Please ensure Javascript is enabled for purposes of website accessibility

Here's Why CVS Health Stock Is On the Move Today

By Cory Renauer - Updated Jul 11, 2019 at 12:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A White House proposal that could have lowered drug prices has gone belly up.

What happened

Shares of CVS Health (CVS 2.33%), America's largest pharmacy benefits manager (PBM), jumped 8.6% in early-morning trading after the White House dropped a plan to outlaw the way PBMs earn a living. Investors relieved to see a serious threat to a source of industry profits recede have pushed the stock 5.4% higher as of 12:15 p.m. on Thursday.

So what 

Last July, Pfizer (PFE 3.00%) and many of its peers made a promise to delay price increases on branded drugs. At around the same time, the Department of Health and Human Services (HHS) submitted a proposal that would have rescinded special protections specifically allocated to the PBM industry that it can't operate without. 

Colorful assortment of pills in a toy shopping cart on a bed of money.

Image source: Getty Images.

Instead of negotiating directly with drugmakers, thousands of smaller healthcare plan sponsors hire PBMs to negotiate on their behalf. The PBMs wrangle undisclosed discounts and rebates from drugmakers in return for the placement of high-priced drugs on affordable copay tiers. In other words, PBMs indirectly encourage drugmakers to raise list prices because the practice allows them to offer larger rebates to PBMs without losing revenue. Secretive rebates also encourage insurers with copay percentages linked to soaring list prices to transition patients to more expensive brand-name drugs when available generics might be sufficient.

As an insurer, a PBM, and a retail pharmacy chain, CVS Health had a lot to lose if it were no longer allowed to play the rebate game. Today's gains would have been more significant if the proposal's eventual death weren't already a foregone conclusion.

Now what

The White House spokesman who announced the president's decision to withdraw the rebate rule change said the administration was encouraged by bipartisan legislation to control drug costs. While this is great news for CVS Health and its peers, the twisted economic incentives that force drugmakers to make enormous price hikes will probably continue to drive up prices for U.S. consumers.

Luckily for the country's drugmakers, a federal judge recently ruled on the plan to force drugmakers to display theoretical list prices of their drugs on all advertisements. According to the ruling, HHS overstepped its authority with the plan. At least when companies like CVS Health lean on drugmakers to offer bigger rebates, they won't have to frighten consumers with soaring list prices.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
$94.52 (2.33%) $2.15
Pfizer Inc. Stock Quote
Pfizer Inc.
$51.59 (3.00%) $1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.