CVS' split leaves healthcare's conflicts intact

The recently announced breakup of CVS Health - one of the biggest ever in the healthcare industry - marks a major strategic shift for the juggernaut, which was valued at $117 billion before the plan was announced. Hiving off its retail pharmacy business reverses years of creep into more corners of the healthcare universe.

But a leaner CVS Health isn’t necessarily progress in the effort to bust up healthcare behemoths. If the hope is to disentangle conflicted parts of the American healthcare system and lower costs for consumers, CVS’s split is less of an outright divorce than a quiet toggle of the relationship status to “It’s complicated.” And it’s certainly no reason for lawmakers to ease the pressure on these healthcare giants.

CVS, like its healthcare conglomerate counterparts, has been under intense scrutiny from lawmakers. Companies sold their megamergers - which over the last decade brought together insurers, pharmacy benefit managers (PBMs) that negotiate drug prices on insurers’ behalf, and pharmacies that sell those medicines to patients - as a way to lower healthcare costs.

But lawmakers on both sides of the aisle say that vertical integration allowed companies to obscure practices that drove up PBMs’ profits at the expense of American consumers. Meanwhile, independent drugstores have accused megafirms of steering customers to their own pharmacies while also driving down reimbursement rates for the medications they dispense.

Several states have introduced laws targeting PBMs’ practices, including some that bar the middlemen from owning pharmacies. And the federal government last month finalized a regulation intended to shed light on the payments made to PBMs by various players in the US’s convoluted healthcare system.

CVS acknowledged that pressure from lawmakers when discussing the decision to separate from its pharmacy business. “The regulatory environment is clearly one of the things that we need to make sure we’re navigating,” CEO David Joyner told CNBC on Wednesday.

But the move doesn’t exactly signal the demise of vertical integration - or even a major shift away from it. As Craig Garthwaite, professor of strategy at Northwestern University’s Kellogg School of Management, pointed out to me, getting rid of the pharmacy leaves CVS with a business that looks almost identical to that of UnitedHealth and Cigna - the other players being targeted by lawmakers for being too dominant in the healthcare space. “It’s ending a very particular form of the conglomerate, but one that was unique to CVS - they were the only one who owned a chain of retail pharmacies,” he said.

Most tellingly, CVS Health isn’t shedding its entire pharmacy business - only the least profitable part of it. The spin-off doesn’t include its lucrative specialty pharmacy unit. How lucrative? Last year, the Federal Trade Commission estimated that nearly 70% of the dispensing revenue generated by pharmacies tied to the three biggest PBMs (including Caremark) was derived from specialty drugs.

“This is not a cleansing of the perverse incentives,” says Antonio Ciaccia, chief executive officer of 46brooklyn Research, a nonprofit think tank that tracks drug prices. “If anything, it’s a scraping of the cream off the top of the business and letting everything else go.” Ciaccia worries that Caremark, CVS’s PBM that controls nearly 20% of the market, could gerrymander its product list to decide which medicines are considered “specialty,” keeping the profitable medicines in its fold.

Moreover, health policy experts emphasize that the breakup is unlikely to move the needle on drug pricing. Consumers won’t necessarily feel it at the pharmacy counter, nor will employers struggling under the weight of rising healthcare costs.

In other words, CVS’s big breakup provides no reason for lawmakers to move on - from CVS or any of the other healthcare conglomerates they’re scrutinizing. If anything, that pressure should intensify. Democrats have swept Congress, and as they lay out their healthcare agenda, they should be looking for reforms that could rein in the cost of care in both the short and long term.

What could move the needle? Health policy researchers have a lot of ideas that go beyond busting up big firms. For example, the newly finalized PBM transparency rule in theory will finally allow employers to see the finer details of where their money is going - and when the PBM is profiting at their expense. But most PBM contracts prevent customers from suing them if they’re being overcharged. The transparency rule would have more teeth if paired with legislation that gives companies the power to hold PBMs accountable, says Neeraj Sood, a health economist at the USC Price School of Public Policy.

Health policy researchers at Johns Hopkins University are meanwhile pushing to use Medicare’s recently acquired power to negotiate some drug prices to create benchmarks for other parts of the insurance market. The state of Maryland is considering legislation that would cap certain drug prices at that negotiated rate, an experiment that could provide a path forward for other swaths of the country.

And lawmakers’ focus must extend well beyond PBMs. These drug middlemen have made for an easy boogeyman - and their practices certainly deserve to be put under a microscope. But the reality is that other parts of the system are responsible for a larger chunk of the country’s healthcare affordability crisis.

Healthcare behemoths excel at finding new ways to sidestep regulation and continue driving up profits - while consumers pay the price. The intense pressure on healthcare companies might ultimately lead to more moves like CVS that can feel seismic. But even as companies shrink, they are unlikely to give up their biggest asset: their remarkable ability to hold onto profits.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.