Education

The Flaws in Cigna’s New Cost Plus Model

Written by

Alan Pannier

December 4, 2023

As the SVP of Product Strategy at SmithRx, I've been closely following Cigna’s announcement about their new “cost plus” pharmacy network. On the surface, this seems like a move towards greater transparency in drug pricing. But after digging a bit deeper, there are several aspects of this strategy that raise important considerations.

Understanding the Nuances of the Cost Plus Model

Cigna mentions that “employers will have the option to pay for medications at a cost plus 15% model." Initially, you would think this would be an attractive proposition for independent pharmacies. Especially, given their continued reimbursement pressures and their ability to have a consistent reimbursement for their services. Unfortunately, we are already hearing in the market that pharmacies that are looking to join the network are being told they would be reimbursed cost plus 5%. If employers are paying 15% and the pharmacy is being reimbursed 5% then who is taking the extra 10%?

The Problem with a Uniform Fee Structure

If you pay close attention to the language in the press release, you’ll notice that Cigna states the use of this network is optional for clients, and their response regarding the potential for cost savings is somewhat vague. They suggest that while there might be savings on some drugs, it might not be the case for others, leaving the decision to their clients (employers). Translation: this will not be selected by employers due to the increase in cost.

The core issue here is that you can’t offer the reimbursement of cost and 15% across the board. This method can be reasonable for generic medications, echoing the strategy of Mark Cuban’s Cost Plus Drugs. However, when it comes to branded or specialty medications, this model falls apart. In these scenarios, prices remain steep, and pharmacies could end up receiving more than what’s justifiable. This disparity will likely make the model less attractive and cost-effective for employers.

Long-term Viability and Countering the Broader Narrative

Based on these observations, I predict that despite establishing the network, employers won’t opt in due to the potential for increased costs, particularly for expensive medications. I wouldn’t be surprised if, a few months down the line, Cigna steps back from this model, citing lack of sufficient interest.

This prediction mirrors a broader narrative in the industry and on Capitol Hill. There's this prevailing thought out there that spread pricing offers a level of predictability that outweighs the pros of a pass-through model, which are linked to market fluctuations. In a pass-through model, the prices paid by clients directly mirror the actual, current market prices of medications. This means that clients pay the true cost of the drug, plus a fixed management fee, without any additional markup. While this approach is lauded for its transparency, there’s concern around cost being directly linked to the pharmaceutical market. The thing is, however, nothing has historically had as big of an impact on drug costs than traditional PBMs negotiating higher rebates to pocket. 

At SmithRx, our experience tells a different, more positive story about pass-through. We've built our business on this model, and the results speak for themselves. We work with over 3,000 clients who not only benefit from the transparency of our pass-through pricing but also see real, tangible savings of up to 50% on their prescription drug costs. 

What we've found is that predictability doesn’t have to come at the cost of higher fees or back-alley deals. Our clients can budget and plan their healthcare expenses effectively because they know exactly what they're paying for. 

The Real Need for Transparency

From my vantage point, while Cigna's cost plus model might appear progressive, it warrants a careful examination, especially for higher-cost medications. The ongoing challenges in drug pricing accentuate the need for true transparency and fairness in pricing models. At SmithRx, we demonstrate that fair and predictable pricing models are not only feasible but are already benefiting a large number of clients, offering a sustainable and equitable solution in the complex world of healthcare.

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.