. Those conditions account
for 80% of America’s $3.5 trillion in annual health care spending.
The new model’s Rx is to hand Aetna’s data on every detail of its
members’ health—including hospitalizations, lab tests, and doc-
tors’ diagnoses—to the pharmacists and wellness specialists who
encounter those folks in person far more often than anyone else in
their health care orbit. Aetna’s analytics, deploying artificial intel-
ligence, also tell the HealthHUBs’ front line who, from genetics
and medical history, is more likely to contract the conditions. “The
average adult visits the doctor 1.6 times a year,” says Merlo. “People
pick up prescriptions a lot more often than they see a physician.”
Still, CVS must proceed cautiously to avoid either crossing legal
boundaries governing consumer privacy or provoking customers’
perception that it knows too much about them. A thicket of state
and local laws mandate that only employees directly involved in
providing or assessing patient care can view medical histories—
meaning marketing teams at Aetna can’t review prescription
histories from CVS. Regulations also limit who is able to prescribe
and perform tests, and restrict data-sharing for HIV and mental
health patients. Privacy advocates are already raising concerns
about mixing insurance and retail histories. “It’s a way to leverage
more revenue from patients by steering them to their own more
expensive pharmacies because CVS will know everything about
them,” says Dr. Deborah Peel, a psychiatrist who is president of the
advocacy group Patient Privacy Rights.
It’s clear there are efficiencies to be gained from bringing many
of those primary-care functions to the local drugstore. But Merlo
has another, bigger idea: He wants insurers and HMOs to pay CVS
to keep people healthy.


I


N THE PHARMACY BUSINESS, no mechanism now exists
for sharing savings,” says Kevin Hourican, chief of the
$83 billion retail pharmacy business at CVS. The com-
pany’s game plan to change that? “We’ll do it internally
with Aetna to prove we can do it ourselves, then bring it to the
other big insurers.” Hourican notes that a quarter of the 7 million
hospital readmissions each year are preventable, and that most are
caused by patients who either don’t take their chronic-care medi-
cations or take them incorrectly. The return visits, costing $14,000
on average, could be sharply reduced through the type of counsel-
ing offered at the HealthHUBs. “If I can save an insurer $10,000
by preventing Ms. Jones from going back to the hospital, I want to
share x percent of the savings,” says Hourican.
That’s key, because an important part of CVS’s business is in
decline: reimbursements. “The trend from the plans is, ‘Last year we
paid you $10—next year we’ll pay you $9,’ ” says Hourican. Result:
unremitting pressures on margins. That, in turn, is due to a conver-
gence of factors. New generic drugs are typically reimbursed at three
times the rate of branded drugs. But the flow of generics has slowed
in recent years, in part because their share of total prescriptions has


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