CVS CostVantage Milestone Prompts a ‘Healthy Dose’ of Skepticism

CVS Health Corp. said on Jan. 6 that all commercial prescriptions dispensed through CVS Pharmacy are now contracted through the company’s CostVantage reimbursement model. The company aims to increase transparency for patients and PBMs alike with the new model, but some industry experts are greeting the announcement with a dose of skepticism. CVS said in addition to routing all commercial prescriptions through CostVantage, it is working with CMS to eventually include Medicare and Medicaid prescriptions. Reimbursement through CostVantage is based on the underlying cost of a drug plus a “defined markup” and a dispensing fee “tied to the care and value we provide.” “The way community pharmacies have historically been reimbursed for services has not fully reflected the value delivered or the underlying costs of doing business,” CVS explained. “By removing the market reliance on cross-subsidization caused by market basket approaches to reimbursement, CVS CostVantage provides more clarity, ensuring that CVS Pharmacy has a way of pricing and contracting that reflects the reality of today’s marketplace and anticipates the future.” But there are “solid reasons” to be skeptical, says Joe Shields, managing director of Transparency-Rx, a coalition of smaller PBMs pushing for industry reform. For instance, “what is the basis of the cost of the drug? Is it something that’s published, something that’s knowable?” he asks. “How much is that markup? Is it a flat fee? How are they constituting that markup?” The dispensing fee is where it “gets interesting,” Shields says. “It seems their model, despite what they’re saying, seems entirely insular to their own metrics and priorities. They probably have created a model that allows for reliable and knowable margins to their specialty programs, but it’s not clear that it’s actually going to change the market or offer more transparency or, frankly, help community pharmacies and independent pharmacies in meaningful ways…I think a healthy level of skepticism and real hard questions here are worth raising. There are ways to do this that they’re choosing not to, which raises a lot of red flags and questions.” Wall Street Reaction Is a ‘Silver Lining’ Wall Street is more optimistic about the launch, with Mizuho’s Ann Hynes predicting in a Jan. 6 research note that CostVantage “could help ease the ~$1bn of PBM reimbursement pressure every year and help mitigate the earnings headwind from difficulties in the retail pharmacy segment.” Hynes also said that CVS secured contracts with UnitedHealth Group’s Optum Rx and The Cigna Group’s Express Scripts to reimburse them through CostVantage, noting that it is “a key milestone in the company's journey to shift the current, unsustainable reimbursement model.” CostVantage also removes spread pricing, a practice in which the PBM charges the insurer a higher price for a drug than the PBM pays to the pharmacy and pockets the difference, which has historically been an issue in pharmacy reimbursement. “If successful, the removal of spread pricing should stabilize the expected -5% decline in AOI [adjusted operating income] annually and could provide upside to long-term targets for the segment…More importantly, given the focus on spread pricing for any potential future Pharmacy Benefit Manager (PBM) legislation introduced in Washington, we believe the removal of spread pricing de-risks CVS as it loses a meaningful legislative overhang going forward,” Hynes said. CostVantage is an attempt to stabilize the “never-ending headwind” of pharmacy reimbursement, Leerink Partners’ Michael Cherny wrote in a Dec. 18 research note. “CVS’s new CostVantage reimbursement model is an attempt to try to stabilize its overall reimbursement rates by moving to a cost-plus model, but it requires adoption and appropriate pricing over time to be successful,” he wrote. Positive Wall Street reaction is an encouraging sign, Shields says. “If there is a silver lining, it’s an indication that the market has an appetite for more transparency, more clarity, more reliability. But that comes with affordability, and that comes with a model that works for the employer and the client, not for CVS or one of the Big Three PBMs.” Regulatory and Market Pressures Spur Change PBM reform is becoming more of a legislative priority. Despite receiving broad bipartisan support, federal PBM reform measures were removed from the continuing resolution passed by Congress in December. But just because the provisions were not in the bill doesn’t mean they will not show up again in the new Congress, says Ge Bai, Ph.D., a business and health policy professor at Johns Hopkins University. “I think this is more of a preemptive move to adopt more transparent processes so that the regulatory pressure can be mitigated,” she says of CostVantage. Market pressures and competition will prompt PBMs to adopt similar reimbursement and pricing models, Bai predicts. There is fierce pressure from competition such as Amazon Rx and Mark Cuban Cost Plus Drugs, the latter of which uses a flat 15% markup. “I think [CostVantage] reflects the overall market trend, at least in appearance,” she says. “PBMs are moving to a more transparent reimbursement model for pharmacies.” Indeed, Express Scripts and Optum Rx rolled out transparency-focused models in 2023. Express Scripts’ ClearCareRx promised “employer, health plan, and government employer clients the option of a transparent economic model by providing clear and predictable costs for prescription drug benefits.” Optum Rx’s Cost Clarity “bases costs on independent costs baselines, such as the National Average Drug Acquisition Cost (NADAC) and wholesale costs.” And regulations and legislation are coming up because independent pharmacies have fought hard against PBMs, Bai says. “I think [CostVantage] is really three purposes — the regulatory pressure, the competition and market pressure, and then the negative reaction and resistance from independent pharmacies. I think this move is a direct response to all three pressures.” There is also market pressure on CVS to “offer something to clients who don’t find their price reliable or knowable,” Shields says. “This is a complex area that frankly isn’t really addressed by most of the legislation, but the truth is that employers across the country don’t have the ability to really shop for their own PBM.” The idea of true competition in the PBM marketplace is a myth, Shields adds. “I think to the extent to which things like that open up, whether it's through the auspices of public policy or litigation or things else like that, will sort of change the paradigm and offer true alternatives within the solution. In the meantime, you’re seeing the members we represent growing and scaling and competing in meaningful ways. I think both are happening; the market can have significant barriers at the same time. You can see the emergence of solutions that are scaling and proving that transparency can work effectively if it’s allowed to.”