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Spokane, Washington  Est. May 19, 1883

CVS plans to overhaul how drugs are priced

A customer picks up a prescription at a CVS in Parkville, Md., in June 2022.  (Maansi Srivastava/The Washington Post)
By Aaron Gregg and Daniel Gilbert

CVS Health is planning a companywide overhaul of how it prices prescription drugs, doing away with the complex and often opaque formulas that typically govern what patients pay for medications.

Under a new system announced Tuesday, which it calls CostVantage, CVS said it will price drugs based on cost, a set markup, and a fee to cover pharmacy services. CVS said the new format is designed to ensure medication prices more closely reflect their “true net cost.”

“We are leading with an approach that will shift how our retail pharmacy is compensated by implementing a more transparent and sustainable model that fairly aligns pharmacy reimbursement to the quality services we provide,” said Prem Shah, executive vice president, chief pharmacy officer and president of pharmacy and consumer wellness at CVS Health.

The program will start rolling out in 2025, according to CVS. News of the drug pricing overhaul was first reported by the Wall Street Journal.

CVS is shifting course amid a changing commercial and regulatory landscape for drug pricing.

While the Biden administration is working through Medicare to negotiate drug prices, private pharmacies and insurers are trying new approaches as well.

The revamp pursued by CVS is similar to the pricing model implemented by the online pharmacy founded by the entrepreneur and investor Mark Cuban, called the Mark Cuban CostPlus Drug Company.

It bypasses health insurers in selling generic drugs directly to patients, which advertises savings of hundreds or thousands of dollars compared to competing drug-sellers.

Blue Shield of California announced in August it would revamp how it pays for medicine by enlisting five companies to handle the chain of getting drugs from manufacturer to consumer – instead of a single entity known as a pharmacy-benefit manager.

“The current pharmacy system is extremely expensive, enormously complex, completely opaque, and designed to maximize the profit of participants instead of the quality, convenience and cost-effectiveness for consumers,” Paul Markovich, chief executive of Blue Shield of California, said at the time.

CVS owns a large pharmacy benefit manager, CVS Caremark, that provides services to Blue Shield of California; its shares fell 8% the day the nonprofit health plan made its announcement in August.

By closing Tuesday, CVS stock had shot up more than 3.7%.

These changes also come against a backdrop of greater government scrutiny on drug pricing and efforts to tamp them down.

The Federal Trade Commission in June expanded its inquiry into practices by pharmacy-benefit managers.

The agency has also taken a more aggressive approach to pharmaceutical mergers.

It filed suit to block Amgen from acquiring Horizon Therapeutics before reaching a settlement in September that allowed the deal to go forward with conditions.

President Biden issued an executive order last October directing the Department of Health and Human Services to study new models to lower drug costs for Medicare and Medicaid beneficiaries.

HHS in May proposed a rule designed to give the agency and states greater leverage to negotiate payment for the most expensive drugs covered by Medicaid.

The centerpiece of the Biden administration’s efforts to tame drug prices, the Inflation Reduction Act, in August announced the first 10 prescription drugs that will be subject to a maximum price for reimbursement in Medicare.