CVS said Wednesday it returns about 98 percent of rebates to its customers. It expects to keep about $300 million this year, representing about 3 percent of its annual adjusted earnings per share.
Pharmacy benefit managers, including CVS Caremark, control which drugs are covered and negotiate discounts, known as rebates, on branded drugs with manufacturers. Rebates can help manufacturers secure access on drug formularies.
They're a favorite target of drugmakers, who say these middlemen want higher list prices, or advertised prices, so they can negotiate bigger rebates and squeeze higher profits from them. The argument has struck a chord with the Trump administration, which has questioned the system.
"Drug manufacturers want you to believe that increasing drug prices are a result of them happy to pay rebates and that PBMs are retaining these rebates. And this is simply not true. If list prices were the result of a manufacturer's need to address rebates then you would expect rebates and list prices to be highly correlated," Merlo told Wall Street analysts Wednesday on a call discussing its second-quarter financial results.
Instead, Merlo said CVS' data showed list price, or the advertised price of a drug, increases faster for drugs with smaller rebates than it is for treatments with substantial rebates. When drugs don't face any competition, manufacturers have less incentive to compete on price, Merlo said. Therefore, rebates are used more when drugmakers need to compete with each other for formulary placement. Even when rebates are negotiated, PBMs say they pass the bulk of them to clients.
Rebates have come under even more scrutiny lately with the Trump administration repeatedly questioning this system and even vowing to re-examine it. Health and Human Services Secretary Alex Azar told CNBC in June that "we may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts
President spent a large chunk of his speech to lower drug prices attacking middlemen, who he said "won't be so rich anymore." CEO Ian Read last week told Wall Street analysts he believes the Trump administration may eliminate rebates altogether.
PBMs have tried to deflect attention back to drugmakers, who it says are at fault for even setting high drug prices in the first place. They defend their businesses as a way to actually lower drug prices.