CVS Plans to Overhaul How Much Drugs Cost
Dec 07, 2023
The
nation’s biggest drugstore chain to get paid based on the amount it pays for
drugs, plus small markup and fee
CVS
Health CVS 3.49%increase; green up pointing triangle
, 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.
Source: Wall Street Journal