Blue Shield of California shocked a lot of people when it announced it was going to drop CVS Health (CVS) as its main pharmacy benefit manager (PBM) and instead go with companies like Amazon Pharmacy (AMZN) and Mark Cuban’s Cost Plus Drugs. Blue Shield of California CEO Paul Markovich tells Yahoo Finance Live the current system is designed to “maximize the profit of the participants as opposed to the quality, cost effectiveness, and convenience of consumers.” Markovich says “PBMs, as they exist, clearly need to change and change pretty fundamentally,” adding that “incentives and all of the behaviors that come along with it, make drugs highly and unsustainably inflationary.”
BRAD SMITH: A major industry shakeup is playing out in the drug supply chain. Blue Shield of California replacing CVS Health’s Caremark as its main pharmacy benefit manager in January 2025. PBMs negotiate drug spending for insurers and play a major role in determining access to and the cost of drugs.
California Blue Shield will give portions to industry disrupters like Amazon Pharmacy and Mark Cuban’s Cost Plus Drugs. The move is expected to save Blue Shield of California $500 million annually.
Joining us now is Blue Shield of California CEO Paul Markovich. Paul, you made waves with this announcement, this decision. Tell us about some of the catalysts that really drove this from the management and executive perspective here.
PAUL MARKOVICH: Brad and Julie, thanks for having me. Good morning. Well, when we looked at this system, it’s incredibly expensive, it’s enormously complex, and it’s really designed to maximize the profit of the participants as opposed to the quality, cost, effectiveness, and convenience of consumers.
So that’s really what prompted us to start from scratch and try and reinvent this system with a group of like-minded partners to simplify it and to make it much more both customer-centered and less expensive.
JULIE HYMAN: Paul, it’s Julie here. Why is there so much extra cost in your view when buying through the existing model of the pharmacy benefit manager?
PAUL MARKOVICH: Well, it’s just a profit motive over time. There’s at least eight players in this chain and they all make more money when we sell a higher volume of more expensive drugs.
And a great example of this is recently, there’s a prostate cancer drug that costs about $3,000 a month. It’s generic. We managed to negotiate an alternative supply for $160 a month– same drug, same compound, a pretty big difference in price. And when we asked our pharmacy benefit manager to take it and sell it, they initially refused. And it took us about five months to finally get them to offer that drug.
And, again, the reason is the fees and everything that are baked into what they receive in terms of revenue and profit goes up. And that’s true for all the players. And so it’s very difficult to fight financial self-interest. It’s a structurally inflationary system.
BRAD SMITH: And so when we think about the costs that this is expected to bring down for the different health plans that are represented by Blue Shield of California, walk us through some of those costs. This is successful if, you know, your plans and the members within those plans see what type of cost difference.
PAUL MARKOVICH: Well, yes, as I said, we expect to save about $500 million a year on about a $4 billion cost savings. So it’s about a 10% to 15% savings overall. Most of that’s coming out of the distribution costs. Right now about a third of the cost of the drugs goes into this distribution system.
And obviously, with partners like Amazon and Mark Cuban Cost Plus, we feel like we can get to a net price with pharmacy manufacturers. Make sure they’re staying whole, but have the distribution costs come down dramatically.
And then beyond that by taking the incentive out of the system to sell higher volume of more expensive drugs, we think there’s going to be more substitution towards drugs like the one I just mentioned at $160 instead of $3,000..
JULIE HYMAN: Well, sort of on a related note, Amazon and Cost Plus don’t offer everything, right? So where there are gaps, where will your customers go?
PAUL MARKOVICH: Well, we’re going to have all those gaps filled with all of the partners. And so it’s not just Amazon and Mark Cuban Cost Plus. All of our members are going to continue to have all the options they have today, including going to a pharmacy to pick up their drugs. They’re not going to have to get them in terms of home delivery.
So that all of the options that they have today, including getting access to specialty drugs, all of those are going to be available to them. I think they’re going to have more options and I think better options when it comes to things like the convenience of home delivery, accessing a pharmacist through a web chat 24 hours a day and 7 days a week. But that is why we need more than Amazon and Mark Cuban Cost Plus to make this work.
BRAD SMITH: There’s a significant amount of patent roll off that is made Cost Plus, has made Amazon and PillPack and that acquisition, of course, but even furthering of the delivery on what some of the PBMs had been able to kind of corner the market for themselves.
That patent roll off has created that opportunity. And so will that further the kind of smaller players that are able to jump in or perhaps fill the gap and start to reduce some of the costs that the households are seeing in their individual spends that they have on health care costs and specifically on medications?
PAUL MARKOVICH: Well, that’s exactly what we’re hoping will happen and what we’re trying to aspiring to with this model and would like to see happen more broadly.
I think the fundamental difference you’re talking about, Brad, is the difference between treating pharmaceuticals as a means to improve people’s health and reduce the cost of health care, as opposed to seeing as a revenue and profit center. And when it’s seen as a revenue and profit center, it’s not necessarily the best thing either for the consumer or the system.
And when you think about it as how do we get people lifesaving drugs, health improving drugs at the lowest possible cost and all the players are rewarded for doing that, the system shifts and it’s able to do some of the things you just describe, take advantage of when you have patent cliffs, making sure that the most cost-effective version of that drug is available to our members.
JULIE HYMAN: One of the players you’re working with on this is also a PBM, a pharmacy benefit manager, but it’s one that’s jointly owned by a number of these blues plans. It’s called Prime Therapeutics. Is the PBM model itself just fundamentally broken? And is the one that you all jointly operate different because it doesn’t have that profit motive you’re talking about? In other words, like, do PBMs as they exist need to go away?
PAUL MARKOVICH: Well, I think PBMs as they exist clearly need to change and change pretty fundamentally. I think you’re absolutely right, Julie, when you say the system is fundamentally broken. And it’s that those incentives and all of the behaviors that come along with it make drugs highly and unsustainably inflationary and also very opaque.
Like, right now, most of the physicians and that are prescribing medicines and the members that are getting them do not know the price of the drug at the time of the prescription. Pardon me. Or even when they– until they go and pick the drug up at the drugstore. And I think they would all make different choices if they were fully informed. And so yes, I think it’s structurally just doesn’t work.
And the difference between, as I said, treating it as a way to improve people’s health and improve the affordability of health care, as opposed to a way to maximize profit over time is a fundamentally different approach to pharmaceuticals, and that’s what separates these two models.
BRAD SMITH: Paul, just lastly while we have you. A lot of people are wondering at a household level how they can go about reducing some of their own health plan costs as they’re having to adjust for where costs elsewhere within the household may have increased. Is there a successful way beyond the moves that Blue Shield of California and executives like yourself put forward that they can go about taking necessary steps to bring down some of those costs.
PAUL MARKOVICH: Well, yes, I think that shopping is always a good thing to do. I think looking at your alternatives, both in terms of your health plan, at your open enrollment period, and what your benefits are versus what they cost when you’re getting into drugs, there are often alternatives. So talking to your physician and looking at what those alternatives are.
I think the more that we can introduce competition into the system and let consumers look at their options and make those cost value trade offs. I just encourage customers to do that because let’s face it, at 18% or more of gross domestic product, health care is just way too expensive right now. And we’re trying to do everything we can to bring it down, but I think there’s options for customers to do a little shopping and do that for their own pocketbook as well.
JULIE HYMAN: Paul, thanks so much for your time this morning. Paul Markovich, Blue Shield of California CEO. Thank you.
PAUL MARKOVICH: Thank you.