The shake-up in pharmacy benefits manager (PBM) services announced by Blue Shield of California on Thursday sent a number of healthcare stocks tumbling.

CVS (CVS) and Cigna (CI), which hold the lion's share of Blues PBM contracts along with UnitedHealthcare (UNH), lost $7 billion and $5 billion in market cap on Thursday, respectively. Shares of drug distributors like McKesson (MCK), AmerisourceBergen (ABC), and Cardinal Health (CAH) each fell more than 2%.

But analysts say the reality of the announcement is less severe than the market's initial reaction suggested.

"Thursday was a unique 'perfect storm' of news that likely had a bigger impact on sentiment than it will in setting precedent," wrote UBS analyst Kevin Caliendo in a note, adding the selloff Thursday was "nonsensical."

The Blues insurer, which is responsible for about 5 million members in California and posts $24 billion in annual revenue, is unbundling its PBM service and doling out portions to disruptors like Mark Cuban's Cost Plus Drugs and Amazon Pharmacy (AMZN).

The move, according to Blue Shield, will save $500 million on medications annually— a number CEO Paul Markovich told Yahoo Finance he is confident will be achieved.

"We're creating a different mouse trap here. We've done the math," Markovich said.

Under the new arrangement, Cost Plus Drugs will be responsible for generics and Amazon will take on the mail order business. Puerto Rico-based Abarca Health will manage claims and Prime Therapeutics, a PBM jointly owned by 19 Blues plans which works with partners like Walgreens (WBA) and Cigna's Express Scripts, will handle drug pricing negotiations.

The shift will take effect starting in 2024 when Blue Shield's contract with CVS, which has been in place since 2021, ends.

However, CVS will maintain the most profitable segment: specialty pharmacy. That, according to analysts, is the reason the announcement isn't all doom and gloom for the Big 3 PBMs — CVS, Cigna, and United Health Group.

"[The] spectre of AMZN will likely negatively impact sentiment for the group, again," JPMorgan analyst Lisa Gill wrote in a note on Thursday. "However, we think the announcement actually highlights the value of legacy PBMs and limitations of newer models as Blue Shield is keeping the fastest growing and largest portion of its drug spend with CVS."

Gill noted that generics typically represent only 15% of drug spend even though they represent a higher volume of spend, and specialty drugs continue to rise in cost and represent a pain point for large employers, as seen during the recent demand surge for branded weight loss drugs like Novo Nordisk's (NVO) Wegovy and Ozempic, and Eli Lilly's (LLY) Mounjaro.

"Per Cost Plus's page, the company has over 1,000 generic medications available but almost no branded drugs. Although the company seeks to add more branded drugs, it appears to be focusing only on specialty drugs that can be delivered via mail order," Gill said.

In addition, mail order prescriptions have not taken over in-person pickups, despite a surge seen during the pandemic, so there is little concern about Amazon's share of the new arrangement, analysts said.

Some are concerned about the customer experience with the complex makeup of PBMs.

"Coordinating five vendors is like an average Tuesday for us," Markovich said.

He added that despite the criticism, Blue Shield is going to be sticking to the unbundled model long-term, even though it is likely the combination of players changes in the future.

'Hard to replicate'

The announcement from California Blue Shield on Thursday also isn't the first time an insurer has tried such a move.

"Health plans have a mixed track record of separating or in-sourcing PBM functions," Goldman Sachs analysts wrote in a note Friday. "This decision by a large health plan will keep scrutiny on PBM economics and attention on proposed legislative changes, though we see the stock reactions as disproportionate relative to the likely implications."

"Historically, the value of scale offered by the Big 3 PBMs has been difficult to replicate," the firm added.

Craig Garthwaite, a health economist and director of the Program on Healthcare at the Kellogg School at Northwestern University, told Yahoo Finance he's willing to bet the savings California Blue Shield ends up seeing isn't actually $500 million.

"There's got to be a belief (by Blue Shield) that there's $500 million per year in excessive, unwarranted profit that the PBM is taking. I just don't believe that's true," Garthwaite said.

The fact that CVS has been able to keep the profitable specialty pharmacy business also bolsters the unpopular opinion that the Big 3 serve a purpose. Garthwaite said this move runs counter to the idea that "PBM executives are these monopolous fat cats lighting cigars with hundred dollar bills. It's not that. They actually do things that matter to people."

He also noted that CVS could respond by increasing the cost of the business segment it is keeping in the new contract with Blue Shield.

Markovich said anything is possible, but the contracts are in place and renegotiating them could be a breach.

The plan has been in the works for more than two years, with a lengthy request for proposal process, which began just before the pandemic, he said.

The announcement has excited watchers of health care industry trends, who anticipate other Blues and employer plans could emulate the strategy.

"Almost every investor we spoke with felt the consortium hired by Blue Shield was risky at best to be able to execute on the new business," UBS's Caliendo wrote. "We tend to agree, but also understand that this thesis is not likely to be proven anytime soon given timing on onboarding.

"We do think the idea that PBM contracting will be increasingly 'unbundled'...perhaps leading to lower overall profits from purchasing, rebates, and couponing."

Follow Anjalee on Twitter @AnjKhem

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance