CVS plans to launch a cost-based drug pricing method for its retail pharmacies to bolster flatlining growth, executives announced during the company’s investor day on Tuesday.
It’s a significant change in how CVS’ more than 9,000 pharmacies are paid for drugs by pharmacy benefit managers and other payers — and the latest move to shake up the complex and unpopular U.S. drug pricing system.
Under the new model, CVS’ pharmacy network will price drugs based on the amount the company paid for them, plus a defined markup and additional fee to cover pharmacists’ costs of handling and dispensing the prescriptions.
The new model, called CostVantage, will be rolled out starting next year before launching for CVS’ commercial payers — which account for 750 million prescriptions annually — in 2025.
CVS is also launching what it bills as a new, transparent PBM product that’s based on the net cost of drugs, with clear administrative fees.
“We are not satisfied with the status quo” in pharmacy, said Thomas Cowhey, CVS’ interim chief financial officer, during the investor day. “[The model] could stabilize this business over time.”
Refreshed pharmacy pricing
CVS’ retail pharmacy business has struggled this year amid headwinds from declining COVID-19 tests and vaccines and worsening labor relations with its pharmacists.
However, the fundamental issue is the antiquated way pharmacies price the drugs they dispense, said CVS Chief Pharmacy Officer Prem Shah during the investor day.
Pharmacies are generally paid for drugs based on variety of complex factors beyond the acquisition cost of the medications. Pharmacies generally use higher rates on some medicines to subsidize losses on others, a process called “cross subsidization.” As the cost of branded drugs rise and reimbursement from payers falls, this structure has resulted in flattening revenue for pharmacies, Shah said.
Without the pricing change, CVS’ retail pharmacy division expects a 5% drop in adjusted operating income next year. The new model should help CVS boost its margin change to flat next year as opposed to a decline, according to Shah.
“The current pharmacy reimbursement model has been effective over the past decade,” said Shah, “but this model has reached an inflection point that is just ripe for change.”
CVS executives said CostVantage shouldn’t raise prices for medications, and could result in more drugs being priced lower than before.
CVS will launch CostVantage next year for consumers paying with cash using certain drug discount cards, before making it available for employer-sponsored members.
The program should also eliminate the pricing discrepancy where insured patients find it cheaper to pay for drugs with cash, instead of with their pharmacy benefit, CVS executives said.
Shares in digital health company GoodRx, which offers drug discount cards to consumers, fell 8% after CVS’ announcement.
CostVantage is similar to the pricing scheme set up by pharmacy disruptor Mark Cuban Cost Plus Drug Company. Cost Plus, which launched a little under two years ago, sells drugs for its acquisition fee plus a standard markup, and has found success comparing its model to the murkier practices of legacy PBMs.
The program was introduced in tandem with TrueCost, a new transparent PBM product based on the net cost of drugs. TrueCost will be an option for employers and other clients in 2025, said Caremark President David Joyner.
The new programs come as PBMs face intense criticism — and lose some clients — over business practices seen as opaque and even anticompetitive.
The companies, which serve as middlemen between drug manufacturers and health insurers, are currently facing an investigation by the Federal Trade Commission, along with scrutiny (and the threat of potential legislation) in Congress.
In light of that, some major PBMs have recently announced new programs they say are simpler and more transparent. In November, Cigna’s PBM Express Scripts — the second-largest PBM in the U.S. after Caremark — also said it was launching a cost-based pricing method for prescription drugs.
Also during its investor day, CVS launches a new brand for its health services segment, which it’s renaming Healthspire.
Healthspire includes Caremark, value-based care network Oak Street Health, at-home care provider Signify Health and its network of walk-in MinuteClinics, among other businesses.