Wholesale retailer Costco is expanding its footprint in the pharmacy benefit management business by purchasing a minor stake in a PBM owned by St. Louis-based hospital system SSM Health.
SSM Health said the deal would allow the not-for-profit system to tap into Costco's expertise and expand its transparent PBM model, called Navitus Health Solutions, to more people. The deal also includes a specialty pharmacy subsidiary.
Costco, meanwhile, could benefit if Navitus members are steered toward Costco stores and clinics, analysts at investment banking and advisory firm Evercore ISI wrote in a research note Wednesday. The retailer could also increase the reach of its own internal PBM business, depending on whether Costco's own internal PBM integrates with SSM Health's. Costco declined to answer questions about the partnership and financial details weren't disclosed.
Pharmacy benefit managers administer prescription drug benefits for employers and insurers. Both SSM Health and Costco operate "100% pass-through" PBMs, meaning they derive revenue from a set administrative fee and return all rebates and discounts received from drugmakers back to their clients.
Traditional PBMs, such as CVS Caremark and Express Scripts, keep their revenue streams secret, pocketing a certain percentage of those rebates and discounts instead of passing them through to the customer. Critics argue that traditional PBMs help to drive up the cost of prescription drugs, but transparent models have failed to obtain the market share that traditional PBMs have. Insurers Anthem and Centene Corp. are working to change that by investing in their own transparent PBM models.
Navitus serves 6 million people and recorded about $494.2 million in pharmacy benefit management revenue in 2018, SSM Health's latest annual financial data shows. Costco's pharmacy segment and PBM, called Costco Health Solutions, brings in about $2.6 billion in revenue, according to Evercore. Costco launched its PBM in 2013 and primarily serves small and midsize employers.
"Navitus shares our long-term commitment to transparency and our philosophy of reducing costs and passing savings on to our members. Included in that mission is lowering the health care spend for patients at our pharmacy, optical and hearing aid departments," Costco President and CEO Craig Jelinek said in a news release.