CVS Health revamps pharmacy reimbursement model amid scrutiny on high drug prices

CVS Health is overhauling the way it reimburses its pharmacies for prescription medications as the healthcare industry faces increased scrutiny for high drug prices.

The company, the largest drugstore chain in the U.S., said the new model brings more transparency and clarity to prescription drug pricing. Under a new model, CVS will shift to fixed rates for reimbursements from pharmacy benefit managers (PBMS), the company announced.

It's a similar model rolled out by newer companies like Mark Cuban Cost Plus Drugs Co. that are selling prescription drugs at lower prices than traditional pharmacies. Mark Cuban's online pharmacy sells prescription medications at a 15% markup over its cost, plus pharmacy fees.

CVS unveiled Tuesday its CostVantage plan for its roughly 9,500 pharmacies. Under the plan, pharmacies will be reimbursed by contracted pharmacy benefit managers (PBMS) and payers using a transparent formula built on the cost of the drug, a set markup and a patient management fee, executives announced during the company's investor day, the first in two years.

CVS Pharmacy will launch CVS CostVantage with PBMs for their commercial payers in 2025.

"We're going to work together with our PBM and payer partners over the early part of 2024 to facilitate this change," Prem Shah, PharmD, executive vice president, chief pharmacy officer and president, pharmacy and consumer wellness, CVS Health, said during CVS Health's investor day Tuesday.

The company also will extend this reimbursement model to certain third-party cash discount card administrators in the second quarter of 2024, he 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.

"I firmly believe that this is a crucial building block for PBMs to create a more transparent model downstream for their clients. And, it sets the stage for payers to create more predictable pricing at the pharmacy counter [for consumers]," he said.

The traditional prescription drug pricing model is facing macro economic pressures, including reimbursement challenges, hat have increased pharmacy costs, Shah noted.

"This model has reached an inflection point that is just ripe for change. If you look forward, the adoption of generic drugs in our retail pharmacy business is now around 90%. That limits the capacity or the amount of value remaining through the higher levels of generic dispensing," he said. "Branded drugs consistently rise due to inflation and the rising cost of new drugs, further widening the cost difference between generics and branded drugs"

Since 2019 alone, branded drugs have risen more than 40%. This trend has led to higher costs for patients and our health plans and PBM plan sponsors, Shah noted.

"We're changing this outdated reimbursement model that made sense for the last decade, but no longer works today or in the future. We're introducing a new simple model that provides value for all stakeholders across the supply chain in a much more simple, transparent and comprehensive way. The new model shifts the way we're getting paid for the products and services we provide to being more closely aligned to the value we create as a local community pharmacy," he said.

CVS also anticipates that the CostVantage model will "reset the financial outlook of the retail business" with potential upside to the company's long-term guidance for growth expectations, Shah said.

CVS's PBM operation, Caremark, also rolled out a new model called TrueCost to offer client pricing reflecting the true net cost of prescription drugs, with visibility into administrative fees, executives said.

Through this approach, clients will have the flexibility to choose a pharmacy benefit model that works best for the unique needs of their members and plan, executives. CVS Caremark plans to launch the new model in 2025.

During its investor day Tuesday, CVS also projected stronger-than-expected 2024 revenue. The healthcare giant is forecasting overall revenue of at least $366 billion next year, with adjusted profit coming in at around $8.50 per share. The company is banking on CostVantage, better margins under its government-supported Medicare Advantage insurance plans and other healthcare services to boost its earnings in 2024.

CVS shares jumped 4% Tuesday morning.

The company also reiterated its 2023 forecasts for adjusted profit in the range of $8.50 to $8.70 a share and total revenue between $351.5 to $357.3 billion.

CVS also lifted its quarterly dividend by 10%, to 66.5 cents a share.

The company also announced plans to rebrand its health services business to "CVS Healthspire" to integrate its recent acquisitions, including home health provider Signify Health and Medicare-focused primary care player Oak Street Health, with its pharmacy services business. Healthspire also will encompass CVS' new Cordavis operation, a business segment the company launched in August that aims to work with drugmakers to bring additional biosimilars to market.