US-Based CVS Health Revamps Drug Reimbursement Model to Address Rising Costs

CVS's CostVantage plan, set to launch in 2025, focuses on a transparent formula incorporating the drug's cost, a predetermined markup, and a patient management fee.

In a strategic move, CVS Health has revamped its prescription drug reimbursement model, aiming to tackle the escalating concerns surrounding high drug prices. The largest drugstore chain in the US introduced its CostVantage plan during the recent investor day, emphasising transparency and clarity in prescription drug pricing.

Under the new model, CVS will transition to fixed rates for reimbursements from pharmacy benefit managers (PBMs), aligning with the approach adopted by newer players including Mark Cuban Cost Plus Drugs Co. 

CVS's CostVantage plan, set to launch in 2025, focuses on a transparent formula incorporating the drug's cost, a predetermined markup, and a patient management fee.

Prem Shah, PharmD, executive vice president of CVS Health, highlighted the necessity of this change in response to macroeconomic pressures, including reimbursement challenges, affecting pharmacy costs. Shah pointed out the limitations of the traditional model, particularly as the adoption of generic drugs in retail pharmacies reaches around 90%.

"This model has reached an inflection point that is just ripe for change," Shah stated, noting the continuous rise in costs of branded drugs, leading to increased expenses for patients and healthcare plans.

Shah highlighted the shift from an outdated reimbursement model to a new, simple, and transparent approach aligned with the value provided by local community pharmacies. 

CVS anticipates that the CostVantage model will not only address current challenges but also positively impact the financial outlook of the retail business, providing potential upside to the company's long-term growth expectations.

In addition to the retail sector, CVS's pharmacy benefit manager, Caremark, introduced a new model called TrueCost. This model aims to offer client pricing reflecting the true net cost of prescription drugs, with visibility into administrative fees. CVS Caremark plans to launch the TrueCost model in 2025, giving clients flexibility in choosing a pharmacy benefit model that suits their unique needs.

During the investor day, CVS projected stronger-than-expected revenue for 2024, with an overall forecast of at least $366 billion and adjusted profit around $8.50 per share. The company attributes this optimistic outlook to the implementation of CostVantage, improved margins under government-supported Medicare Advantage insurance plans, and other healthcare services.

CVS shares experienced a 4% jump following the announcement. The company also reaffirmed its 2023 forecasts for adjusted profit and total revenue, and additionally, increased its quarterly dividend by 10% to 66.5 cents a share.

In a strategic move to integrate recent acquisitions, CVS also announced the rebranding of its health services business to "CVS Healthspire," including acquisitions such as Signify Health, Oak Street Health, and the newly launched Cordavis operation, focusing on bringing additional biosimilars to market in collaboration with drugmakers.