CVS is changing its payment model for prescription drugs

Currently, prescription drug costs for customers and payments received by pharmacies are largely determined by pharmacy benefit managers (PBMs), which negotiate rebates between drugmakers and insurers.

PBMs often use complex reimbursement formulas that set compensation targets across groups of drugs instead of specific products. Under this model, pharmacies may be paid higher rates for certain medications, then use that margin to subsidize losses from other drugs.

However, CVS on Tuesday announced that it would be moving away from this traditional approach and implementing a simpler model. Under the new model, which is called CVS CostVantage, pharmacies will be reimbursed based on the cost of a drug plus a limited markup and flat fee to cover handling and dispensing services.

According to the Wall Street Journal, a similar payment model called "cost plus" has been used by other organizations, including Mark Cuban's Cost Plus Drug Company, and is said to improve clarity and accountability when it comes to drug pricing.

The new CostVantage model is expected to be phased in starting in the first half of 2024, and it will be incorporated into pharmacies' contracts with PBMs covering drugs under employer plans by 2025. CVS also said it plans to implement the model for government-backed coverage in the future.

CVS pharmacies will be paid in "a much simpler and more transparent way," said Prem Shah, co-president of CVS Pharmacy and chief pharmacy officer at CVS Health. "We want to change the market for the future."

CVS also plans to introduce a new payment option for clients of its PBM, CVS Caremark. This new option, called TrueCost, will determine prices based on the net cost of drugs and specifically defined fee structures. Employers and other clients will be able to choose to participate in the new option or stick with the original process.

How will the change impact consumers?

According to Adam Fein, CEO of the Drugs Channels Institute, CVS' new reimbursement model is "a fundamental change in how pharmacy services are priced" and "a legitimate step toward transparency."

"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, CEO of the Purchaser Business Group on Health.

Although CVS' decision appears to be a step toward transparency, Mitchell noted that she wants more details on the company's plans. "What really matters is, will this make drugs more affordable?" she said.

According to CVS, prices for consumers will more closely align with what the company's pharmacies pay to acquire prescription drugs. The new model will also likely eliminate high-profile differences where insured patients found they could get medications for cheaper prices when they paid with cash and a drug discount card instead of using their health plan's drug benefit coverage.

Although some drugs may cost less under the new model, others may increase in price. Overall, more drugs should decrease in price than increase, CVS executives said.

"We are leading with an approach that will shift how our retail pharmacy is compensated by implementing a more transparent and sustainable model that fairly aligns pharmacy reimbursement to the quality services we provide," Shah said. "It provides our [pharmacy benefit managers] and payor clients a foundational step towards more pricing clarity for consumers." (Mathews, Wall Street Journal, 12/5; Luhby/Meyersohn, CNN, 12/5)

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