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A Spoonful of Sugar Makes the Medicine Go Down

CVS Health’s recent announcement that it is committed to bringing transparency and simplicity to the opaque world of drug pricing – a world it helped create – has a happy Hollywood ring to it, literally a spoonful of sugar to help the medicine go down. It appears to be a sweet deal for pharmacies and consumers. Yet like many medications, it is designed to reduce symptoms and not the underlying condition, namely high drug prices.

CVS said its 9,500 pharmacies would soon be reimbursed by health insurers and other payers for the cost of the drugs plus Reimbursement on such a cost-plus basis sounds like it will illuminate and simplify drug pricing. But its chief effect is to increase CVS pharmacy revenues.

Most people associate CVS Health with the ubiquitous chain of retail pharmacies, whose logo is now emblazoned on Fenway Park’s fabled Green Monster. Through mergers and acquisitions, however, CVS Health has become a vertically integrated conglomerate (#6 on the Fortune 500 list) consisting of a large health insurer (Aetna), the country’s largest pharmacy benefit manager (PBM, Caremark), and the country’s largest network of retail, mail-order and specialty pharmacies. 

CVS Caremark is one of three dominant PBMs that sit at the center of the pharmaceutical supply chain. They negotiate drug prices with manufacturers and pharmacies on behalf of health insurers and employers that offer health plans. PBMs maintain proprietary contracts and derive revenue from manufacturers, payers, and pharmacies, with little transparency of what each party is paid or reimbursed.

This lack of transparency is critical to their business model and allows them to negotiate the price of a drug from one stakeholder in the system (e.g. manufacturer) and invoice another stakeholder (employer or government program) at a higher price, without the payer understanding the true profit retained by the PBM, a practice known as “spread pricing”. This lack of clarity throughout the supply chain prevents plan sponsors from realizing the scope and size of PBM compensation, which is estimated to exceed $28 billion in gross profit in 2019.

In response to criticisms over opaque pricing, PBMs increasingly rely on revenue collected through fees assessed on manufacturers, payers, and pharmacies, and gross profits on prescriptions filled through their affiliated mail order and specialty pharmacies. This is one reason why CVS’ announcement can be considered a pyrrhic victory.

For the vertically integrated CVS Health, revenue will shift from one business division (CVS Caremark) to another (CVS Pharmacy) and strengthens their incentive to steer patients towards pharmacies or specialty services affiliated with CVS Health. 

CVS Caremark’s CostVantage program has yet to say how it will determine acquisition costs or what formulas will be used for markups and fees. Meanwhile, the opacity surrounding their other PBM operations will persist, including rebate negotiations, formulary placements, proprietary pricing lists, and patient cost-sharing arrangements.

Perhaps the most objective barometer of how this move will affect CVS Health is its stock price, which rose 3.7% following the announcement. Apparently Wall Street believes that this change to pharmacy reimbursement will benefit CVS more than its main competitors that do not own retail pharmacies.

More importantly, though, this move may be an attempt to defuse growing political pressure to regulate the PBM industry. The Senate Committee on Commerce, Science and Transportation, the House Committee on Oversight and Accountability, the Federal Trade Commission and just about every other regulatory and oversight body aside from Special Counsel Jack Smith is investigating the alleged anti-competitive behaviors of PBMs. 

To paraphrase another iconic Hollywood line, CVS Health apparently was shocked, shocked to find that opaque drug pricing was going on here. Round up the usual suspects.

Geoffrey Joyce, Ph.D., is Director of Health Policy at the USC Schaeffer Center for Health Policy & Economics.

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