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Texas Dermatopathology Laboratory Under Fire for Genetic Testing Scheme Targeting Soldiers Near Fort Hood

CBS News investigation alleges Cockerell Dermatopathology used service members to bill military health insurance system for millions of dollars of unnecessary screening tests

Following its investigation, CBS News reported allegations that a Texas dermatopathology laboratory has bilked the military healthcare system out of millions of dollars by enticing service members to sign up for unnecessary genetic and drug screening tests in exchange for $50 gift cards.

This latest incident adds to the growing number of investigations and health insurer lawsuits in recent years alleging fraudulent business practices within the clinical laboratory industry. Although only a handful of companies have been prosecuted by the federal government for fraud and abuse, The Dark Report last year noted that the hundreds of millions of dollars involved in these cases represent just a portion of the fraudulent clinical laboratory test claims that federal officials believe have been submitted in recent years by a much larger number of lab companies performing toxicology, pain management, and cardiology tests.

Clinical Laboratory Allegedly Committed Insurance Fraud According to CBS News

In its June 8, 2016, broadcast, CBS News exposed this latest alleged insurance scam involving Cockerell Dermatopathology Laboratory in Dallas. CBS News claims soldiers and their family members were drawn to makeshift clinics near Fort Hood Army base in Texas by a marketing campaign that offered a $50 Walmart gift card in exchange for providing DNA, a urine sample, and a copy of their military identification card. CBS said screening tests were then conducted and billed to Tricare, the health insurance program for military members, retirees, and their family members.

Linda Bozeman, wife of a service member, stated in the CBS News report that she visited a Fort Hood area clinic several times last year to earn extra money during the Christmas holiday season.

“They said they had this clinical research going and that they paid you by Walmart cards, so you’d give your urine,” said Bozeman, whose photocopied ID card was found by CBS News in a shed filled with discarded DNA specimens, medical information, Social Security numbers, and other paperwork.

CBS News reported that Cockerell Dermatopathology used Bozeman’s samples to bill Tricare 418 separate times for unneeded screenings for dozens of drugs such as PCP, cocaine, and methadone at a cost of nearly $7,000.

Accused Lab Received Millions in Payments from Tricare

According to CBS News, Cockerell Dermatopathology received more than $5 million in Tricare payments last year for allegedly unnecessary lab tests performed by Origen Laboratories in Dallas. The lab conducts molecular, genomics, and toxicology testing for Cockerell Dermatopathology, and also is owned by Clay Cockerell, MD, who is past President of the American Academy of Dermatology. Origen Laboratories is managed by ProGen Lab Systems, an independent laboratory management organization.

Retired 2-star General Richard Thomas (left), former head of Tricare, speaks with Jim Axelrod (right) of CBS News, about the investigation into Cockerell Dermatopathology of Dallas. The investigation was sparked by a CBS News story that alleged the clinical laboratory was part of a scheme to entice service members near Fort Hood Texas to provide DNA and urine samples that were used to bill the military health insurance system for millions of dollars of unnecessary genetic and drug screening tests. (Photo copyright: CBS News.)

Retired 2-star General Richard Thomas (left), former head of Tricare, speaks with Jim Axelrod (right) of CBS News, about the investigation into Cockerell Dermatopathology of Dallas. The investigation was sparked by a CBS News story that alleged the clinical laboratory was part of a scheme to entice service members near Fort Hood Texas to provide DNA and urine samples that were used to bill the military health insurance system for millions of dollars of unnecessary genetic and drug screening tests. (Photo copyright: CBS News.)

During a briefing with reporters that took place the day after the CBS News report aired, Pentagon Press Secretary Peter Cook did not confirm a Pentagon investigation was under way to determine who made money at Tricare’s expense, but noted, “Reports like this are obviously of concern to us and something we want to address.”

Cockerell Lab Responds to Allegations of Wrongdoing

An estimated 2,000 soldiers may have been duped, CBS News stated in its report.

In response to the CBS broadcast, Cockerell Dermatopathology posted a statement on its website in which the lab stated it would be refunding money received from the tests in question, which was reported by Military.com. The clinical laboratory company did not provide details on the amount being refunded or indicate who would receive reimbursements. Cockerell Dermatopathology stated that the lab would “vigorously defend [itself] against allegations of wrongdoing.”

“When Origen became aware that certain individuals were operating outside of the organization’s strict compliance requirements regarding the manner in which laboratory services are marketed, we took immediate action, including terminating individuals and relationships with those that acted in violation of the laboratory’s compliance policies,” Cockerell Dermatopathology wrote in that statement. “We are also voluntarily refunding monies resulting from these activities. In no case did Origen or Cockerell profit from these activities as suggested by the CBS story.”

The original statement is no longer available to be read on the Cockerell Dermatopathology website. However, in a “Clarification of Facts,” statement posted on July 11, Cockerell admitted to having a “relationship” with Origen Laboratories, which is managed by ProGen. He also claims that “months prior to the airing of the CBS story” ProGen learned of “individuals operating outside of the company’s compliance policies and requirements” and immediately terminated those individuals.

In July, following the CBS broadcast, Baylor University Medical Center announced that Alan Menter, MD, would remain as the university’s Chairman of Dermatology indefinitely. According to Dallas/Fort Worth Healthcare Daily, Clay Cockerell had been scheduled to take over Menter’s post on July 1. In a statement, Baylor praised Cockerell, stating, “Dr. Clay Cockerell is a well-regarded dermatologist who has an excellent clinical reputation. We were previously in discussions with Dr. Cockerell about a leadership position at Baylor University Medical Center. However, both parties have formally paused the talks.”

The article also reported that, in an e-mail, Cockerell stated, “While I work to correct the misinformation in the story, we thought it best to delay my appointment temporarily and mutually agreed to a short term pause.” Cockerell also wrote, “I do not own a lab in Killeen. The lab that is managed by ProGen performed tests on specimens that were sent to us that were induced by dishonest individuals. We learned about it over nine months ago. ProGen terminated relationships with all individuals involved, notified the payer, and began voluntarily returning all monies garnered by the tests associated with the scheme.” The amounts of the refunds have not been disclosed, however, CBS News did confirm in its report that an investigation by the federal government has begun.

Tricare is managed by the Defense Health Agency and is divided into three regions in the United States and multiple regions overseas, with each region served by a health insurance contractor. The Tricare South region, which includes Texas, is administered by Humana Military. A Humana media relations manager did not respond to Dark Daily’s request for a response to the CBS News report.

Over the past year, Dark Daily and its sister publication, The Dark Report have been contacted by numerous individuals claiming knowledge of businessmen, often located in Texas, who are organizing clinical enterprises designed to remunerate physicians for clinical laboratory test referrals in ways that would be recognized by experienced medical laboratory professionals as illegal inducements and kickbacks under federal law.

In several cases, these scammers have approached established clinical labs, such as hospital labs, to ask for an agreement wherein the established labs would perform testing on specimens referred by the clinical enterprises being organized by these individuals. Where such agreements have been negotiated, the scammers then use the credibility of their “reference lab” to persuade physicians to send patient lab test samples to their shell companies. Anyone with knowledge of similar arrangements is encouraged to contact the editors of The Dark Report in confidence.

—Andrea Downing Peck

Related Information:

U.S. Military Members Duped to Help Pull Off Insurance Fraud

Feds Investigating Insurance Fraud That Duped U.S. Military Members

Department of Defense Press Briefing by Pentagon Press Secretary Peter Cook in the Pentagon Briefing Room

In Response to the CBS News Story That Aired on June 8, 2016

Report: Troops Duped in Alleged Tricare Fraud

Baylor Taps the Brakes On Replacing the Chairman of Its Dermatology Program

Lab Testing Scheme Targets Tricare

Baylor Delays Leadership Appointment for Dermatologist Linked to Scam Involving Vets

Is New Cycle of Laboratory Fraud Plaguing the Industry?

Mayo Clinic Scientists Develop AI Tool That Can Determine If Gut Microbiome is Healthy

Although it is a non-specific procedure that does not identify specific health conditions, it could lead to new biomarkers that clinical laboratories could use for predictive healthcare

Researchers from the Mayo Clinic recently used artificial intelligence (AI) to develop a predictive computational tool that analyzes an individual’s gut microbiome to identify how a person may experience improvement or deterioration in health. 

Dubbed the Gut Microbiome Wellness Index 2 (GMWI2), Mayo’s new tool does not identify the presence of specific health conditions but can detect even minor changes in overall gut health.

Built on an earlier prototype, GMWI2 “demonstrated at least 80% accuracy in differentiating healthy individuals from those with any disease,” according to a Mayo news release. “The researchers used bioinformatics and machine learning methods to analyze gut microbiome profiles in stool samples gathered from 54 published studies spanning 26 countries and six continents. This approach produced a diverse and comprehensive dataset.”

The Mayo researchers published their findings in the journal Nature Communications titled, “Gut Microbiome Wellness Index 2 Enhances Health Status Prediction from Gut Microbiome Taxonomic Profiles.”

“Finally, we have a standardized index to quantitatively measure how ‘healthy’ a person’s gut microbiome is,” said Jaeyun Sung, PhD, a computational biologist at the Mayo Clinic Center for Individualized Medicine: Microbiomics Program and senior author of the study in the news release.

“Our tool is not intended to diagnose specific diseases but rather to serve as a proactive health indicator,” said senior study author Jaeyun Sung, PhD (above), a computational biologist at the Mayo Clinic Center for Individualized Medicine: Microbiomics Program in the news release ease. “By identifying adverse changes in gut health before serious symptoms arise, the tool could potentially inform dietary or lifestyle modifications to prevent mild issues from escalating into more severe health conditions, or prompt further diagnostic testing.” For microbiologists and clinical laboratory managers, this area of new knowledge about the human microbiome may lead to multiplex diagnostic assays. (Photo copyright: Mayo Clinic.)

Connecting Specific Diseases with Gut Microbiome

Gut bacteria that resides in the gastrointestinal tract consists of trillions of microbes that help regulate various bodily functions and may provide insights regarding the overall health of an individual. An imbalance in the gut microbiome is associated with an assortment of illnesses and chronic diseases, including cardiovascular issues, digestive problems, and some cancers and autoimmune diseases

To develop GMWI2, the Mayo scientists provided the machine-learning algorithm with data on microbes found in stool samples from approximately 8,000 people collected from 54 published studies. They looked for the presence of 11 diseases, including colorectal cancer and inflammatory bowel disease (IBS). About 5,500 of the subjects had been previously diagnosed with one of the 11 diseases, and the remaining people did not have a diagnosis of the conditions. 

The scientists then tested the efficacy of GMWI2 on an additional 1,140 stool samples from individuals who were diagnosed with conditions such as pancreatic cancer and Parkinson’s disease, compared with those who did not have those illnesses.

The algorithm gives subjects a score between -6 and +6. People with a higher GMWI2 score have a healthier microbiome that more closely resembles individuals who do not have certain diseases.

Likewise, a low GMWI2 score suggests the individual has a gut microbiome that is similar to those who have specific illnesses. 

Highly Accurate Results

According to their study, the researchers determined that “GMWI2 achieves a cross-validation balanced accuracy of 80% in distinguishing healthy (no disease) from non-healthy (diseased) individuals and surpasses 90% accuracy for samples with higher confidence,” they wrote in Nature Communications.

Launched in 2020, the original GMWI (Gut Microbiome Wellness Index) was trained on a much smaller number of samples but still showed similar results. 

The researchers tested the enhanced GMWI2 algorithm across various clinical schemes to determine if the results were similar. These scenarios included individuals who had previous fecal microbiota transplants and people who had made dietary changes or who had exposure to antibiotics. They found that their improved tool detected changes in gut health in those scenarios as well.

“By being able to answer whether a person’s gut is healthy or trending toward a diseased state, we ultimately aim to empower individuals to take proactive steps in managing their own health,” Sung said in the news release.

The Mayo Clinic team is developing the next version of their tool, which will be known as the Gut Microbiome Wellness Index 3. They plan to train it on at least 12,000 stool samples and use more sophisticated algorithms to decipher the data.

More research and studies are needed to determine the overall usefulness of Mayo’s Gut Microbiome Wellness Index and its marketability. Here is a world-class health institution disclosing a pathway/tool that analyzes the human microbiome to identify how an individual may be experiencing either an improvement in health or a deterioration in health.

The developers believe it will eventually help physicians determine how patients’ conditions are improving or worsening by comparing the patients’ microbiomes to the profiles of other healthy and unhealthy microbiomes. As this happens, it would create a new opportunity for clinical laboratories to perform the studies on the microbiomes of patients being assayed in this way by their physicians.  

—JP Schlingman

Related Information:

Mayo Researchers Develop Tool That Measures Health of a Person’s Gut Microbiome

Gut Microbiome Wellness Index 2 Enhances Health Status Prediction from Gut Microbiome Taxonomic Profiles

Stanford University Scientists Discover New Lifeform Residing in Human Microbiome

Researchers Use Ingestible Device to Non-Invasively Sample Human Gut Bacteria in a Development That Could Enable More Clinical Laboratory Testing of Microbiomes

Researchers from Stanford University Develop First Synthetic Human Microbiome from Scratch

In Massive Crackdown, US Department of Justice Charges 193 Defendants with $2.75 Billion in Healthcare Fraud

Charges include $1.1 billion in alleged telemedicine and fraudulent clinical laboratory testing

Nearly 200 individuals in 25 states are facing charges for alleged participation in a variety of healthcare frauds, the US Department of Justice (DOJ) announced in a press release. This major enforcement action involves telemedicine and clinical laboratory testing as well as other healthcare schemes. In total, the DOJ is alleging the defendants are responsible for $2.75 billion in intended losses and $1.6 billion in actual losses.

The charges include:

  • $1.1 billion in alleged telemedicine and clinical laboratory fraud.
  • A $900 million scheme involving fraudulent Medicare billing for amniotic wound grafts.
  • Unlawful distribution of Adderall and other stimulants.
  • A $90 million scheme involving distribution of “adulterated and misbranded HIV medication.”
  • More than $146 million in fraud involving addiction treatment schemes.
  • A variety of schemes involving fraudulent billing for durable medical equipment (DME) products.

This is one of the DOJ’s largest fraud enforcement actions to date. The charges follow investigations by the Department of Health and Human Services Office of Inspector General (OIG), the Federal Bureau of Investigations (FBI), the Drug Enforcement Administration (DEA), and other federal and state law enforcement agencies, the government said. Most defendants are facing charges in federal court, but some cases are being prosecuted in state courts.

As part of the action, the government has seized more than $231 million in assets, including cash, luxury vehicles, and gold.

Monica Cooper, JD (above), a DOJ trial attorney and member of the Texas Strike Force, is one of two attorneys prosecuting the case against Harold Albert “Al” Knowles of Delray Beach, Fla., and Chantal Swart of Boca Raton, Fla., in the DOJ’s latest crackdown on healthcare fraud. Charges against Knowles and Swart include conspiracy to commit healthcare fraud, conspiracy to defraud the United States, and paying/receiving healthcare kickbacks in a $359 million scheme to bill Medicare for medically unnecessary genetic tests at two Houston clinical laboratories. (Photo copyright: US Department of Justice.)

Houston-Area Labs Charged in $359 Million Scheme

In one case, the government charged Florida residents Harold Albert “Al” Knowles and Chantal Swart in a $359 million scheme involving fraudulent Medicare billing for medically unnecessary genetic tests. Knowles owned two Houston-area labs—Bio Choice Laboratories, Inc. and Bios Scientific, LLC—while Swart ran a telemarketing operation. According to DOJ case summaries, the government alleges that Knowles paid kickbacks to Swart to obtain DNA samples and doctors’ orders for tests.

“Knowles, Swart, and others obtained access to tens of thousands of beneficiaries across the United States by targeting them with deceptive telemarketing campaigns,” the indictments allege. “Call center representatives—who were almost never medical professionals—often prompted beneficiaries to disclose their medical conditions and induced them to agree to genetic testing regardless of medical necessity.”

In addition, “Knowles, Swart, and others agreed that Swart and others would pay illegal kickbacks and bribes to purported telemedicine companies to obtain signed doctors’ orders for genetic testing after only a brief telemedicine visit,” the indictment stated. “Knowles and his co-conspirators knew that the purported telemedicine companies’ physicians were rarely, if ever, the beneficiaries’ treating physicians and rarely, if ever, used the genetic testing results in the beneficiaries’ treatment.”

Dallas-Area Labs Charged in $335 Million Scheme

In another case, the federal government charged that the owner of two Dallas-area clinical laboratories engaged in a $335 million Medicare billing scheme.

Keith Gray, owner of Axis Professional Labs, LLC and Kingdom Health Laboratory, LLC, “offered and paid kickbacks to marketers in exchange for their referral to Axis and Kingdom of Medicare beneficiaries’ DNA samples, personally identifiable information (including Medicare numbers), and signed doctors’ orders authorizing medically unnecessary cardio genetic testing,” the government alleged. “As part of the scheme, the marketers engaged other companies to solicit Medicare beneficiaries through telemarketing and to engage in ‘doctor chase,’ i.e., to obtain the identity of beneficiaries’ primary care physicians and pressure them to approve genetic testing orders for patients who purportedly had already been ‘qualified’ for the testing.”

The indictment, filed in the US District Court for the Northern District of Texas, noted that cardio, or cardiovascular tests, are designed to assess a patient’s risk of developing cardiovascular diseases or assist in treatment.

Other Clinical Laboratory and Healthcare Fraud Cases

DOJ attorneys charged the owners of Innovative Genomics, a clinical laboratory in San Antonio, in a $65 million scheme to bill Medicare and the COVID-19 Uninsured Program for “medically unnecessary and otherwise non-reimbursable COVID-19 and genetic testing,” according to the indictment. Also charged were two patient recruiters who allegedly received kickbacks for referring patients.

Richard Abrazi of New York City was charged in a $60 million Medicare billing scheme. Abrazi owned two clinical laboratories: Enigma Management Corp. and Up Services Inc. Both operated as Alliance Laboratories.

“Abrazi and others engaged in a scheme to pay and receive kickbacks and bribes in exchange for laboratory tests, including genetic tests, that Enigma and Up billed to Medicare,” the indictment alleges. “Abrazi and others also allegedly paid and received kickbacks and bribes in exchange for arranging for the ordering of medically unnecessary genetic tests that were ineligible for Medicare reimbursement.”

The DOJ charged Brian Cotugno, of Auburn, Ga., and James Matthew Thorton “Bo” Potter, of Santa Rosa Beach, Fla., in a $20 million Medicare billing scheme. Cotugno, the indictment alleges, sold Medicare Beneficiary Identification Numbers (BINs) to two Alabama laboratories co-owned by Potter.

“The BINs were used to bill Medicare tens of millions of dollars for OTC COVID-19 test kits, many of which had not been requested by the beneficiaries,” the government alleged.

These are only a few of the recent cases the DOJ brought against defendants nationwide for healthcare, telemedicine, and clinical laboratory fraud. Both Dark Daily and our sister publication The Dark Report have covered these ongoing investigations for years. And we will continue to do so because it’s important that lab managers and pathology group leaders are aware of the lengths to which the DOJ is pursuing bad actors in healthcare.

—Stephen Beale

Related Information:

National Health Care Fraud Enforcement Action Results in 193 Defendants Charged and Over $2.75 Billion in False Claims

2024 National Health Care Fraud Enforcement Action Summary of Criminal Charges

2024 National Health Care Fraud Enforcement Action Court Documents

Clinical Laboratory Testing Implicated in National Healthcare Fraud Sting

Almost 200 People Charged in Schemes Totaling $2.7B in False Health Care Claims

DOJ Catches Over $2.7B in Healthcare Fraud Schemes

University College London Study Shows Direct-to-Consumer DNA Tests Not Reliable in Assessing Disease Risk

Regulatory agencies in UK and US have yet to address dangers inherent in customer misunderstanding of DTC medical laboratory genetic test results

Direct-to-consumer (DTC) medical laboratory genetic tests are gaining popularity across the globe. But recent research out of the United Kingdom questions the reliability of these tests. The study, according to The Guardian, found that “Over the counter genetic tests in the UK that assess the risk of cancer or heart problems fail to identify 89% of those in danger of getting killer diseases.”

Researchers at University College London (UCL) examined 926 polygenic scores for risk of 310 different diseases from details retrieved from the Polygenic Score (PGS) Catalog. This catalog is an open-access database of published polygenic scores.

According the PGS website, “each PGS in the catalog is consistently annotated with relevant metadata; including scoring files (variants, effect alleles/weights), annotations of how the PGS was developed and applied, and evaluations of their predictive performance.”

However, the researchers told The Guardian, “Polygenic risk scores performed poorly in population screening, individual risk prediction, and population risk stratification. Strong claims about the effect of polygenic risk scores on healthcare seem to be disproportionate to their performance.”

The UCL researchers published their findings in the journal BMJ Medicine titled, “Performance of Polygenic Risk Scores in Screening, Prediction, and Risk Stratification: Secondary Analysis of Data in the Polygenic Source Catalog.”

“Strong claims have been made about the potential of polygenic risk scores in medicine, but our study shows that this is not justified,” Aroon Hingorani, PhD (above), Professor of Genetic Epidemiology at UCL and lead author of the study, told The Guardian. “We found that, when held to the same standards as employed for other tests in medicine, polygenic risk scores performed poorly for prediction and screening across a range of common diseases.” Consumer misunderstanding of DTC medical laboratory genetic tests is a real danger. (Photo copyright: University College London.)

Polygenic Scores Not Beneficial to Cancer Screening

To complete their study, the UCL researchers compared PGS genetic risk data to conventional clinical laboratory testing methods and discovered some troubling results. They include:

  • On average, only 11% of individuals who developed a disease had been identified by the tests.
  • A 5% false positive rate where people were informed that they would get a disease within 10 years but did not.
  • PGS only identified 10% of people who later developed breast cancer.
  • PGS only identified 12% of individuals who later developed coronary artery disease.

The researchers state in their BMJ Medicine paper that polygenic risk scores are not the same as testing for certain gene mutations, which could be critical in screening for some cancers. They also wrote that discovering genetic variants associated with the risk for disease is still crucial for drug development.

“It has been suggested that polygenic risk scores could be introduced early on to help prevent breast cancer and heart disease but, in the examples we looked at, we found that the scores contributed little, if any, health benefit while adding cost and complexity,” research physician and epidemiologist Sir Nicholas Wald, FRS, FRCP, FMedSci, Professor of Preventive Medicine at UCL Institute of Health Informatics and co-author of the study, told the Jersey Evening Post

“Our results build on evidence that indicates that polygenic risk scores do not have a role in public health screening programs,” Wald added.

“This research study rightly highlights that for many health conditions genetic risk scores alone may have limited usefulness, because other factors such as deprivation, lifestyles, and environment are also important,” clinical epidemiologist Raghib Ali, MD, CEO, Chief Investigator and Chief Medical Officer, Our Future Health UK, told The Guardian

Our Future Health is a collaboration between public, non-profit, and private sectors to create the UK’s largest health research program. The researchers in this endeavor intend to recruit over five million volunteers and use polygenic risk scores to develop innovative ways to prevent, detect, and treat disease. This program is funded by the UK’s National Health System (NHS).

“[Our] research program will be developing integrated risk scores that will take in all the important risk factors,” Ali explained. “We hope these integrated risk scores can identify people more likely to develop diseases, but this is a relatively new area of science and there are still unanswered questions around it.”

Danger of Misunderstanding DTC Genetic Tests

Here in the US, there have been news stories in recent years about the unreliability of certain genetic tests. Dark Daily covered these stories in previous ebriefs. News stories about the unreliability of genetic tests, particularly those marketed directly to consumers, reveal the problems that existing regulatory schemes have yet to address.

In “Consumer Reports Identifies ‘Potential Pitfalls’ of Direct-to-Consumer Genetic Tests,” we covered CR’s findings that though clinical laboratory and pathology professionals understand the difference between a doctor-ordered genetic health risk (GHR) test and a direct-to-consumer (DTC) genetic test, the typical genetic test customer may not. And that, misunderstanding the results of a DTC at-home genetic test can lead to confusion, loss of privacy, and potential harm.

Scientific American also covered the dangers of DTC testing in “The Problem with Direct-to-Consumer Genetic Tests,” in which the author notes that “despite caveats in ads and on packages, users can fail to understand their limitations,” and that “consumer-grade products are easily misconstrued as appropriate medical tests and create false reassurances in patients who could be at legitimate risk.”

Most clinical laboratory managers and pathologists are probably not surprised that the research performed at UCL shows that there are still issues surrounding genetic tests, particularly those marketed directly to consumers. While direct-to-consumer DNA tests can have some benefits, at this time, they are not always the best option for individuals seeking information about their personal risk for hereditary diseases.

—JP Schlingman

Related Information:

Over the Counter Genetic Tests in UK ‘Fail to Identify 89%’ of Those at Serious Risk

Performance of Polygenic Risk Scores in Screening, Prediction, and Risk Stratification: Secondary Analysis of Data in the Polygenic Score Catalog

3 Things to Know about At-home DNA Testing Kits

What Can At-home Genetic Tests Tell Me about My Health?

What are the Benefits and Risks of Direct-to-consumer Genetic Testing?

Genetic Risk Scores ‘Do Not Have a Place in Public Health Screening’

Consumer Reports Identifies ‘Potential Pitfalls’ of Direct-to-Consumer Genetic Tests

The Problem with Direct-to-Consumer Genetic Tests

CVS Health is Changing the Way it Prices Prescription Drugs Using a New Cost-Plus Model

New ‘simple’ pricing scheme will provide transparency and value to all stakeholders, says company’s Chief Pharmacy Officer

Woonsocket, R.I.-based CVS Health (NYSE:CVS) is planning to scrap what it says is an old-school prescription reimbursement model and turn to a new way to price prescription medications at its 9,000 CVS pharmacies nationwide. Why is this relevant for clinical laboratory and pathology managers? It shows the disruption that is ongoing in healthcare.

Like clinical laboratories, retail pharmacies have significant reimbursement, competition, and labor challenges to address. But unique to retail pharmacies is the emergence of pharmacy benefit management (PBM) companies that work between health insurance plans and drug makers.

“National pharmacy chains found themselves disintermediated from providing prescriptions to patients by pharmacy benefit management (PBM) companies. By 2021, PBMs had captured $484 billion of the total prescription drug spending of $576.9 billion. That meant PBMs controlled 84% of the prescription drug market! That caused retail pharmacies to look for new sources of revenue,” noted Dark Daily’s sister publication The Dark Report.

This arrangement may be motivating retail pharmacy companies to seek ways to recover the volume lost to PBMs.

CVS’ new CostVantage model will work with a formula based on how much CVS paid for the drug, a set markup over those costs, and a fee for pharmacy services to fill the prescription, according to a news release. Some experts and publications have compared the change to the approach used by the Mark Cuban Cost Plus Drug Company.

CVS Health expects to start CostVantage in 2024 before introducing it to PBMs for commercial payers in 2025.

CVS is “committed to lowering drug pricing,” CVS Health Chief Executive Officer Karen Lynch (above), CVS Health’s President and Chief Executive Officer, told CNBC. “What this (the new model) does is it essentially aligns the economics of our pricing for drugs to what consumers will pay at the pharmacy counter,” she added. Clinical laboratory managers and pathologists should understand that this new pricing strategy may be an attempt by CVS to win back prescription business lost to pharmacy benefit management companies. (Photo copyright: Rick Burn/Wikipedia.)

CVS Aims for Value and Transparency

CVS Health’s leaders believe it is time for a change in how the company’s pharmacies are reimbursed by PBMs and other payers.

Prem Shah, PharmD, Executive Vice President and Chief Pharmacy Officer, CVS Health, explained during a CVS Health Corporation Investor Day presentation some of the challenges of current pharmacy reimbursement:

  • Generic drugs dispensed in CVS pharmacies reached 90%. “That limits the capacity or the amount of value remaining through the higher levels of generic dispensing,” he said.
  • Also branded drugs have risen in price about 40% since 2019, leading to “higher costs for patients, our customers’ plans, and PBM plan sponsors.”

“This model has reached an inflection point that is just ripe for change,” Shah said. “We’re changing this outdated reimbursement model that made sense for the last decade, but no longer works today or in the future. We’re introducing a new simple model that provides value for all stakeholders across the supply chain in a much more simple, transparent, and comprehensive way,” he continued.

Cost-Plus Plans versus Retail Drug Prices 

Fierce Healthcare compared CVS CostVantage to the Mark Cuban Cost Plus Drug Company, which claims it offers prescription drugs at prices below traditional pharmacies and openly shares with customers the “15% markup over its cost, plus pharmacy fees.”

Some examples on the company’s website include: Abiraterone acetate (generic for Zytiga), a prostate cancer treatment. It is priced at $33.50, compared to $1,093 retail. Cost Plus Drug Company says its costs are:

  • Manufacturing: $24.60
  • 15% markup: $3.90
  • Pharmacy labor fee: $5.00

Another drug offered is canagliflozin (generic for Invokana), a type 2 diabetes medication, which sells for $245.92, compared to $676.14 retail. Cost Plus Drug Company says its costs are:

  • Manufacturing: $209.50
  • 15% markup: $31.42
  • Pharmacy labor fee: $5

Expert Sees More Cost-Plus Plans

In a column he penned for Drug Channels titled, “What CVS Pharmacy’s New Cost-Plus Reimbursement Approach Means for PBMs, Pharmacies, Plan Sponsors, and Prescription Prices,” Adam Fein, PhD, President of the Drug Channels Institute, a pharmaceutical research firm, wrote “Mark Cuban should be flattered but not fearful.”

Fein predicts there will be more cost-plus models by retail pharmacies. “Other large pharmacies will likely follow CVS with attempts to force payers and PBMs to accept some form of cost-plus reimbursement,” he wrote.

Fein noted pharmacies prefer cost-plus models for reasons including the “stripping away of complexity and hidden cross-subsidies. … For a pharmacy, the same PBM would pay the same price for the same prescription regardless of the PBM’s arrangement with different plan sponsors.”

Turbulent Retail Pharmacy Market

CVS has also been dealing with limited growth, pharmacist labor relations issues, and a decline in COVID-19 testing, Healthcare Dive reported.

Meanwhile, pharmacies have been closing store sites and affiliated physician practices. CVS announced plans to close 900 stores between 2022 and 2024, according to a news release.

Rite Aid Corporation, Philadelphia, announced last year that it had filed for bankruptcy and may eventually close 400 to 500 of its 2,100 stores. 

Walgreens Boots Alliance, Deerfield, Ill., intends to close 150 US and 300 United Kingdom locations, according to its former Chief Financial Officer James Kehoe’s remarks in a third quarter 2023 earnings call transcribed by Motley Fool.

The turbulence in the retail pharmacy market is another sign of ongoing disruption in healthcare. Long-established sectors are experiencing market shifts that are eroding their access to patients and ability to generate adequate profits.

Understanding how pharmacies approach these issues may help medical laboratory and pathology managers develop strategies for adding value to their relationships with healthcare providers and insurance plans.

—Donna Marie Pocius

Related Information:

CVS Health Highlights Path to Accelerating Long-Term Growth through Building a World of Health Around Every Consumer

CVS to Change How it Prices Prescription Drugs with New Pharmacy Reimbursement Model

CVS Health Corporation Investor Day

Navigating CVS’s New Pricing Models: What to Know about CVS CostVantage and CVS Caremark TrueCost

CVS Health Revamps Pharmacy Reimbursement Model Amid Scrutiny on High Drug Prices

What CVS Pharmacy’s New Cost-Plus Reimbursement Approach Means for PBMs, Pharmacies, Plan Sponsors, and Prescription Prices

CVS Health Announces Steps to Accelerate Omnichannel Health

CVS Overhauls How Its Retail Pharmacies Charge for Prescription Drugs

Walgreens to Close 60 VillageMD Locations

Bankruptcies and Store Closings are Signs of Tough Times Ahead for US Retail Pharmacy Chains

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