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How Will CVS’s Pricing Announcement Impact Health Plan Sponsors?

CVS, owner of over 9,000 pharmacies and one of the largest pharmacy benefit managers in the United States, has committed to a significant change in how it prices drugs.

On Tuesday, December 5th, 2023, CVS announced a radical simplification of its pharmacy reimbursement model. These pricing changes, which have the potential to impact tens of millions of Americans and the employers who sponsor their health insurance plans, are set to take effect on January 1st, 2025. The new program is called CVS CostVantage.

Like most other pharmacy providers in the United States, CVS currently operates under a payment model that has been widely criticized as lacking transparency. The company’s announced shift towards a new model has been billed as an effort to address these issues. Some have speculated that these changes were influenced by Blue Shield of California’s recent decision to cut ties with CVS Caremark and the entry of players such as Amazon and Mark Cuban’s Cost Plus Drugs into the pharma space.

What Did the Announcement Say?

Beginning in 2025, thousands of CVS locations will start basing their prescription prices on how much it costs pharmacies to acquire and supply their drugs. Under this new system, CVS pharmacies will take the cost of a given medication, add a markup and some handling fees, and simply sell said medication at that price point. This is in contrast to current industry standards, where murky formulas and complicated negotiations between insurance carriers, pharmacy benefit managers, drug manufacturers, and other entities are used to generate consumer-facing prices that often bear very little relation to a medication’s actual cost. Crucially, the company noted that the new CostVantage payment model will not apply to specialty medications, which are responsible for the lion’s share of rising pharmacy spending in the United States.

Crucially, CVS noted that the new payment model will not apply to specialty medications.

CVS representatives were careful to manage expectations as the changes were announced, noting that the new policy should not be expected to immediately result in lower costs for consumers or health plan sponsors. Instead, emphasis was placed on boosting transparency and reducing price variability. Under the current system, consumers can wind up paying dramatically different prices for the exact same product, and the company has presented the CostVantage model as a way to help alleviate this.

What Could This Mean for Health Plan Sponsors?

While this is certainly a welcome step for employers who are fed up with paying high pharmacy costs, near-term savings for plan sponsors and members are likely to be quite limited. The company’s decision to omit specialty medications from these pricing reforms leaves more than half of pharmacy spending untouched and significantly dampens the potential for cost savings. In fact, it’s even possible that implementing the CostVantage model will cause some drug prices to go up.

However, the positive impacts of this CVS policy change should not be overlooked. Pivoting to a model that shows consumers and their employers how it actually costs pharmacies to provide their medications is a significant transparency win. It is also possible that the CostVantage model will result in a “flattening” of drug prices for millions of consumers by reducing the disparity in what different people pay for identical prescriptions.

Moreover, the fact that a company as large and influential as CVS has voluntarily undertaken these reforms represents a meaningful response to public pressure. These developments could possibly spur actions from other entities throughout the pharmacy supply chain, although only time will tell.

Eric Elliott, Director of Strategic Growth for OneDigital's Pharmacy Consulting division, had this to say about the potential impact of CVS CostVantage on the pharmaceutical status quo:

“If we take this CostVantage announcement at face value, it is good news for pharmacies in terms of stabilizing reimbursements and removing the complexity of current pricing models. However, this does not directly translate into lower medication costs paid by consumers or plan sponsors. With this being positioned as a move toward greater transparency in the space, it will be important to see how CVS ultimately defines acquisition costs, how this pricing model will be rolled out and accepted by non-CVS pharmacies in the network, and what level of audit rights will be permitted.”

Employers should continue to monitor healthcare trends, utilization, and spending in order to make the best policy decisions for their organizations. For more pharmacy-related resources and customized analysis and advice, contact the OneDigital pharmacy consulting team.

Want to take action to lower the cost of your organization’s pharmacy plan? Check out OneDigital’s free Cost Containment Playbook.