February 21, 2019

Breakingviews: Scale is no easy remedy for CVS price pressures

by Breakingviews.

Scale is no easy remedy for CVS Health’s price pressures. The company slashed its 2019 profit forecast Wednesday in part due to a squeeze on pharmacy reimbursements and slower branded drug-price growth. Investors responded by wiping $7 billion of its market value in early trading. Buying Aetna was supposed to help it cut costs and improve patient outcomes, but that’s harder than banking on healthcare inflation.

In the U.S. healthcare system, nearly all middlemen have historically benefited from rising prices. Drug firms sold medicines and hospitals offered services at inflated list prices. Pharmacy benefit firms and insurers justified their existence by negotiating discounts to these fake prices. Wholesalers could stockpile medicines and sell them after regular annual price increases. And insurers could raise premiums to cover escalating costs. The result was a spiral that made U.S. healthcare spending, and costs, an outlier among large industrialized nations.

CVS’s results show that this cycle is breaking down as governments, voters and companies struggle to afford healthcare. Pharmacies big and small are receiving less for filling prescriptions. Competition is heating up as Amazon.com and Walmart fight to expand their share of the business. Insurers and other payers are fighting harder for each healthcare dollar. Political pressure is making it harder for pharma firms to justify price increases for branded drugs. That means less money to share with pharmacies and CVS’s pharmacy benefit manager.

The company’s $77 billion purchase of health insurer Aetna, which closed in November, may help. The company told analysts they are on track to exceed $750 million in targeted annual savings by 2020. And if CVS can reduce healthcare costs by steering Aetna customers to cheaper in-store clinics, and improve their health by making sure patients take their medicines, that could buff its profit margins.

This won’t be easy though. Mergers often give acquirers a headache. CVS posted a loss in the fourth quarter of 2018 after taking a $2.2 billion writedown on a troubled long-term care business it bought in 2015. And changing customer behavior is difficult and potentially costly. It’s notable that CVS plans to plow this year’s Aetna savings back into the business.

Slower price rises are bound to spread pain throughout the healthcare industry. If deflation kicks in, the problems for CVS and its peers will be far worse.

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