Insurance Companies Start To Bring PBM In-house: CVS Health’s PBM Business Could Be Under Threat

+13.66%
Upside
77.57
Market
88.17
Trefis
CVS: CVS Health logo
CVS
CVS Health

There is abundant M&A in the healthcare sector. Be it health insurance providers, pharmacy benefit managers or drug retailers, there has been consolidation, both horizontal and vertical, in this sector. Usually, such widespread interest in consolidation is seen in rather mature industries where growth rates are slowing down towards a (lower) long-term rate. But, the case is different with the healthcare sector, specifically in pharmacy benefit management.

More than 30 million people are expected to come under insurance coverage, which will increase access to healthcare and lead to a higher number prescriptions filled. Also, because of an aging population, overall spending is likely to go up and will further boost healthcare spending. While these factors will only drive revenues upward for pharmacy benefit managers, steps taken by the government to control expenditure have been eating into their profits. This has driven healthcare companies to merge with each other, which, we believe, could pose new questions for CVS Health (NYSE:CVS).

Recently, Aetna, an insurance company, from which CVS gets about half of its PBM business, decided to buy itself a pharmacy benefit manager. Losing a contract from Aetna could have a significant negative impact on CVS, especially if other insurance companies follow suit. Below, we will look into how things have changed in the PBM market and what CVS has done to diversify.

Relevant Articles
  1. Should You Pick CVS Stock At $75 After A 6% Fall This Year?
  2. Is CVS Health Stock Undervalued At $70?
  3. Will CVS Health Stock Recover To Its Pre-Inflation Shock Highs of $110?
  4. Higher Costs To Weigh On CVS Health’s Q2?
  5. Should You Buy CVS Stock At $70?
  6. Will CVS Stock Rise Post Q1?

View our detailed analysis for CVS Health

PBM Market Landscape After Consolidation

Earlier this year, the third largest PBM, UnitedHealth Group (NYSE:UNH), acquired Catamaran Corporation (NASDAQ:CTRX), the  fourth largest PBM [1], increasing the concentration in this market. Together, these companies will have a market share of 22% (share by prescriptions) and the number of prescriptions managed by their PBM will increase from about 600 million to a billion prescriptions. This brings it very close to CVS, while Express Scripts is still comfortably ahead in the race.

PBM

As cost of acquiring drugs decreases with scale, larger PBMs will be able to pass on more benefits to consumers, resulting in more consumer friendly insurance plans. This is likely to translate into more business from groups that pay for drugs (usually insurance companies or corporations) and thus a higher share in incremental market revenues.

CVS Health’s Contract With Aetna Might Not Be Extended

Aetna, a leading insurance company, currently has a long-term contract with CVS for managing prescriptions from its plan members, which amounts to more than 600 million prescriptions. [2] The company, however, decided to acquire Humana for about $37 billion (pending an antitrust review), which will add a PBM services arm to Aetna. It would no longer have to depend on CVS Health to manage those prescriptions, if it can do it in-house with the help of Humana. Not only will Aetna save on expenses by bringing prescription management under its own roof, but will also make Humana’s business much stronger, with more prescriptions to manage.

It will be a big blow to CVS if Aetna does not renew its contract, which amounts to a half of all the prescriptions that CVS manages. A scenario where other insurance companies replicate Aetna’s model of bringing PBM in-house cannot be ruled out. Such a situation could be disastrous for CVS, especially during a period when competitors are growing in scale.

CVS’ Recent Deals Diversify Its Business Away From PBM

CVS seems to be have already taken a few steps to diversify itself away from PBM services. Recently, it acquired all of Target’s pharmacy stores to become the largest pharmacy network in the US, overtaking Walgreens. It also acquired Omnicare to extend reach to the senior patient segment as well as to strengthen its specialty pharmacy capabilities. This will reduce the share of profits that the company earns from PBM and also the exposure to risks involved in the business. Nevertheless, PBM will remain to be a vital part of CVS and not much can be done, if clients (insurance companies) learn to don’t need it to fulfill their needs anymore.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Other Sources: Pharmacy Benefit Management Institute

Notes:
  1. UnitedHealth Expands PBM Footprint With Catamaran Acquisition []
  2. Aetna-Humana Investor Presentation []