While CVS and Walgreens are both facing challenges with retail pharmacies, CVS has an advantage due to its PBM and size.
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While retail pharmacies have been struggling lately, CVS may have an ace up its sleeve: its pharmacy benefit manager (PBM) Caremark.
PBMs are the intermediaries between pharmacies and drug manufacturers that set the reimbursement rates pharmacies receive for dispensing drugs. The three largest PBMs in the country—CVS’s Caremark, Cigna’s Express Scripts, and UnitedHealth Group’s Optum Rx—are all vertically integrated within other large healthcare companies and collectively administer roughly 80% of prescriptions in the US, affecting an estimated 270 million people, according to the Federal Trade Commission (FTC).
The companies’ pricing structures are not very transparent, as they aren’t required to disclose how they set reimbursement rates or how much they profit from drug manufacturer rebates. They’re also generally pretty profitable, with the big three PBMs achieving combined revenues of more than $400 billion in 2022, according to data from nonprofit research organization the Brookings Institution.
For comparison, the global pharmaceutical industry brings in about $1.6 trillion a year, while the health tech market was worth $278 billion in 2023.
Since CVS has its own PBM, which it acquired in 2007, it gets visibility into an opaque pricing system as well as a revenue boost.
In CVS’s Q3 earnings released on November 6, the company reported revenue of $44.1 billion in its health services segment, which includes Caremark. In the report, CVS said its PBM had “a robust selling season,” and on its earnings call, EVP and CFO Thomas Cowhey said the adjusted operating income of the health services segment was $2.2 billion, a 17% increase from Q3 2023’s $1.9 billion.
That’s despite CVS leadership’s complaints over its financial challenges related to its insurance arm, Aetna. The company reported a 40% YoY drop in operating income in its Q2 2024 earnings released on August 7, which led the company to replace its CEO with Caremark President David Joyner.
Since CVS owns both Caremark and Aetna, it is taking “money out of one pocket to pay the other,” according to Leventhal, so it doesn’t rely on its pharmacy business as much as other retail pharmacies like Walgreens.
But it may be “too late” for Walgreens to get into the PBM game, Hal Andrews, president and CEO of healthcare analytics firm Trilliant Health, told Healthcare Brew, as PBMs have come under fire from the federal government in recent months, facing an investigation and a lawsuit from the FTC that accuses the intermediaries of inflating drug costs.
“The PBM business is clearly in the sights of the FTC,” he said. “I think you might be making a questionable move if you decided that you wanted to go buy a business—that is, by definition, opaque—that Congress and the FTC are trying to understand.”
Rite Aid in 2015 attempted to get into the PBM game when it purchased its subsidiary Elixir (called EnvisionRx at the time) for $2 billion. But the business failed to prosper, and by 2018, analysts advised Rite Aid offload it to help alleviate the company’s overall debt.
Then in September 2022, Rite Aid was hit with a class-action lawsuit claiming the company had made “false and/or misleading statements” about Elixir’s performance. By February 2024, Rite Aid sold off Elixir for $576.5 million as part of its bankruptcy restructuring plan.
