The insurer, a nonprofit, said Thursday it expects to save as much as $500 million a year by switching to a group of companies including Amazon.com Inc. and an upstart from billionaire Mark Cuban. It’s the biggest win yet for those newcomers trying to upend the existing prescription benefits system, and if it works could provide a blueprint for other insurers and employers to follow.

The goal is to change the incentives for prescription benefits managers, distributors and pharmacies, said Paul Markovich, chief executive of Blue Shield of California. “They make more revenue and they make more profit when we sell a higher volume of more expensive drugs,” he said in an interview. “We just need to start over in terms of thinking about this system.”

News of the high-profile experiment sent shares of dominant PBMs down sharply: CVS shares fell 8.1% as of trading close Thursday, its most since October, while rival Cigna Group fell 6.4%.

The Wall Street Journal earlier reported the change-up.

Blue Shield may face challenges replacing one vendor for PBM services with five, some with competing interests. “We’re skeptical this approach is sophisticated enough and practical, yet it bears watching,” Bloomberg Intelligence analysts Jonathan Palmer and Jordan Dahan said in a note. 

The insurer is also not dropping CVS entirely, as Caremark will continue to process more expensive specialty drugs, a profitable and growing market for PBMs.

Tapping Newcomers

Companies that provide health benefits have long bemoaned their lack of visibility into how much drug middlemen pay and charge for medications. The California insurer’s move will test whether it can assemble an alternative supply chain involving a mix of companies new to the pharmacy benefits business alongside established suppliers.

Amazon, the retail giant whose greater penetration into the drug supply chain has been dreaded by pharmacy benefit managers and drugstore chains, will offer at-home drug delivery. Mark Cuban’s Cost Plus Drugs Co. will provide access to low-cost medications, and Abarca Health will process drug claims, Blue Shield of California said. 

The plan will also rely on Prime Therapeutics, a pharmacy benefits manager operated by a group of Blue Cross Blue Shield plans, to negotiate savings with drug manufacturers.

Using services from several new companies to provide drug benefits may be challenging, but if the regional health insurer is successful, others may follow, according to analysts at Evercore ISI.

Some are more skeptical. The selloff “overstates” the impact of the decision, TD Cowen analyst Charles Rhyee wrote, adding: “We don’t believe the BSCA decision will have a long-term impact on the PBM model.”

CVS affirmed its earnings guidance for 2023 and said the partial loss of the contract would have an “immaterial impact” on the company’s long-term outlook.

Broken Incentives

Blue Shield of California spends about $4 billion a year on drugs, Markovich said, and the company estimates it can save 10% to 15% of that through this new model. Some of the savings will come from removing incentives that favor high-cost drugs over less expensive alternatives.

For example, he said, the insurer struggled to get CVS to cover a less expensive version of a prostate cancer drug called abiraterone that would cut the price to $160 from about $3,000. “They initially refused and they kept refusing” for months, he said. “It’s like pulling teeth to get that to happen.”

CVS gets generic drugs through an existing joint venture and medications must meet certain standards, a company representative said in an email. Some health plans that invested in a new generic drug manufacturer called CivicaScript sought to dispense those products through an outside pharmacy, and CVS is working with them to do it, the representative said. Blue Shield of California is participating in CivicaScript.

Markovich said the insurer’s 7,500 employees would first see the new arrangement in 2024, and it will offer it to some clients who may be interested. In 2025, the change will be effective across its lines of business for commercial and government health plans.

Profit Impact

The loss could dent CVS’s 2025 earnings by 2 to 6 cents a share, the Evercore analysts estimated. About half of the insurer’s annual drug spend is likely to be retained by CVS in its specialty pharmacy business, they said. 

“We look forward to providing care for Blue Shield of California’s members who require complex, specialty medications – as we have for nearly two decades,” a CVS spokesperson said in an email.

Markovich said CVS might have been a strong contender if Blue Shield wanted to continue with a traditional PBM, but he said the company is aiming for a broader change.

“This issue is a systemic one,” he said. “All of the pharmacy benefits managers operate this way in this system, and they have no financial interest in changing it.”