If you own shares in pharmacy benefit managers like CVS (NYSE:CVS), you might want to think twice about the January 31 news about drug-plan rebates before jumping to sell your CVS stock.
The Department of Health and Human Services (HHS) is proposing the elimination of drug-plan rebates, what some refer to as “kickbacks” to the middlemen (pharmacy benefit managers), and that’s putting a crimp in PBM share prices.
“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.
Good News for Consumers?
The good news for consumers is that rebates would not be considered illegal kickbacks by the federal government if they went directly to patients or were part of a fixed-fee service arrangement between the PBM and drug companies.
As a Canadian viewing the machinations of the U.S. healthcare system from afar, I see this as a good thing, and so, apparently, does President Trump who feels rebates are the cause of high drug prices. Naturally, PBMs counter that the drug companies are solely responsible for this situation.
It sounds a lot like the blame game for the recent government shutdown. But I digress.
From my perspective, any proposal or idea surrounding healthcare that can make it cheaper for the end user is a good one. CVS shareholders shouldn’t fear the bogeyman. This proposal is simply one move of hundreds that have to take place if America wants to fix a broken system.
And before you go all anti-Canadian on me, our healthcare system isn’t perfect either. Here in Nova Scotia, I can’t get a family physician — I moved from Toronto to Halifax a year ago — because there’s a 56,000 person waiting list to get one.
It is worth noting however, that this proposal faces significant push back — and not just from insurance companies. Congressional Democrats have pointed out that the proposed rule does nothing to require the drug companies to lower prices. Senator Ron Wyden of Oregon, Senior Democrat on the Finance Committee, said that the rule should go further and “force drug companies to lower their list prices to fully account for the removal of rebates, rather than pocket the difference as a windfall.”
Other members of Congress have pointed out that Medicare beneficiaries will see premiums and out-of-pocket costs go up as a result of this rule.
Speaker Nancy Pelosi has released a statement reiterating these points.
So if you agree with the Democrats…that’s still good news for CVS stock.
An Interesting Solution
I happened to read a January 31 article by veteran Washington Post business columnist Steven Pearlstein that was very interesting, but not for the reason he might think, or you for that matter if you read it.
The headline: CVS bought your local drugstore, mail-order pharmacy and health insurer. What’s next, your hospital?
Now, to be clear, Pearlstein’s point of the story is that CVS’s apparent anti-competitive practices are bad for capitalism and should be stamped out by the federal government, both Democrats and Republicans. On that, he’s spot-on. Governments are meant to protect the little guy, not the billionaires of the world.
Which got me to thinking about his headline.
As the current healthcare system is currently organized, a move by CVS to acquire hospitals and large medical practices in an effort to create an end-to-end, vertically-integrated solution would likely meet with massive resistance from all kinds of special interests; consumers would probably worry about even higher healthcare costs, something Pearlstein discusses in his piece.
Here in Canada, forces are at work to provide greater coverage by the federal and provincial governments for prescription drugs, primarily handled through private insurance. One in ten Canadians can’t pay for prescription drugs because they don’t have insurance and can’t afford them out of pocket. While the private insurers naturally would fight the introduction of a universal system of coverage, I believe that day will come because Canadians have long been fans of its public healthcare system.
The point I’m trying to make is that Canadians likely wouldn’t oppose a vertically integrated healthcare system that starts at the drug store all the way to palliative care at the end of one’s life; if the appropriate regulatory oversight was in place to control costs of such a system.
Canada’s not anywhere near that point, which is most certainly music to the ears of many large Canadian businesses including Loblaw Companies (OTCMKTS:LBLCF), which owns Shoppers Drug Mart, Canada’s largest pharmacy.
The End Game for CVS Stock
Howard Schultz, the former CEO of Starbucks (NASDAQ:SBUX), is thinking about running for President as an independent. Some like it. Some don’t.
In an interview on CBS This Morning, he called Kamala Harris’ idea to provide universal healthcare coverage, thereby eliminating the need for insurance companies, “not American.”
As a big fan of Schultz’s, I was disappointed to hear that he was against Harris’ plan because of all the insurance-industry jobs that would be lost.
What Schultz forgets is that many of those jobs would move over to federal and state organizations handling the comprehensive government-run insurance. Maybe there would be job losses? But like the synergies and savings companies say a merger will generate, but never do, the job losses, in my opinion, would likely be far less than estimated.
For CVS, whatever happens in the next 5-10 years on the healthcare front, it’s going to get paid. You can be sure of that. If you own CVS stock, I wouldn’t get too concerned about the latest shot across its bow. Long term, it shouldn’t affect the CVS stock price.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
