CVS Health Corp.’s Caremark is the latest big PBM to offer clients new pricing models that the company claims will increase transparency and reduce overhead. Experts say that the new offerings are not as transparent as CVS claims they are, and constitute a response to various pressures including likely federal PBM reforms, scrutiny from plan sponsors and disruptive business trends like the growth of Mark Cuban Cost Plus Drug Co.
Most experts expect that the new CVS offerings, called CostVantage and TrueCost, will only make a marginal difference — if any — in either drug costs or price transparency. Industry observers point to similar product rollouts by the other two of the Big Three PBMs, UnitedHealth Group’s Optum Rx and The Cigna Group’s Express Scripts, neither of which seemed to dampen the firms’ PBM earnings. Express Scripts’ ClearCareRx and Optum Rx’s Cost Clarity launched in April and May, respectively. Express Scripts also rolled out a new “cost-plus pharmacy pricing” option, called ClearNetwork, in November.
Caremark’s CostVantage revamps the PBM’s retail pharmacy payment model. It uses a “transparent” formula for setting drug reimbursement rates with contracted PBMs and payers, based on the internally computed acquisition cost of a given drug, a set markup amount, and a “patient management fee.” TrueCost “offers client pricing reflecting the true net cost of prescription drugs, with visibility into administrative fees,” per a press release.
During their respective product rollouts, each firm promised that their new model would increase price transparency. Some experts say it may be an attempt by CVS to head off stricter proposed federal price transparency rules. A bill including PBM price transparency rules passed the U.S. House of Representatives on Dec. 11.
- Caremark, in its CostVantage model, promised “greater transparency and simplicity” by “defin[ing] the drug cost and related reimbursement with contracted pharmacy benefit managers and payors using a transparent formula built on the cost of the drug, a set markup, and a fee that reflects the care and value of pharmacy services.”
- Express Scripts said that with ClearCareRx it would deliver “a simpler option in which employers, health plans, and government employer clients pay exactly what Express Scripts pays for drugs” backed by “enhanced disclosures.”
- Optum Rx said that Cost Clarity bases drug costs on independent cost baselines, such as the National Average Drug Acquisition Cost (NADAC) and wholesale costs, and “align[s] incentives across the supply chain.”
This year, all three PBMs have been key growth segments for their parent companies and, in some cases, offset lackluster performance by their parent companies’ managed care divisions.
Despite the Big Three’s typical financial success, the rollouts came amid the most turbulent year for PBMs in recent memory. Disruption is spreading across the pharmacy benefits space, with newer entrants including Cost Plus Drugs, Amazon.com Inc. and GoodRx Inc. gobbling up a growing share of generic fills outside traditional pharmacy benefits. Regional carriers seem to be reconsidering their relationships with the Big Three PBMs: Health care insiders say Blue Shield of California’s decision to revamp its PBM strategy is a “warning shot” to the Big Three. Similarly, in October, UCare broke off its relationship with Express Scripts, instead opting for the “pass through” PBM Navitus Health Solutions.
PBM Legislation Seems Imminent
Most of all, new PBM regulations seem likely to pass Congress in the next few months. A bill with PBM price transparency mandates just advanced out of the House of Representatives. Plan sponsors and independent retail pharmacy groups — the groups that the new Caremark products seem designed to appease — have been some of the loudest backers of such reforms and have advocated for even tougher measures than the House bill contains. At least one plan sponsor group isn’t satisfied with what CVS brought to the table.
Alan Gilbert, vice president for policy at the Purchaser Business Group on Health, called the new “transparent” Big Three offerings a “shell game” that could be an attempt to “bake into the system the games that they play to guarantee those kinds of profits.”
If anything, Gilbert says, “the CVS deal, I believe it acknowledges that the market needs some reform,” he tells AIS Health, a division of MMIT. But Gilbert maintains that “Congress needs to act and pass reasonable and meaningful legislation to change this PBM business model.”
Ashraf Shehata, national sector lead for health care and life sciences at KPMG, says it is “accurate” that the Big Three’s new offerings still offer ample opportunity for rent seeking. “Any of these transparency tools are not sufficient, necessarily, to be the intermediary” that plan sponsors hope for, he added.
However, he did say that he’s hopeful the new CVS offering, CostVantage, will grant consumers more predictable pharmacy prices.
“What I do like about this is, the more the pricing can be more consistent, the more people will rely on it,” he says. “Pricing varies by location — people don’t like that. If I go to a CVS here in South Florida, and I go to a Walgreens in Ohio, I’m going to probably get two very different prices for the same drug.…Pricing policies are important to give confidence to consumers.”
Big Three PBMs Promise Transparency
Karen Van Nuys, Ph.D., senior fellow at the USC Schaeffer Center for Health Policy and Economics, says that the Big Three’s promises of increased transparency won’t actually amount to much.
It’s “window dressing,” Van Nuys says. “The press releases are pretty short, and details are pretty thin — and this comes at a time when PBMs are under increasing pressure from Congress. The timing of it, if nothing else, suggests that this is a response to try and forestall legislative actions that might clip their wings.”
While Van Nuys agrees that the Big Three’s new models are also likely a response to the likes of Cost Plus Drugs, she says that “there are big differences between what Mark Cuban is doing and what it sounds like these models are doing.”
With the Big Three’s “transparent” offerings, she says, “you don’t have that kind of visibility” into what the PBM plans to charge, especially in terms of acquisition costs. “Mark Cuban has committed to [a] 15% [markup]. And, sure, I guess he could change that, but it would cost him something to change that number in terms of PR, goodwill, and so on. Whereas [the Big Three] say, ‘We have a markup of our acquisition costs,’ but they don’t tell you what they’re using for acquisition cost.”
Adam Fein, Ph.D., CEO of the Drug Channels Institute, also said that comparisons to the CostPlus Drugs model are overblown.
“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,” Fein wrote in a Dec. 6 blog post. Indeed, he says that the CostVantage and TrueCost rollouts could be excuses for Caremark to add more line items to retail pharmacy transactions through varied markups and complicated computation methodology for acquisition costs.
“Other large pharmacies will likely follow CVS with attempts to force payers and PBMs to accept some form of cost-plus reimbursement,” Fein said. “If that happens, expect higher prescriptions prices, less efficiency, and a slowdown in the inevitable retail pharmacy shakeout.”
Fein predicted that plan sponsors are unlikely to flock to TrueCost pricing: “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!”
Wall Street Predicts Minimal Changes
The Big Three’s new products are not exactly alike: It’s important to note that CVS, as the largest retail pharmacy operator in the U.S., has different incentives than Cigna and UnitedHealth. According to JP Morgan analyst Lisa Gill, the motivation behind the new CostVantage model appears to be an attempt to stabilize CVS’s retail pharmacy reimbursement and make cash flow to CVS stores from third-party PBMs including Express Scripts more predictable.
“We see CostVantage” — which affects mainly retail pharmacies — “as an acknowledgement that the long-running headwind to reimbursement is reaching a point where there isn’t much more that can be extracted from pharmacies,” Gill said in a Dec. 6 investor note. TrueCost, which is directed more toward plan sponsors, “will mainly increase transparency for the consumer,” Gill said. However, the way Gill attempted to explain the TrueCost rollout spoke to the shortage of public details on the product.
“We believe this new pricing model is somewhat similar to Express Scripts’ ClearCareRx, which allows clients to choose a fully transparent model where clients pay exactly what Express Scripts pays for drugs,” Gill said.
Gill was uncertain of the impact that TrueCost will have on Caremark’s client retention: “While we continue to hear from plan sponsors that they want more transparency, they also want to retain control around rebates as many times the rebate is used for other programs such as to reduce out of pocket costs or to lower premiums. We believe choice will continue to be important in the highly competitive PBM marketplace.”
TD Cowen’s Charles Rhyee, echoing Fein, doubts that plan sponsors would flock to the new TrueCost product, citing the appeal of rebates.
“We believe the offering may not be immediately appealing to health plan sponsors, as many existing models see members responsible for an out of pocket based on the gross price (pre-rebate) of a drug. The model, which would automatically apply rebates to prescriptions and not pass through rebates to the health plan, may not appeal to health plan sponsors that rely on rebates to offset other health care costs,” Rhyee wrote in a Dec. 5 note to investors.
This article was reprinted from AIS Health’s biweekly publication Radar on Drug Benefits.