CVS Health, the nation’s largest drugstore chain, will move away from the complex formulas used to set the prices of the prescription drugs it sells, shifting to a simpler model that could upend how American pharmacies are paid.
Under the plan, CVS’s roughly 9,500 retail pharmacies will get reimbursed by pharmacy-benefit managers and other payers based on the amount that CVS paid for the drugs, in addition to a limited markup and a flat fee to cover the services involved in handling and dispensing the prescriptions. Today, pharmacies are generally paid using complex measures that aren’t directly based on what they spent to purchase specific drugs.
A similar payment model, sometimes known as “cost plus,” has been promoted by entrepreneur Mark Cuban’s eponymous pharmacy company, among others, which have said it brings greater clarity and accountability to drug pricing.
CVS’s move, earlier reported by The Wall Street Journal, is to be phased in starting in the first half of 2024. It will take the approach to a far greater scale, embedding it in a company that stands at the core of the American drug-supply chain.
“It’s a fundamental change in how pharmacy services are priced,” said Adam Fein, chief executive of the Drug Channels Institute, which provides research on the drug-supply chain. It is also, he said, “a legitimate step toward transparency.”
For consumers, employers and health insurers paying for prescriptions, the change will have mixed effects. Some drugs may cost less, while others might rise in price, CVS executives said. More should show declines than increases, they said.
CVS is making the move as it seeks to stabilize its retail pharmacy business, which has long struggled with stagnating margins on its core function of dispensing prescriptions.
The company is also responding to criticism from lawmakers, employers and patients about the complexity and opacity around how drugs are bought and sold. Members of Congress and some employer groups have argued that the current setup is flawed and secretive.
“Transparency and clear pass-through pricing based on the actual cost of the drugs is exactly what we have been hoping the market will do,” said Elizabeth Mitchell, chief executive of the Purchaser Business Group on Health.
The company’s move appears to be a step in that direction, Mitchell said, though she wants more detail on its plans. “What really matters is, will this make drugs more affordable?” she said.
CVS said prices will much more closely reflect what the company’s pharmacies pay to acquire the drugs. The shift will likely also eliminate many high-profile discrepancies in which patients with insurance found they could get medications for less when they paid cash with a drug discount card instead of using their employers’ drug-benefit coverage.
The pharmacies will be paid in “a much simpler and more transparent way,” said CVS Chief Pharmacy Officer Prem Shah. “We want to change the market for the future.”
The company will call the payment model CostVantage. When it starts rolling out next year, the new prices will first become available to consumers paying cash for their prescriptions using an array of drug discount cards.
In 2025, the setup will be incorporated into CVS pharmacies’ contracts with pharmacy-benefit managers covering drugs paid for under employer plans.
Executives said they plan to implement the new retail pharmacy-payment model for government-backed coverage, such as Medicare plans, in the future.
CVS said the change isn’t expected to increase its pharmacies’ profits, but would ensure more stable and predictable earnings. The company declined to disclose target ranges for its drug markup or the flat fees.
Fein said that, over time, the new model will likely mean that retail pharmacies are able to halt the trend toward shrinking profits on prescriptions and retain higher margins than they otherwise would have.
He also said that CVS-linked units are sometimes involved in setting the price of drugs sold to the company’s own pharmacies, which may muddy the picture.
A CVS spokesman said its pharmacies pass the value of all of their drug savings on to PBMs and other payers.
Pharmacies are mostly paid by pharmacy-benefit managers—including CVS Caremark, a sister company to the retail-pharmacy unit—often using a complicated setup in which compensation targets are set across groups of drugs, not for particular products.
Under that model, pharmacies may get paid at relatively higher rates for certain medications, and use that margin to subsidize losses on other prescriptions. Using a “cost-plus” structure, this should no longer be typical.
Still, CVS’s pharmacy unit will be using an index to approximate its cost for acquiring drugs.
CVS will also introduce a new option for clients of its PBM, CVS Caremark, that will work in tandem with the new retail pharmacy-payment scheme. The new PBM product, called TrueCost, will be based on the net cost of drugs with defined fee structures, the company said. Employers and other clients will have the choice to use it or not.
However, employers may be reluctant to take one step that is part of the TrueCost setup, which involves applying rebates the PBM receives from drugmakers to individual prescriptions for those drugs. Currently, patients often pay out of pocket amounts based on the higher, prerebate price. Employers and insurers sometimes use those rebates to offset other healthcare costs.
Other pharmacy-benefit managers have also been touting efforts to increase transparency and clarity. Express Scripts, a unit of Cigna Group, recently announced a new model called ClearNetwork.