What happened
Shares of CVS Health Corp. (CVS +0.08%), an integrated healthcare Goliath, slipped 6.4% in early morning trading after Amazon.com, Inc. (AMZN 0.89%), Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), and JPMorgan Chase & Co. (JPM +0.19%) announced the formation of a not-for-profit venture tasked with reducing healthcare costs for their U.S.-based employees. The stock was down 4.4% as of 11:16 a.m. EST on Tuesday.
So what
The purpose of the three-partner venture, which I'll be calling "JPHathazon" until it has an official name, is to improve employee satisfaction and reduce costs. Reducing costs is CVS Health's job, or at least that's how it markets pharmacy benefits management (PBM) services that contributed 71% of total revenue in the latest reported quarter.
Image source: Getty Images.
During the decade ended 2016, prescription drug spending in the U.S. rose 39% to $328.6 billion. That was a bit slower than total healthcare spending, which rose 45% to $3.3 trillion over the same period, but employers that hire CVS Health and its peers to lower costs aren't impressed. A recent survey of 88 employers with more than 5,000 employees from the National Pharmaceutical Council found just 41% rank their PBM's ability to negotiate with drugmakers to achieve cost savings as very good.
Now what
CVS Health's PBM boasted a 97% client retention rate for 2018, which is encouraging for now. One of employers' biggest complaints, though, is a lack of transparency. PBMs use their size to wrangle rebates from drugmakers on behalf of employers, but the exact size of those rebates and the percentage they actually pass on to their clients are closely guarded secrets.
Lack of transparency across the healthcare sector drives employers, and patients, up the wall. JPHathazon was light on operational details, but transparency is in its crosshairs. The partnership's initial focus will be "technology solutions" to provide its own employees with transparent healthcare at a reasonable cost.
