Tuesday, April 02, 2024

What CVS Pharmacy’s New Cost-Plus Reimbursement Approach Means for PBMs, Pharmacies, Plan Sponsors, and Prescription Prices (rerun)

This week, I’m rerunning some popular posts while I prepare for Friday’s live video webinar: Drug Channel Implications of the Inflation Reduction Act.

For more on acquisition cost reimbursement for pharmacies, see Sections 8.4. and 12.3.4. of our new 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

Click here to see the original post from December 2023.

Is the world ready for new ways to price pharmacy and pharmacy benefit manager (PBM) services? CVS Health thinks so, as evidenced by two new initiatives that it announced yesterday. Below you'll find details and links to source documents.

I commend CVS Health for attempting to address key economic challenges facing the retail pharmacy industry and for tackling the hidden complexities of PBM pricing models. As I explain, a shift to cost-based pharmacy reimbursement could stabilize CVS Health’s retail business by improving its dispensing profits.

Nonetheless, CVS Pharmacy’s cost-plus model has some notable shortcomings for plan sponsors and is far less “disruptive” than the company would like us to believe. Mark Cuban should be flattered—but not fearful.

What's more, other large pharmacies will likely follow CVS with attempts to force payers and PBMs to accept some form of cost-plus reimbursement. (Et tu, Walgreens?) If that happens, expect higher prescriptions prices, less efficiency, and a slowdown in the inevitable retail pharmacy shakeout.


At yesterday's investor day meeting, CVS Health announced two new pricing models:
  • CVS CostVantage, a new cost-based pharmacy reimbursement approach that all payers and PBMs will eventually be required to use for CVS retail pharmacies.
  • CVS Caremark TrueCost, an optional PBM program that simplifies pricing of PBM services for plan sponsors. TrueCost will also urge plans to share rebates and net prices with patients—a long overdue move, IMHO.
As always, I encourage you to review the original source material for yourself: ICYMI, The Wall Street Journal broke the story with a few quotes from yours truly: CVS Plans to Overhaul How Much Drugs Cost.


Acquisition cost pharmacy reimbursement models are a lower risk / lower return model for pharmacies. This reimbursement approach offers the prospect of higher pharmacy profits, particularly for generic prescriptions and certain brand-name prescriptions.

Typically, payers and PBMs don’t know any pharmacy’s specific acquisition cost. Traditional pharmacy reimbursement models estimate acquisition costs using discounts from list prices and/or a payer-determined maximum allowable cost (MAC). The reimbursement payment combines the drug cost with the pharmacy’s channel value. Pharmacies earn, on average, positive prescription gross margins. A pharmacy can sometimes earn a high margin on a prescription. However, it can sometimes earn a low margin or even lose money.

An acquisition cost approach trades this volatility for a stable average margin with less variability. In these models, a pharmacy is reimbursed based on some measure of its acquisition cost for a drug, plus additional amounts to cover the pharmacist’s services, the pharmacy’s cost of dispensing, and profit. Thus, cost-plus models shift compensation for prescriptions from a spread-based model to a service-based model.

For example, federal government regulations require fee-for-service state Medicaid programs to adopt acquisition cost pharmacy reimbursement. (See Sections 8.4. and 12.3.4. of the 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.) Medicaid programs with acquisition cost reimbursement have dispensing fees averaging about $11 per prescription. These amounts often exceed a pharmacy’s spread-based profits for a generic prescription.


There are at least four primary reasons why cost-based reimbursement should sound pretty good to a pharmacy owner—and to the shareholders of a public pharmacy business. As I see it, reimbursing pharmacies based on drug acquisition cost will:
  • Remove hidden cross-subsidies in pharmacy and PBM businesses. PBMs establish brand-name and generic prescription reimbursement amounts in unpredictable ways that don't appear related to pharmacies’ acquisition costs. For the same prescription drug, different plan sponsors can pay widely varying prices based on their PBM’s discount and rebate guarantees. Arbitrage opportunities between these price discrepancies has led to a boom in patient-paid prescriptions that bypass insurance via such cash-pay pharmacies as the Mark Cuban Cost Plus Drug Company and such discount cards as GoodRx. (Watch How Discount Cards Work: A Primer on GoodRx and Its Competitors.)

    In theory, a cost-plus reimbursement model strips away complexity and hidden cross-subsidies in favor of a more straightforward, understandable approach to pricing. For a pharmacy, the same PBM would pay the same price for the same prescription, regardless of the PBM’s arrangement with different plan sponsors. What’s more, the ability of discount card vendors like GoodRx to arbitrage PBM network rates would shrink considerably. That's likely why GoodRx's stock price dropped yesterday.
  • Delink pharmacist services from drug prices. Acquisition cost reimbursement also supports pharmacies with worse-than-average acquisition costs. The largest generic purchasing consortia—Red Oak Sourcing, Walgreens Boots Alliance Development, and ClarusONE—have used their buying power to reduce computed market averages. By establishing a professional dispensing fee that is not linked to market prices, pharmacies and pharmacists are assured of receiving compensation for their services.
  • Enable pharmacies to benefit from limitations in the computation of acquisition costs. Measuring a pharmacy’s true, net acquisition costs is a non-trivial cost accounting task. Existing benchmarks have limitations that can be exploited to boost pharmacy profits. 

    Consider National Average Drug Acquisition Cost (NADAC) and state-based Average Acquisition Cost (AAC) surveys used for reimbursement in fee-for-service Medicaid programs. Neither NADAC nor AAC reflect a pharmacy’s actual net acquisition costs. That’s because these surveys exclude off-invoice discounts, rebates, and price concessions that pharmacies can receive from wholesalers, buying groups, and manufacturers. These off-invoice discounts supplement a pharmacy’s negotiated invoice discounts, which are generally small for single-source brand-name drugs but large for multisource generic drugs. Consequently, a pharmacy’s gross profit per prescription could be larger than the dispensing fee.
Few commercial payers have adopted published acquisition cost data as a pharmacy reimbursement method. Capital Rx, the fast-growing PBM, is a notable exception. Since 2019, the company has had a NADAC-based reimbursement approach, which the company tells me has been driven by its client preferences.


Yesterday, CVS Health made a big splash by announcing its new CVS CostVantage programs. Under the program, CVS pharmacies will be reimbursed for prescriptions based on a measure of pharmacy acquisition cost plus an undisclosed percentage margin and a flat fee for pharmacy services. This program will launch in 2025 for CVS Caremark’s commercial customers. See pages 72 to 74 of its investor day deck.

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I commend CVS Health for attempting to address key economic challenges facing the retail pharmacy industry and for tackling the hidden complexities of PBM pricing models. The company’s size and influence could trigger a fundamental shift in the spread-based economic model that currently underpins pharmacy dispensing.

Alas, a moment’s reflection highlights some ways by which cost-plus pricing could discourage efficiency and raise prescription costs:
  • Weakened incentives. If a pharmacy knows that it receives a guaranteed margin on top of cost, why should it try to find a lower cost-of-goods? Even worse, the pharmacy may prefer higher acquisition costs, because the margin percentage translates into higher dollar payments. Wholesalers and manufacturers would also benefit if the entire pharmacy industry became less price sensitive following a shift to cost-based reimbursement.
  • Varying mark-ups. I was surprised to learn that CVS Pharmacy will negotiate the “mark-up %” with each individual payor. That’s a notable difference from the Mark Cuban approach, which sells at MCCPDC’s acquisition cost plus a flat 15% margin and a pharmacist fee. It also sounds suspiciously like the current system in whcih different payers and plans will pay different amounts for the same prescription.
  • Computation methodology for acquisition costs. CVS Pharmacy will be relying on some sort of internally-computed “acquisition cost index.” As I understand it, this index will place drugs into an unspecified number of cost “buckets.” For instance, all prescriptions with total costs below $1 could be placed in the same bucket. The percentage markup will be apply to all products in that bucket.

    CVS told me that its clients will have transparency and some sort of audit rights to the cost figures behind these indices. But the possibility for hard-to-detect shenanigans seems pretty high to me, consistent with fourth point in the preceding section.
As I told The Wall Street Journal:
“It’s a fundamental change in how pharmacy services are priced,” said Adam Fein, chief executive of the Drug Channels Institute, which provides research on the drug-supply chain. It is also, he said, “a legitimate step toward transparency.”
After reviewing the available details, I stand by my initial assessment. But as with any breathless public announcement, we should all curb our enthusiasm about the true outcomes and consequences.


Based on what I know so far, CVS Health’s new programs differ from the Express Scripts’ ClearNetwork, which I outlined in last week’s news roundup.

Briefly, ESI's ClearNetwork is a PBM-led approach that will rely on external measures of acquisition cost for pharmacy reimbursement to both its network and in-house pharmacies.

Like ESI’s ClearNetwork, CVS Health’s TrueCost will also use “acquisition-cost based pharmacy reimbursement” for network pharmacies, whether owned by CVS or not. However, CVS hasn’t explained any details about how cost will be computed for non-CVS pharmacies. The company told me that “the actual rate will be dependent on the individual network negotiations.” Isn’t that how things are done now?

The main focus of TrueCost appears to be transparency of net, post-rebate costs with plan clients along with a push to get plan sponsors to use point-of-sale rebates. In other words, CVS Health would like patients with coinsurance and deductibles to pay out-of-pocket costs based on net (not list) prices. Alas, it will have to convince its plan sponsor clients to give up their addiction to rebates for that to happen. Good luck!

In the meantime, I hope we see more concrete details about the PBMs' new programs before concluding that true change has arrived.

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