If CVS’s ‘True Cost’ Drug Pricing Passes The Test, It Could Save An Industry

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CVS’s store receipts may stay long, but its prescription slips are about to get shorter.

CVS Pharmacy is reformulating how it will price Rx drugs at its nearly 9,000 pharmacies, with a simplified system that establishes price based on the drug’s cost, an established markup charge and a fee for services.

When it takes effect in 2025, this approach, called CostVantage, will more closely link prescription prices to the base cost of drugs, meaning consumers and insurers could pay less. CVS describes the plan as a “transparent and sustainable model that fairly aligns pharmacy reimbursement to the quality services we provide.”

The “true net cost” pricing model also can be described as similar to that of Mark Cuban Cost Plus Drug Co., the e-pharmacy founded by entrepreneur Mark Cuban. It sells generic drugs directly to consumers, bypassing health insurers, using a similar formula: the manufacturer’s price for the generic plus a 15% markup, a pharmacist fee and shipping.

This similarity signals a potentially major shift in retail pharmacy.

The Retail Prescription Story

The lion’s share of drugstore sales comes from prescription fulfillments. But profits from this segment have been declining due to lower reimbursement rates for prescription drugs, as well as competition from Amazon Pharmacy (and PillPack), Walmart and online prescription services such as Cost Plus Drug, CNN reports.

Meanwhile, the front-ends of drugstores, where shoppers can buy snacks, cosmetics and household items, face competitive pressure on price and selection.

As a result CVS, Walgreens and Rite Aid have been closing stores. CVS in 2021 said it planned to shutter 900 stores by 2024, and Walgreens in June said it would close 150 locations – that’s on top of 200 stores it said it would close in 2019, according to CNN.

And Rite Aid, which in October filed for bankruptcy protection, will reportedly close as many as 500 of its 2,200 locations.

Putting A Price On CVS’s Drug Competition

CVS’s CostVantage plan is designed to deliver more predictable, if not improved, profits. This is a foundational requirement as the retailer transforms further into a wellness chain from a snacks-and-cola stop.

This transformation is in CVS’s roots. It started out in 1963 not as a pharmacy chain, but as a health and beauty shop called Consumer Value Store. In 1967, it added its first pharmacies, which helped seed its national expansion.

As wellness became more of a competitive opportunity, CVS leaned in. In 2006, it acquired MinuteClinic in-store health clinics, and in 2007, it bought Caremark, the nation’s largest pharmacy benefit manager (PBM). By 2015, CVS had acquired the pharmacy services provider Omnicare and all of Target’s 1,600 pharmacies and clinics. 

And from 2018 to 2023, it purchased Aetna health insurance (the largest healthcare merger in the U.S.), Signify Health, a tech platform for at-home health assessments, and Oak Street Health, a primary care company for older adults.

These added services contribute markedly to CVS’s top line. For the nine months ended Sept. 30, CVS reported pharmacy sales (which include its health services) of $164 billion, compared with $151 billion in the 2022 period – despite store closings. Meanwhile, front-store sales slipped to almost $16.6 billion from $16.63 billion (likely reflecting store closings).

CostVantage Pros And Cons

Competition is likely not the only motivation for CVS’s new pricing formula. Federal regulations could soon change how drugs are priced – the Department of Health and Human Services has been asked to study models to reduce drug costs for Medicare and Medicaid patients, the Washington Post reports.

But efforts to manage prescription costs have been coming out of the bushes. Insurance-skirting services, such as GoodRx, also offer lower-priced drug options. And in November, the Cigna-owned PBM Express Scrips announced a similar cost-plus pricing option.

This is significant because PBMs (including CVS Caremark) are middlemen that negotiate prices with drug makers. They then determine how much savings to pass on to insurers and consumers and what to keep as profit, as explained by Axios. PBMs aren’t often transparent about their rebates.

Enter CVS.

Will its CostAdvantage resolve the dilemma of managing drug prices while generating a profit? Here are a few benefits, and side effects. 

Benefit 1: It should build trust. Information is power. CVS’s transparent pricing model could resolve some frustrations among customers who don’t understand why a pill or ointment costs what it does. In simplifying its pricing structure, CVS could be perceived as showing care.

Side effect: There may be achy profits. It’s not clear how or if CVS will maintain its prescription profit margin on the cost-plus structure. The PBM industry is large, and many could resist the transparent pricing model.

Benefit 2: California dreaming. Blue Shield of California, which represents more than 4.8 million consumers, in August dropped CVS Caremark as its only PBM and shifted business to a number of others, including Amazon and Mark Cuban Cost Plus Drug. So CVS’s “true cost” model could earn it reconsideration across the Golden Gate.

Side effect: Lost sleep. In going head-to-head with Amazon and Mark Cuban Cost Plus, even outside of California, CVS’s buying power with drug companies will be tested. The PBM industry is competitive and massive – it generated $498.5 billion in revenue in 2022, according to IBIS World, and its market size has expanded by 2.7% a year, on average, from 2017 to 2022.

Benefit 3: It could provide price relief. The cost-plus-fee model could reduce the price tag on many prescriptions – not just for consumers, but for insurers, since PBMs negotiate prices for insurers. If CVS saves money, then, it could decide to pass some of those savings on to its clients.

Side effect: But you might not feel relief. The transparent pricing model is designed to offer transparency to CVS only, so it doesn’t guarantee lower pricing for consumers on all prescriptions. CVS negotiates prices with other PBMs, insurers and employers, CNN reports. The model should reduce the cost of most drugs, a CVS spokeswomen told CNN, but some might increase.

Drug Prices Are A Headache. But Is It Chronic?

Consumers, and potentially regulators, will determine if the benefits of CVS’ transparent drug pricing approach outweigh the side effects, but this much is clear: Healthcare costs are too complicated for the average patient to decipher, and this problem requires more than a generic solution.

If CVS can help expand the solution to the retail store, it’s a healthy step in the right direction.

 

This article originally appeared in Forbes.

Jenn McMillen
Jenn McMillen is Founder and Chief Accelerant of Incendio, a firm specializing in customer-facing initiatives, whether it’s marketing or technology. She was the VP of Loyalty and CRM for GameStop & Michaels.

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