CVS Retained Drug Rebates Fall Far Below Analyst Projections

CVS Health downplayed the role that rebates play in high drug costs, noting during the company’s earnings call on August 8 that the pharmacy benefit manager (PBM) retained far below the rebate amount than some analysts projected.

With manufacturers and PBMs each pointing fingers at each other in terms of drug pricing and the debate growing around the role PBMs play in affecting out-of-pocket costs, CVS President and CEO Larry Merlo said that speculation of CVS’ retained rebates being as much as $2 billion were inaccurate. Merlo said the PBM actually projected its retained rebates at nearly $300 million, which translates to approximately 3% of CVS annual adjusted earnings per share.

“Competition among PBMs means more and more rebates are going and will continue to go back to clients, and this is a good thing,” Merlo said during the call. “It demonstrates that the market techniques used by PBMs do in fact work. And no matter what may happen to the ability to rebate, PBMs will still be needed to drive discounts and cost savings for their clients and members, and the PBM model will continue to evolve as a result.”

With public scrutiny growing around the high cost of care in the United States, the Trump administration is currently examining the role PBMs play in managing drug spend, how they are compensated for their activities, and any potential conflicts of interest. Specifically, increased attention is being devoted to how PBMs are compensated by both payers and pharma for negotiating value. Much of this debate is centered on the rebate mechanism.

“The amount of rebates we retain is a relatively small cost for the value we provide through our formulary negotiations, tens of billions of dollars of rebates generated, the overwhelming majority of which are passed back to clients and their members,” Merlo said on the call. “Let's also be clear about what happens with the rebates that are passed to clients. Our clients, employers and insurers, use rebates to lower the costs of providing insurance for their employees and members. And typically, this means investing in insurance premiums to keep growth for all members to a minimum.”

Merlo said CVS does offer rebates at the point of sale as an option for all clients to help decrease out-of-pocket spending. He added that the true cause of rising costs at the pharmacy counter is the drug prices that manufacturers set.

Merlo noted that competition among manufacturers with equivalent products are what maximizes rebates, which influences formulary placement and subsequently lowers costs. As such, he said that correlating rebate retention with higher drug prices ignores the bottom line.

“For members in high-deductible health plans, the availability of point-of-sale rebates before their deductible is met can be a key solution to help members stay adherent on their essential medications by making them more affordable, and today, we provide this service for approximately 10 million of our commercial members,” Merlo said. “This is what's getting lost in this debate, the fact that we have been able to improve adherence and keep drug cost inflation under control using key PBM techniques.”

Last year, drug price growth for CVS clients was reported at 0.2% on a per capita basis, while average wholesale price inflation was approximately 10%, according to the PBM. Merlo said that gains in boosting adherence reduced overall health care costs by approximately $600 million.

Merlo added that last week’s announcement by the Centers for Medicare and Medicaid Services of its new step therapy policy shows the Trump administration recognizes the role PBMs and the tools they employ play in lowering drug costs. He added that given the limited role rebates play in PBM earnings and the value of PBM tools in lowering drug prices, the role of benefit managers will still be significant in the future, regardless of whether rebates disappear.

“No matter what may happen to the ability to rebate, PBMs will still be needed to drive discounts and cost savings for their clients and members, and the PBM model will continue to evolve as a result,” he said.