Photo by Anastasiia Gudantova on Unsplash | Credit: CVS Health
December 8, 2023
Will CVS’s New Reimbursement Model Be Better for Drug Pricing?
With the healthcare industry facing increased scrutiny for high drug prices, CVS Health announced plans to switch to a more “transparent” prescription reimbursement model for its pharmacies.
Under the new model, CVS CostVantage, CVS’s roughly 9,500 retail pharmacies will get reimbursed by pharmacy-benefit managers (PBMs) 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.
It’s a similar model to entrepreneur Mark Cuban’s Cost Plus Drugs online pharmacy. Under Cost Plus Drugs’ setup, consumers pay the manufacturer’s cost, plus a 15% markup, a $5 handling fee for the pharmacist, and $5 for shipping. Cost Plus Drugs has become known for delivering low prices on older generics but has faced challenges securing competitive pricing for newer brand-name meds.
Under CVS’ current system, the rate pharmacies are paid for filling prescriptions is largely determined by the pharmacy-benefit managers, which act as middlemen and negotiate rebates from drug manufacturers to insurers. These complex reimbursement formulas aren’t directly based on what pharmacies spend to purchase specific drugs, with compensation targets set across groups of drugs rather than particular products. CVS owns Caremark, the country’s largest PBM.
CVS Health execs told The Wall Street Journal that employers and health insurers paying for prescriptions will see some drugs costing less and others more. Still, the restructuring should eliminate the sometimes wide discrepancies insured patients encounter at the pharmacy between the cash cost (with a drug discount card) and using their employer-sponsored drug coverage, according to CVS.
Prem Shah, chief pharmacy officer and president of Pharmacy and Consumer Wellness at CVS Health, told the New York Times that the company’s goal was “to provide a much more transparent model that provides predictability and value for the payers in a way that is more aligned in terms of the way that any other normal market would work.”
The updated model, to launch in 2025, comes as the pharmaceutical industry’s pricing methods face backlash from patients and lawmakers, with Congress considering bills to force more transparency.
Dr. Scott Gottlieb, a former commissioner of the Food and Drug Administration, was optimistic about the change. He said on CNBC that under CVS’s new model, “the consumer is going to have more insight into what drugs actually cost, and it’s going to also help the pharmacies have more stability in their revenue.”
Antonio Ciaccia, a consultant who works with clients who are scrutinizing their deals with their PBMs, was skeptical, however, telling the New York Times that the key problem with drug pricing “is this intersection between PBMs and pharmacies.”
Discussion Questions
Does CVS’ CostVantage reimbursement model for prescription drugs provide more benefits than its current model? Will a more straightforward approach offer a better path to reducing drug prices?
Poll
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Lucille DeHart
Principal, MKT Marketing Services/Columbus Consulting
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
Ryan Mathews
Founder, CEO, Black Monk Consulting
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Like most things in American healthcare, the drug system is overly-complex and involves far too many layers and far too little transparency. CVS’s attempt to simplify things should be welcomed, mainly because it will help reduce costs in most (though not all) cases. That said, it does not remove all of the layers in the pricing process, so this is only part of the solution. Of course, CVS is not doing this out of the goodness of its heart. It has come under more pressure from rivals like Cost Plus Drug and Amazon, both of which Blue Shield of California is partnering with instead of CVS.
The cost of prescription drugs has been an ongoing battle between law makers and the pharmaceutical industry for years, with the consumer stuck in the middle. The CostVantage model is a step in the right direction. Providing greater price transparency can only be a good thing for consumers, and I believe that it will lead to some relief on prices. This is a step in the right direction. However, greater price transparency alone won’t address the fundamental challenges that drive the cost of drugs – the drug patent system that limits competition and enables pharmaceutical companies to charge exorbitant fees to deliver the high margins needed to drive their stock prices.
The cost of prescription drugs in the US is a joke. We have a free for all where we don’t negotiate at a national level like every other country. That’s one reason the myriad of amorphous rules and jurisdictions end up costing Americans citizens billions of dollars.
The cost we pay for life-saving drugs is criminal, yet we continue to be ruled by the lobbyists on K Street rather than a true national healthcare program. You know, one that actually considers that not all humans who get sick also happen to be millionaires. When these lifesaving drugs cost less in Cuba than here (please see the Michael Moore movie, Sicko), we need a massive change. This CVSHealth program looks like it might help. Nothing like some real-life free market competition from Mark Cuban’s Cost Plus Drugs to inspire CVS to make a change.
I don’t think it is an easy fix, but applaud CVS for trying to become more transparent and customer centric. They are, however, still at the mercy of the drug company pricing for determining their base cost. The overall industry is quite complex and this single adjustment will certainly not level the playing field. If it works and builds customer trust and loyalty, we may see other retailers embracing the model and, perhaps, the critcal mass will be the tipping point.
Full disclosure: after my CVS closed, I moved my scripts to Mark Cuban’s pharmacy, and have had no issues, and prices are noticeably lower. It is smart of CVS to realize that consumers have choices, and to take proactive steps to remain competitive.
CVS has two challenges: 1) a healthcare system that is by any measure, bizarre in its payment plans and 2) differentiating from the other half of the duopoly, Walgreens.
I think this is a great step….a beginning. As Neil pointed out, part of it is “keep up with the new upstarts” but it’s also about differentiating from other “old favorites” who are way too focused on cost reduction, and not enough on customer service.
CVS is a big enough player in the pharma ecosystem to make a start on radically rethinking this part of our country’s healthcare crisis. Taking out multiple layers of costs and restrictions benefit consumers and gives CVS a competitive advantage.
Pricing may be more transparent, but will it be lower? The proof is in the pudding. It’s not just a matter of how pharmacies and insurers are reimbursed by PBM’s and drug companies — it’s also about the arcane system of “tier pricing” affecting most drugs, and driving up the price of branded drugs when they get plenty of advertising. Until these drugs hit the generic market, they can be cash cows for Big Pharma and I don’t see that model changing anytime soon.
Respectfully, this question is ambiguous at best. The real question ought to be something like, “Who benefits more from CVS’ CostVantage reimbursement model?” Is it the consumer? Not really since price transparency doesn’t automatically translate to lower prices. Is it the PBM system in a world where the “middleman” role is often synonymous with added costs? Maybe, at least on a temporary basis. Is it CVS itself? Looks to me like the answer to that is yes. CVS has gained great publicity by taking a baby step toward defending against more streamlined digital competitors. Is that enough to carry them forward to a profitable future? Not by itself.
Ryan, a great point about CVS being the main beneficiary. They may pick up some market share (or protect what they have against more agile competition), but the store experience at both CVS and Walgreens is famously broken right now. Until the big drug chains address their hiring practices and service levels, transparent pricing is only part of their competitive problem.
Of course CVS anticipates a business benefit from CostVantage. Price transparency might relieve some patient stress, but I’ll believe costs are lower when I see it. For now, it’s a bizzarro world where the cash/discount card prices on some drugs are a small fraction of the insured cost.
It would be one thing if the USA healthcare system was the most expensive in the world, AND…delivered the best health outcomes in the world. That’s not the case. It’s not even close. So the citizens of the USA are owed some pretty dramatic breakthroughs in both the financial efficiencies and the delivered outcomes of the healthcare system. Sounds like this is one small step in that direction, but we have so much further to go.
The pricing models for drugs in our country is more complex than the tax code, and that is saying something. Any initiative to increase transparency is welcome, and most likely will not be nearly enough, but a start is welcome!
This just another way that CVS is trying to confuse what should be a direct, fee-based, reimbursement system for our drugs. Filling our generic prescriptions and picking them up at major pharmacies cost only $4. Why should it cost $5, plus 15%, plus $5 for mailing? CVS is not passing on its costs correctly. Why doesn’t it cost the same $4, plus a flat mailing fee of $2. or $3? CVS needs to be transparent, honest, and build a prescription refill model for others to follow.