A person walks past a CVS Pharmacy store in Manhattan, New York, U.S., November 15, 2021.
Andrew Kelly | Reuters
CVS Health on Tuesday he said he would renovate how it prices prescription drugs and does away with a complex model that typically dictates how much pharmacies are reimbursed and what patients pay for those drugs.
The new effort makes CVS the latest company to try to upend the traditional prescription drug pricing system, which has faced years of political scrutiny for what critics call a lack of transparency and inflated health care costs for U.S. consumers.
CVS will launch a new model for reimbursing its pharmacies on Jan. 1, 2025 for commercial payers, executives said during the company’s 2023 investor day.
CVS’s new model could change the cost of prescription drugs for some patients, but it won’t necessarily make all drugs cost less, company officials said. Some dcirugs may cost less, while the prices of others may increase, they noted. But it should lower prescription costs more than increase them for consumers, employers and health insurers, according to executives.
But CVS is “committed to lowering drug pricing” and making the process more transparent, CEO Karen Lynch told CNBC’s “The Exchange” on Tuesday.
“What this does is it essentially aligns the economic pricing of our drugs with what consumers will pay at the pharmacy counter,” Lynch said of the new model. “What people are saying is, ‘We don’t understand, it’s not transparent, it’s not easy to understand how much drugs cost.’
“We’re changing that,” he added.
Shares of CVS closed nearly 4% higher on Tuesday after the company’s investor day, where it also issued a better 2024 revenue forecast than Wall Street expected.
CVS said the plan, called CVS CostVantage, would use a “sustainable and transparent” formula to determine the price of a drug and the corresponding reimbursements pharmacies receive from pharmacy benefit managers. These middlemen negotiate drug discounts with manufacturers on behalf of health insurance companies, large employers and others who contract with them.
Under the new model, CVS’s more than 9,000 retail pharmacies will be reimbursed by PBMs and other payers based on the cost of the drug, a “clearly defined” label and a fee to cover the handling and filling of prescriptions, said the Prem Shah. president of CVS’ pharmacy and consumer wellness division, during the company’s investor day.
Lynch told CNBC: “It’s a cost plus markup, plus a fee. And that’s the transparency of what we’re trying to do.”
Currently, pharmacies are typically paid using a complex system that is not directly based on what they spent on the drug purchase. This model, which involves a multi-layered network of insurers, drug manufacturers, PBMs and pharmacies, leads to ambiguity about the fees and markups that are added to the upfront cost of a drug.
Billionaire Mark Cuban launched an online pharmacy last year that takes a similar approach to CVS’s new reimbursement model. The company, called Cost Plus Drugs, aims to lower the price of drugs across the board by selling them at a total 15% markup of their cost, plus pharmacy fees.
Cuban said in an email to CNBC that he has “absolutely no reaction” to CVS’s new model.
Cuba’s venture is already shaking up the broader health care industry: CVS suffered a blow over the summer when a major California health insurer, Blue Shield of California, announced it would no longer use the company as its PBM and instead will work with several companies, including the Cuban company and Amazon Pharmacy.
CVS Health’s Caremark is one of the largest PBMs in the U.S. Caremark and other PBMs have faced increased scrutiny over their role in driving up drug costs, and the Federal Trade Commission is also investigating their practices.
Cuba’s pharmaceutical company has pressured other companies that manage drug benefits to make their own changes. For example, Cigna announced last month that its PBM will offer a similar pricing model on Cost Plus drugs.
The Biden administration is making its own moves to curb drug prices.
As part of the president’s law to reduce inflation, the government announced in August the first 10 prescription drugs that would be subject to drug price negotiations with the federal Medicare program, which aims to make costly drugs more affordable for older Americans.
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