Dec 6, 2023 - Health

CVS drug pricing overhaul signals a broader industry shift

Photo: Mario Tama/Getty Images

CVS Health's new plan to make the way it prices prescription drugs more predictable is the latest shift by pharmacy giants to overhaul their business models amid increasing pressure from policymakers and industry upstarts.

Why it matters: More transparent pricing that's more closely tied to the base cost of a drug could drive down how much consumers and insurers pay for some medicines.

  • And it could also help diffuse consumer anger directed at major industry players involved in the typically opaque system for setting drug prices.

Driving the news: CVS Health announced Tuesday it plans to move away from the complex formulas it's used to set prices, shifting to a simpler model often called "cost-plus" pricing that some rivals have already adopted.

  • CVS — which also owns the nation's largest pharmacy benefit manager, CVS Caremark, and a major health insurer, Aetna — in 2025 will start charging commercial health plans the amount they pay to acquire the drug, plus a small markup and fee.
  • Cigna-owned Express Scripts, the second-largest PBM, announced last month it would offer a similar option to employers and health plans, including its government clients.
  • The model most notably has been used by Mark Cuban's Cost Plus Drugs since its launch in 2021. The firm, which largely cuts out insurers to sell generic drugs directly to patients, marks up drugs from cost by 15% and adds a $3 pharmacy fee.

Between the lines: Lawmakers and regulators have been more closely scrutinizing PBMs. At the same time, employers, health plans and health systems have increasingly been pushing back against PBM contracts.

  • Drug manufacturers compete against each other for better placement on formularies by negotiating rebates with PBMs. Much of the controversy around PBMs centers on the amount of savings they pass onto health plans — and ultimately consumers — and how much they book as profit.
  • In August, Blue Shield of California dropped CVS Caremark as its sole PBM and shifted much of its business to Amazon and Cuban's drug company.
  • Some other smaller PBMs have also been bolstered by their promises of transparent pricing, including Capital Rx, which recently nabbed $50 million in backing from health systems.
  • "Capital Rx and some of the new transparent PBMs are demonstrating that this is a fair expectation from employers," said Elizabeth Mitchell, CEO of the Purchaser Business Group on Health (PBGH), which two years ago launched its own PBM for large employers.
  • Employers should have clarity about their health plans' drug costs, have the right to audit them and have the ability to drive down costs when they effectively manage their formularies, Mitchell said. They're not always getting what they need from legacy PBM models, she said.

What they're saying: It's possible CVS was starting to see the advantages of its secretive pricing model erode, “especially as Congress is set to act on rebates,” former FDA commissioner Scott Gottlieb wrote on X, formerly Twitter.

  • “My sense is what this move signals is that CVS is saying 'OK that whole rebating structure is eroding, so we need to stop clinging to it in a circumstance where [it] could also be hurting the retail experience for our customers,’” he wrote.
  • Others registered skepticism that PBMs would move entirely away from the rebate model.
  • "There is so much money riding on the existing model, it's hard for me to believe that they've given up the existing model without a fight,'" said Michael Thompson, CEO of the National Alliance of Healthcare Purchaser Coalitions.
  • "The question is, 'How have they preserved their profitability?'" Thompson told Axios.

The intrigue: It's also possible the growing concern among large employers about the cost of new anti-obesity medications is driving tougher conversations with PBMs, said Rob Andrews, CEO of the Health Transformation Alliance, which includes member companies like Marriott, Coca-Cola and American Express.

  • "The smart players in this space are beginning to think about how they can save money in other areas of their spend with Rx in order to pay for the weight loss," Andrews told Axios. "They can't be smart about that if they don't have the data and they don't have transparency."

The bottom line: While transparent pricing is exactly what industry and policymakers have been calling for, many say they are taking a wait-and-see approach when it comes to CVS's latest announcement.

  • The company itself said the costs for some drugs could go up in the new model.
  • "Does it make needed drugs more affordable for people paying for them? I think that's the key indicator," said Mitchell, the PBGH chief executive. "Will they be contributing to that or is this just a way to move money around in a vertically integrated company? It's too soon to tell."
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