Smoke and Mirrors: Analyzing CVS’s Drug Pricing Revamp

Written by

Alan Pannier

December 7, 2023

In the wake of CVS Health's recent announcement to revamp its drug pricing model, closely following Cigna's introduction of a cost-plus model, those of us in the pharmacy benefits management world are compelled to examine these changes with a critical eye. We will be anxiously awaiting Optum’s new pricing announcement to see what creative name they bring forward. Clear Network, CostVantage, True Cost, the pressure is on. 

At SmithRx, our commitment to transparency and innovation in drug pricing drives us to look beyond the surface of these corporate declarations. Let’s dig in.

First, it is important to note there are two very distinct programs: CostVantage (offered by the retail pharmacies) and TrueCost (offered by the PBM). 

Interpreting CostVantage: A True Transformation or a Strategic Play?

The introduction of CVS's CostVantage model seems timely, aligning with a broader industry movement towards transparent pricing. But when a giant like CVS adjusts its pricing model to lower cost, the proof should be in the pudding - or rather, in their financial reports. If these changes were genuine, we’d expect to see CVS executives tempering Wall Street expectations. Yet, what we often observe is a different story: CEOs reassuring analysts that despite grandiose announcements in the media, financial guidance remains unchanged.

In fact, CVS projected a stronger-than-expected 2024 revenue. The healthcare giant is forecasting overall revenue of at least USD $366 billion next year, with adjusted profit coming in at USD $8.50 per share.

CVS has announced that their pharmacies will be contracting with PBMs using their “acquisition cost” plus a pharmacy service fee. They have yet to define “acquisition cost” but there are a couple of options:

Option 1: They define their acquisition cost, which would put us in no better place than we are today: reliant on the pharmacy to accurately disclose their true acquisition cost of medications. With no way for validation, they have the flexibility to provide a cushion. They could also mimic the PBM rebate GPO game by adding a layer. This would allow them to provide an inflated acquisition cost that comes after an intermediary markup (enter AVERON). 

Option 2: They utilize the publicly disclosed NADAC pricing benchmark that is set by CMS. NADAC pricing is most commonly used in Medicaid pricing and is created based on survey data that pharmacies self report on their acquisition cost. Reporting is not mandatory, and as a result the larger chains (i.e. CVS) do not report their acquisition cost. This leaves mostly independent pharmacies and grocers to report their acquisition cost. If NADAC is used as a benchmark this would provide more profit to CVS as their buying power is far greater than an independent pharmacy. Alternatively, CVS could begin to report their “acquisition cost” but it would be the acquisition cost post Averon’s take, which would be inflated and not the actual acquisition cost by CVS.

In either scenario, the translation would be higher costs for employers and more money to the pharmacy. 

We commend CVS pharmacies for looking to move to a more straightforward pricing model and we welcome the opportunity to work with them on contracting a new pricing arrangement. We joke internally that there is only 100% of the average wholesale price and we are approaching that threshold as generic discounts move to the high eighties and nineties. The AWP pricing structure for pharmacy network contracts is antiquated and needs to change, but it needs to move to true price transparency. 

Understanding True Cost

Another critical component of CVS's strategy is the True Cost pricing structure. This structure, which is targeted at CVS's PBM clients (primarily employers), seems to revolve around offering the net cost and promoting rebates at the point of sale. This initiative appears to be a direct response to the increasing legislative and Federal Trade Commission scrutiny that PBMs are currently facing – a scrutiny that initiatives like TransparencyRx have been instrumental in bringing about.

In the past, point-of-sale rebate models haven't seen widespread adoption, primarily because PBMs tend to keep a large portion of these rebates to offset the risk involved in discounting drugs at the point of sale. Given that track record, one can't help but wonder if this is just another attempt that looks good on paper but falls short in practice. CVS states they will be providing optionality and offering clients both options. As we have seen with offering both pass-through and traditional pricing models, the optics push towards the traditional model. There is no reason this will not continue under True Cost. 

Proceeding with Caution 

History, among other things, gives us a reason for skepticism. Take CVS's past attempt with the Guaranteed Net Cost model, which, despite its fanfare (“drug cost predictability and pricing simplicity”), was not broadly implemented. When it was offered, traditional models were made more enticing, leading to its lukewarm reception. This pattern makes one question whether the latest announcement is a genuine shift or just another headline-grabbing move.

At the end of the day, we all need to remember that while the promise of more transparent and straightforward drug pricing is appealing, the true measure of success lies in the implementation, market acceptance, and a shift in revenue reporting.

As we navigate these changes, our focus at SmithRx remains steadfast on ensuring these developments translate into real benefits for plan sponsors and patients. The industry needs more than just surface-level reforms; it requires a fundamental shift towards genuine transparency and fairness in drug pricing. We will be watching closely, ready to call out hollow promises and champion true innovations.

Written by

Alan Pannier

SVP, Product, SmithRx

A new type of pharmacy benefits manager, SmithRx is working to reduce pharmacy costs by reimagining the traditional PBM as a Drug Acquisition Platform built on transparent modern technology that aligns with the needs of our customers.