CVS Health (NYSE:CVS) reported its fourth-quarter financial results on Thursday. The big pharmacy services company beat its guidance, helped primarily by a strong performance from its pharmacy benefits management (PBM) segment. The bar had been lowered, however, because CVS reduced its fourth-quarter projections three months ago in light of contract losses to Walgreens Boot Alliance (NASDAQ:WBA).
What was more interesting than the fourth-quarter numbers, though, was the Q&A session in the company's quarterly conference call with analysts. Here are five things CVS Health's management said in that call that you'll want to know. (Quotes courtesy of S&P Global Market Intelligence.)
Clearing the air on DIR fees
CVS Health CEO Larry Merlo came out swinging about what he referred to as "false and misleading statements in the marketplace" about the impact of direct and indirect remuneration (DIR) fees on the company's business. Merlo said that suggestions that DIR fees could present a material risk to CVS Health "could not be further from the truth."
DIR fees originally addressed only rebates for Medicare Part D prescription drugs. Over time, however, the term grew to include an assortment of fees that payers and PBMs charge pharmacies.
Merlo stressed that CVS passes all DIR fees, which is allowed by federal regulations, back to its clients. He said that these fees are "fully disclosed as part of the annual bid process." He also said that DIR fees aren't likely to go away, but even if they do "there would be a level playing field" and would not materially impact CVS Health's business.
PBM role in drug pricing
Merlo also directly addressed what he called "the ongoing rhetoric around drug pricing." He stated, "Any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem."
Merlo noted a recent industry study which reported "that every dollar invested in PBM services returned $6 in savings for clients and members." He pointed out that CVS Health's Caremark PBM helped customers hold their prescription drug cost trend down to 3.3%.
CVS Health's PBM business has been its primary driver for growth recently. Merlo was asked if the company has "reached a point where the low-hanging fruit has been plucked."
He responded that concerns about big health plan mergers "are now in the rearview mirror." Merlo also said that CVS Health will continue to bring value for small regional health plans.
CVS Caremark President Jonathan Roberts added that although he thought it would "be more challenging to win health plans moving forward," some low-hanging fruit remained. Roberts said that his company's advances in helping health plans change PBMs in less disruptive ways was an important factor in growing CVS Health's PBM business.
Rebuilding in 2017
Merlo admitted that 2017 will be "a rebuilding year of sorts." That's a direct result of Walgreens taking the Tricare and Prime Therapeutics contracts away from CVS Health.
Merlo said that the Tricare impact thus far has been in line with the company's expectations. CVS Health CFO David Denton mentioned that there are "a little more than 40 million prescriptions that are cycling out of our business" due to the Tricare and Prime losses.
However, the 2017 PBM selling season looks to be going a little better than initially reported, according to Merlo. He said that the PBM gained net new business of around $4.4 billion and achieved a client retention rate of around 97%.
Merlo was emphatic that CVS Health will return to growth. He reiterated the company's four-point plan to achieve more robust growth. This plan includes partnering with other PBMs and health plans, innovating with new products, streamlining operations, and using cash flow to bolster growth through share repurchases and potential acquisitions.
Several factors could impact CVS Health's future prospects. Merlo said, "It's extremely difficult for us to comment on the possible scenarios that may play out in the coming months" with regards to potential repeal of Obamacare. He also stated that significant corporate tax reform "would allow CVS to unlock even greater economic opportunities."