A Shift Towards Transparency: CVS Health Announces New Drug Pricing and Payment Model

CVS Health’s new CostVantage™ payment model will reimburse its pharmacies based on the purchase price of drugs instead of through complex traditional pharmaceutical pricing formulas, according to a report by The Wall Street Journal.¹ 

CVS Health President and CEO Karen S. Lynch made a statement in a recent press release regarding the payment model’s value, “The combination of our businesses, and the key growth areas we have invested in, drive our ability to lower the total cost of care, improve health outcomes, and deliver on our commitments to our customers, consumers, and shareholders."² 

Traditional pricing models have long drawn criticism from consumers, health insurers, employers, and even congressional lawmakers for obscuring the process of how drugs are bought and sold. Pharmacy-benefit managers often subsidize pharmacies’ profit losses on specific prescriptions by setting higher rates across groups of drugs.¹

Beginning in 2024, under the CostVantage model, payers will compensate CVS pharmacies according to the price of drugs, a flat service fee, and a minimal markup.¹  

Similar payment structures, like Mark Cuban’s “Cost Plus” pharmaceutical company and the Express Scripts ClearNetwork model, present simpler solutions that could benefit all parties. 

"It's a fundamental change in how pharmacy services are priced," Adam Fein, chief executive of the Drug Channels Institute, told The Wall Street Journal. “[It is] a legitimate step toward transparency."

CVS Health executives anticipate that drug prices should decrease overall even though a few may increase in cost.¹ Consumers frustrated that drugs are cheapest when purchased with cash and a drug discount card may find their prescriptions most affordable through insurance coverage under the new model.  

In the future, CVS Pharmacy contracts will incorporate CostVantage with pharmacy-benefit managers (PBMs) covering drugs paid for under employer plans.¹ Executives hope to eventually integrate the new model for government-sponsored coverage, such as Medicare.  

CVS Caremark® will also introduce TrueCost™, a CostVantage-compatible PBM product. TrueCost will be based on the net cost of drugs with defined fee structures, giving employers and other clients the choice to use it. However, it remains to be seen regarding how employers view TrueCost, since the model applies rebates from drugmakers to individual prescriptions, potentially impacting the out-of-pocket prices that patients pay and interfering with employers' and insurers' ability to offset other health care costs.¹

CostVantage may also lend CVS’s retail pharmacy security against a history of stagnant margins for dispensing prescriptions. While the new model may not boost overall profits for CVS, it could stabilize earnings long-term.¹  

Over time, retail pharmacies may be able to halt the trend toward shrinking profits on prescriptions under the new model and retain higher margins than they otherwise would have, Fein told The Wall Street Journal. He also cautioned that CVS-linked units sometimes set the price of drugs sold to the company's own pharmacies. 

References  

1. Mathews AW. CVS plans to overhaul how much drugs cost. The Wall Street Journal. December 5, 2023. Accessed December 5, 2023. https://www.wsj.com/health/healthcare/prescription-drug-costs-cvs-pharmacy-56acb623 
2. CVS Health highlights path to accelerating long-term growth through building a world of health around every consumer. News release. Nasdaq; December 5, 2023. Accessed December 5, 2023. https://www.nasdaq.com/press-release/cvs-health-highlights-path-to-accelerating-long-term-growth-through-building-a-world