CVS has unveiled plans to introduce a groundbreaking cost-based drug pricing strategy for its extensive retail pharmacy network, marking a pivotal shift in its approach to counter flatlining growth. During the company's recent investor day, executives presented the new model, named CostVantage, which aims to revamp the convoluted and unpopular U.S. drug pricing system.
Under the innovative CostVantage model, CVS pharmacies will determine drug prices based on the actual amount the company paid for them, incorporating a defined markup along with an additional cost to cover the handling and dispensing expenses that pharmacists bear. This strategic transformation is expected to be implemented next year and is scheduled for a comprehensive launch targeting CVS' commercial payers—responsible for 750 million prescriptions annually—in 2025.
Addressing the stagnant performance of CVS' retail pharmacy business amidst challenges such as declining COVID-19 tests and vaccines and strained labor relations, Thomas Cowhey, CVS' interim CFO, emphasized the imperative need for change in the outdated drug pricing structure. The current model, involving intricate factors beyond medication acquisition costs, has led to a scenario where pharmacies employ higher rates on certain drugs to offset losses on others—a practice known as "cross subsidization."
The existing pharmacy reimbursement model has reached a critical inflection point, calling for a paradigm shift, according to Prem Shah, CVS Chief Pharmacy Officer. Without the proposed pricing overhaul, CVS anticipates a 5% decline in adjusted operating income for its retail pharmacy division next year. The new model, however, is anticipated to arrest this decline, positioning CVS for a margin change to remain flat in the coming year.
Further, executives assured that CostVantage should not escalate medication prices, which could potentially result in lower prices for certain drugs. The program will initially be available for cash-paying consumers using specific drug discount cards, eventually extending to employer-sponsored members. Importantly, it aims to rectify pricing discrepancies, ensuring that insured patients find it economically equivalent to pay with their pharmacy benefit rather than opting for cash transactions.
CostVantage adopts a pricing strategy similar to that of the disruptive Cost Plus Drug Company, which Mark Cuban founded. This model, which sells drugs based on acquisition fees plus a standard markup, has gained traction by contrasting itself with the opaque practices of traditional pharmacy benefits (PBMs). Notably, CVS' move follows industry trends, with major PBMs facing scrutiny and client attrition over perceived opaque and anticompetitive practices.
In tandem with CostVantage, CVS is introducing a transparent PBM product named TrueCost, based on the net cost of drugs, expected to be an option for employers and clients in 2025. This initiative aligns with the broader industry trend, as other PBMs, including Cigna's Express Scripts, have also recently announced simpler and more transparent pricing methods.
Amidst these strategic shifts, CVS is rebranding its health services segment as Healthspire, encompassing Caremark, Oak Street Health, Signify Health, and its network of MinuteClinics. This multifaceted approach underscores CVS's commitment to addressing challenges, fostering transparency, and ushering in a new era in the complex landscape of drug pricing and healthcare services.