Industry Voices—A new reimbursement model is needed to ensure the future of community pharmacy

Community pharmacies are well positioned to make a difference in the lives of their patients by providing convenient access to quality, affordable clinical pharmacy services while closing gaps in care.

But the retail pharmacy industry is at an inflection point. The current environment of decreasing reimbursement and increasing drug costs is not sustainable for either chain or independent pharmacies. Market factors such as wage pressures and drug mix shifts—accelerated by growth in expensive branded medications—are creating challenging economic conditions and operational dynamics.

For years, the way retail pharmacies are paid has worked and made sense. Pharmacy compensation uses discounts from multiple industry benchmarks, such as average wholesale price. In this model, reimbursement is not correlated to actual drug acquisition costs.

Historically, retail pharmacies would manage contracting with pharmacy benefit managers and plan sponsors using a market-basket approach across the portfolio of prescription drugs, including across brands and generics in the aggregate, leading to distortions in prices at the drug level that are no longer sustainable. In fact, at CVS Pharmacy, we’ve maximized generic drug dispensing, but we’re seeing the cost of branded drugs consistently rise—by more than 40% since 2019 (PDF).

Current reimbursement also does not account for the broader range of services pharmacists are required to deliver, ranging from drug adherence support to safety guidance. Despite these increased responsibilities, pharmacists continue to receive high marks from consumers, with 90% saying they trust their local pharmacist.

Maintaining the status quo is no longer an option. Real change is needed, and we are well positioned to lead the way. PBMs and payers want, need and require a local, vibrant pharmacy network to serve their members. To relieve the pressure on pharmacy, we have developed a new reimbursement model that provides transparency and simplicity and compensates CVS pharmacies for the important clinical services they provide. It’s a reimbursement standard that applies to every payer we work with, based on a transparent formula built on the underlying cost of the drug, plus a clearly defined markup, and a handling and dispensing fee tied to the care and value we provide.

The model is not about raising prices for clients or members. Instead, it focuses on resetting reimbursement to directly tie to our underlying cost of doing business. We will continue to lower the cost of drugs by leveraging our purchasing scale, negotiating reductions with suppliers and passing through improvements to PBMs and payers, which are already working toward greater simplicity and transparency in our relationship.

We believe this new approach—called CVS CostVantage—is a foundational building block that accelerates that effort. Starting as early as this spring, we will extend this new standard of compensation to certain third-party discount card administrators. It will launch with commercial payers in early 2025.

Community pharmacy is more important than ever

This ability to provide access to medications and other health services at convenient locations—including those in underserved areas—is an advantage that only community pharmacies can deliver. Ninety percent of Americans live within five miles of a retail pharmacy, and nearly 1 in 3 visit their pharmacy at least once per week (PDF), with evening and weekend hours boosting accessibility.

At no other point have the public health benefits of community pharmacy been better demonstrated than during the COVID-19 pandemic, when some 41,000 pharmacies were mobilized to deliver more than 300 million vaccines across the country.

But the demand, in many ways, has not eased despite the retreat of the pandemic. To meet consumers’ needs, we must foster an environment that creates sustainable and balanced working conditions while also elevating the profession of pharmacy. This includes creating more efficiency and capacity for pharmacists to provide the clinical services consumers want and need. So, it’s time that we consider an industrywide change that modernizes the retail pharmacy model and evolves how community pharmacy is paid for its work and support of patient care. 

This transformation from a market-basket to an acquisition-based approach sets the stage for payers across our industry to create more predictable pricing at the pharmacy counter. It’s a foundational step toward a more transparent model for consumers—and a healthier, more vibrant community pharmacy industry ensures ongoing access to local care and the ability to invest in improving service and quality for consumers.

Prem Shah is EVP, chief pharmacy officer and president, pharmacy and consumer wellness at CVS Health.