chevron-down Created with Sketch Beta.

ABA Health eSource

Health eSource | February 2024

More Transparency, But Will it Lower Drug Prices? New Pharmacy Reimbursement Models

Hayley White Coley

Summary

  • It’s estimated that drug companies generate roughly three-quarters of their worldwide profits in the U.S. alone because of high drug prices.
  • An overview of pharmacy-benefit managers (PBMs) and pharmacies, actors of the prescription drug distribution chain, provides an understanding of new pharmacy reimbursement models.
  • Cost Plus Drugs buys drugs from pharmaceutical manufacturers and sells them directly to patients online in an attempt to charge less than traditional pharmacies under its “cost-plus” pharmaceutical reimbursement model.
More Transparency, But Will it Lower Drug Prices? New Pharmacy Reimbursement Models
Tobias Buschmann via Getty Images

Jump to:

On December 5, 2023, CVS Health, which owns the largest drugstore chain in the United States, announced its plan to overhaul how it reimburses its 9,500 pharmacies for prescription drugs. Under the new model, called CVS CostVantage, CVS’s pharmacies will get reimbursed by pharmacy-benefit managers (PBMs) and other payors based on the cost of the drug, a set markup, and a flat fee to cover its pharmacies’ handling and servicing of the drug. Currently, CVS pharmacies, and most pharmacies in the U.S., are compensated for groups of drugs or by using other complex formulas, rather than for the cost of acquiring a single drug. CVS announced its new model “brings greater transparency and simplicity to [its] system.” A similar pharmacy reimbursement model, referred to as “cost-plus,” could be the influence for CVS’s change and has been promoted by the Mark Cuban Cost Plus Drug Company. Cigna Corp.’s Express Scripts, a competitor of CVS Health’s PBM, CVS Caremark, also announced a new pharmacy reimbursement model at the end of 2023.

Overall, CVS and other pharmacy actors’ moves towards transparency and simplicity could be a welcome change to the pharmacy industry. In 2021, the USC Leonard D. Schaeffer Center for Health Policy & Economics reported that 79 percent of Americans consider U.S. prescription drug costs “unreasonable,” and that three in 10 report going without their required prescription drugs because of the cost. Because of high drug prices in the U.S., it is estimated that drug companies generate roughly three-quarters of their worldwide profits in the U.S. alone. And with 70 percent of Americans expressing that lowering drug costs is their highest healthcare priority, it is no surprise that the Biden Administration and other governmental actors have taken note.

For example, on December 14, 2023, President Biden announced that 48 Medicare Part B drugs had raised their prices faster than inflation and that the pharmaceutical companies that owned these drugs may have to pay rebates to Medicare as a result of these increases as part of the 2022 Inflation Reduction Act. The Centers for Medicare & Medicaid Services on the same day also wrote a letter to PBMs, Medicare Part D plans, Medicaid managed care plans, and private insurance plans expressing certain concerns about their practices, including the worry that the vertical integration increasingly occurring among plans, PBMs, and pharmacies is having an anticompetitive impact on the industry. But PBMs specifically have attracted noteworthy scrutiny for their role in prescription drug costs, with a number of U.S. Congressional committees recently reporting out draft legislation to change PBM practices.

While a potential welcome shift in the pharmacy industry, it is unclear how additional transparency into pharmacy reimbursement practices will lead to lower drug costs for patients. These moves may also just be in response to pressure from policymakers and competitors, and they may not even be intended to lower drug prices. However, they are interesting steps towards transparency and clarity and a potential shift from the outdated to the new that should be reviewed in an industry that has been increasingly scrutinized.

The Status Quo of PBMs and Pharmacies

In an effort to understand the new pharmacy reimbursement models, it is important to understand two actors at the middle and end of the prescription drug distribution chain: PBMs and pharmacies.

PBMs

PBMs, in the middle of the prescription drug distribution chain, manage prescription drug insurance benefits on behalf of health plans, large employers, Medicare Part D plans, and other payors.PBMs negotiate with drug manufacturers for discounts and rebates on the price of each manufacturer’s prescription drug in an attempt to pay less for the drug than the manufacturer’s list price.PBMs have negotiation power as manufacturers want their prescription drug on the plan’s formulary, which is a list of covered medications for the plan.PBMs are also responsible for negotiating with pharmacies to offer them a place in the plan’s network in exchange for the pharmacies accepting specified prices for drug dispensing.Finally, PBMs decide what a patient’s copayment is for the drugs.

With these administrative responsibilities, PBMs are known to have significant impacts on the total drug costs for insurers, determining access to prescription drugs for patients and negotiating with pharmacies as to their reimbursements.Today, PBMs administer the prescription drug plans for more than 266 million insured Americans.PBMs have become increasingly integrated, with the largest insurers all generally owning PBMs or being a part of companies that do so.This integration shapes how PBM services are sold, as they are usually just combined in the insurance company’s products.The three largest PBMs—Cigna Corp.’s Express Scripts, CVS Health Corp.’s CVS Caremark, and UnitedHealth Group Inc.’s OptumRx—together control 89 percent of the PBM market.

PBMs earn money for their services through administrative fees, spread pricing (the difference between what PBMs charge an insurer or plan for pharmacy claims and what the PBM reimburses pharmacies to fulfill the claim), and the discounts or rebates that PBMs are able to negotiate with drug manufacturers.There have been certain questions and complaints raised over these practices and the lack of transparency with regard to what PBMs are ultimately paid under these methods.

More specifically, drug manufacturers have complained that PBMs receiving these rebates and discounts from them on the cost of their drugs results in higher prices.From 2012 to 2016, rebates to PBMs from drug manufacturers increased from $39.7 to $89.5 billion.There is a lot of debate regarding whether these rebates and discounts should be kept by PBMs or instead shared with insurers and other payors.The idea is that these discounts could be used to decrease patients’ cost-sharing and premium responsibilities with these insurers and payors.However, PBMs argue that they already pass on these savings.In a 2019 report from the U.S. Government Accountability Office, PBMs in 2019 kept less than 1 percent of Medicare Part D plan rebates, passing on the rest to insurers, plans, and patients.

Another PBM controversy has arisen over spread pricing, with certain policymakers considering a ban on this practice.A recent legislative proposal, H.R. 5378, would prohibit PBMs from engaging in spread pricing for in-state Medicaid plans. Instead, any contract between a state Medicaid plan and a PBM would require that payment made by a PBM be based on the ingredient cost and a professional dispensing fee.The entire payment would then be passed through to the pharmacy and PBMs would be compensated through an administrative fee.Critics of limiting spread pricing note that if PBMs are barred from retaining this money, they may attempt to obtain additional fees through other methods like increasing their administrative fees.It also may result in PBMs being less motivated in negotiating lower prices with pharmacies.

PBMs are also at the center of ongoing litigation in a number of circuit courts over states’ regulation of them. Currently, 37 states have laws that require PBMs to reimburse state pharmacies at or above the pharmacy’s wholesale cost.PBMs have argued that these state laws are preempted by the Employee Retirement Income Security Act (ERISA).Courts are still weighing in, but in 2020, the U.S. Supreme Court ruled in favor of Arkansas concerning its similar PBM law, holding that its law amounts to cost regulation that does not bear an impermissible connection with or reference to ERISA.

Pharmacies

At the end of the prescription drug distribution chain, pharmacies are responsible for providing prescription drugs directly to patients. Pharmacists in retail pharmacies help patients manage their prescriptions, handle and dispense the prescription drugs, and screen for possible side effects to the prescription drugs. Pharmacies affect drug prices by marking up wholesale prices, working with PBMs on discounts and fees, choosing generic or brand name prescription drugs to offer, and offering discounts to patients in coupon or other non-insurance discount forms. Prescription drugs in a pharmacy are usually bought by pharmacies directly from wholesalers or drug manufacturers, and pharmacies then contract with PBMs to be reimbursed for the drugs.

Emergence of New Pharmacy Reimbursement Models and Initiatives

In the call for lower drug prices and transparency with PBM compensation, it appears the pharmacy industry is reacting with new actors entering the market looking for an opportunity to improve it and old actors creating new initiatives and pharmacy reimbursement models in response.

Mark Cuban Cost Plus Drug Company

In 2018, the Mark Cuban Cost Plus Drug Company was started over an email from the company’s founder, Alex Oshmyansky, to Mark Cuban, in which he enticed the famous billionaire entrepreneur by asking him if he wanted to invest in a company whose mission was to lower prescription drugs’ cost.In its mission statement, the company explains that “every American should have access to safe, affordable medicines” and that Cost Plus Drugs takes this problem “head on.”

Launched in January 2022, Cost Plus Drugs buys drugs from pharmaceutical manufacturers and sells those drugs directly to patients online. The company does not charge the patient’s insurance provider, and the drugs are available to be purchased nationwide.Claiming to cut out the middleman in the distribution process, Cost Plus Drugs attempts to charge less than traditional pharmacies with its “cost-plus” pharmaceutical reimbursement model. Under that model, drugs are sold for a publicly provided price plus a 15 percent markup, a $5 cost for pharmacy labor, and a standard shipping fee of $5. Roughly two million people are members of Cost Plus Drugs.

Critics of Cost Plus Drugs claim that with a list of roughly 2,200 drugs that are mostly all generics, or drugs that are no longer protected by patents, it is not particularly surprising that the company is able to offer low-cost options.In a Kaiser Health Network study, Cost Plus Drugs’ costs were also compared to those at GoodRx, a comparable drug discount site, and the study found that Cost Plus Drugs’ drugs were the lesser-priced option on fewer occasions. Focusing on the Washington, D.C., area, Kaiser Health Network found that, when reviewing roughly 211 combinations of medications, GoodRx had lower prices in at least one pharmacy in 141 instances, whereas only in the remaining 70 instances did Cost Plus Drugs have the lower price or was beaten by competition only because of a limited or one-time discount offer. As one critic also pointed out, Cost Plus Drugs has yet to accomplish its goal of eliminating the middleman. Instead, Truepill, a digital mail order pharmacy, completes Cost Plus Drugs’ processing; Cost Plus Drugs is not and does not own a PBM; and it has yet to manufacture generic drugs, despite starting to build a factory to do so, making it quite literally the middleman in the drug supply chain between the consumer and the drugs.Yet, its transparent pharmaceutical pricing model and ability to fulfill a 90-day medication supply make it appealing to a number of consumers.

CVS Health’s and Express Scripts’ Response

Similar to and likely motivated by the Cost Plus Drugs’ reimbursement model, CVS CostVantage, CVS Health’s new approach to its traditional pharmacy reimbursement model, will base fees from PBMs and insurers to CVS pharmacies on the cost of the drug, a set markup, and a fee for pharmaceutical handling and servicing.CVS announced at its 2023 investor meeting that starting in 2024, the CVS CostVantage program will be available to consumers who pay cash for their prescriptions using a drug discount card. In 2025, it will be incorporated into CVS’s commercial payors’ contracts between pharmacies and PBMs.CVS executives noted that CVS CostVantage will be implemented in government payor programs at some point in the future.

In addition to CVS CostVantage, CVS Health announced CVS TrueCost, a new PBM pricing option.CVS Health explains that the new pricing model will reflect the cost of prescription drugs and provide insights into the administrative fees charged.Clients, including health plans and employers, will choose whether they want to use the new model and apply the PBM rebates from drug manufacturers to the prescriptions for those drugs rather than using those rebates to offset their other costs.This model will launch in 2025.

Express Scripts is also launching a new drug pricing model in 2024. Through its pharmacy network, ClearNetwork, employers, government organizations, and health plans will have the option to pay the estimated acquisition cost for the pharmaceutical drug plus a 15 percent markup fee and flat pharmaceutical dispensing and servicing fees. The pharmaceutical dispensing fee will go to the pharmacy, and the servicing fee will be shared between Express Scripts and its pharmacy partners. This will be an alternative model for clients who would like to opt out of its PBM pricings’ typical practices.This new model will apply to all drugs on a client plan sponsor’s formulary and will be available in the more than 65,000 pharmacies in Express Scripts’ network.

Possible Outcomes/Criticisms of these New Pharmacy Reimbursement Models and Initiatives

In a Wall Street Journal article released on the same day as CVS’s announcement on its new CVS CostVantage and CVS TrueCost programs, Prem Shah, CVS’s chief pharmacy officer, stated that not only will their pharmacies be paid in “a much simpler and more transparent way,” but that CVS “want[s] to change the market for the future.”In a statement released by Express Scripts in response to its reimbursement change, Adam Kautzner, Express Scripts’ president, stated that it is “constantly innovating to provide [its] clients with new options that meet their needs and enable them to build custom pharmacy benefits.”With statements such as these, the hope for change to the industry seems to be high and promising.

However, there are critics of the changes made by both CVS and Express Scripts. For CVS, CVS CostVantage will have no effect on patients directly or the price they pay at CVS pharmacies. Instead, it will change only the arrangement between CVS pharmacies and its clients (PBMs and payors). Differing from the Cost Plus Drugs’ reimbursement model in which prices are public, the set markup and fee for pharmaceutical handling and servicing under CVS CostVantage will not be public. These fees will be determined between CVS Health and PBMs and payors, and there is no planned insight into what those fees and markups are. If there are savings on the cost of drugs, it will also be the responsibility of the PBMs and payors to pass along those savings to patients as they are still the actors that determine patients’ out-of-pocket costs.As Karen Van Nuys, a senior fellow at the USC Leonard D. Schaeffer Center for Health Policy & Economics commented, CVS seems to just be “sloshing money around within the company,” as CVS CostVantage will likely just shift payments from CVS Caremark to the retail pharmacy chain.Critics also point to the increased interest in PBM practices from competition and Congress and note that this change by CVS could really just be the “window dressing” to give the appearance that changes are being made.For the CVS TrueCost initiative, it is focused on offering plan sponsors transparency regarding the costs of prescription drugs after discounts are provided. In this model, again, critics point out that it will be the responsibility of plan sponsors to pass along the rebates they receive to patients, which they believe seems unlikely.

Critics of Express Scripts’ new pharmacy reimbursement model point to the fact that to estimate the acquisition cost, it will be based on the lowest of three benchmarks: the Predictive Acquisition Cost, National Average Drug Acquisition Cost, and Wholesale Acquisition. While two of these benchmarks are available to be viewed publicly (the National Average Drug Acquisition Cost and Wholesale Acquisition), one is not (the Predictive Acquisition Cost). Also, none of these benchmarks reflect the actual acquisition cost incurred by the pharmacies to obtain the drug. Similar to CVS’s new initiatives, it is not apparent what impact this new model will have on patients’ out-of-pocket costs as it does not directly affect or change those costs.

Conclusion

Ultimately, it is unclear what, if any, changes will occur as a result of these new pharmacy reimbursement models. The pharmacy industry could be headed towards major changes that result in lower drug prices for patients and actors in the industry who are focused on creating this change, or it could be stagnant and those actors could be trying to keep with past practices. While unknown, it is an interesting time to pay attention to the pharmacy supply chain to see if these recent pharmacy reimbursement model changes eventually have an effect on the American consumer.

    Author