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.
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:
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.
If there is one healthcare trend that will be truly disruptive to pathologists, it is personalized medicine. The concept behind personalized medicine is simple: understand the genetic and metabolic differences unique to the individual patient. Then use this knowledge to tailor a custom program of therapy, including prescription drugs, that offers the maximum potential for success while minimizing possible side affects.
Personalized medicine is closely linked to the emerging field of companion diagnostics. In combination, these two new ideas have the potential to revolutionize how laboratory testing services are used in developed healthcare systems. For one thing, clinical laboratories and anatomic pathology groups-traditionally the “go to” source for information to drive diagnostic, prognostic, and therapeutic decisions-will have serious competitors in the world of personalized medicine and companion diagnostics.
One keen observer of the personalized medicine trend is Bruce Friedman, M.D., Professor Emeritus of Pathology at the University of Michigan Medical Center in Ann Arbor, Michigan. In his popular LabSoft news blog, he defined companion diagnostics in this manner:
Briefly stated, [companion diagnostics] is a strategy pursued by some IVD companies, Roche Diagnostics in particular, whereby the company develops a gatekeeper biomarker assay. This is a lab test that serves to qualify a patient for treatment with a particular drug. The most common example of such a test is the HER-2/neu assay that is required prior to treatment with Herceptin.
Friedman, like your Dark Daily editor, recognizes that advances in genetic science and molecular technologies are making it possible for other medical specialties to crowd into the diagnostic field. He believes that the current, commonly-used definition of companion diagnostics-as primarily measurement by use of serum biomarkers-is outdated. He thinks the definition should be widened, writing in his blog that: “I personally have begun to routinely assume that diagnostics, unless otherwise qualified, should be more broadly defined to include both the analysis of serum and tissue biomarkers as well as medical imaging procedures. I have posted a number of notes about molecular imaging, which is defined in the following way in the Wikipedia:
[Molecular imaging] differs from traditional imaging in that probes known as biomarkers are used to help image various targets or pathways, particularly. Biomarkers interact chemically with their surroundings and in turn alter the image according to the molecular changes occurring within the area of interest. This is markedly different from previous methods of imaging which primarily imaged differences in qualities such as densities or water content.”
Friedman continues, saying: “I think that we now need to broaden our definition of companion diagnostics to include both the measurement of serum/tissue biomarkers as well as medical imaging and particularly molecular imaging. Such an approach also echoes my belief, expressed in a number of previous notes, that pathology, lab medicine, and radiology are becoming much more closely aligned and should now merge into a new discipline of diagnostic medicine. This broader definition for companion diagnostics also suggests that Roche, GE, and Siemens are embarking on very similar strategy in the pursuit of personalized medicine.”
All pathologists and radiologists should track this trend, which is poised to disrupt long-standing practices in their respective medical specialties. Friedman will speak on this topic at the upcoming Molecular Summit on the Integration of In Vivo and In Vitro Diagnostics in Philadelphia on February 10-11, 2009. Location is the Sheraton Society Hill Hotel in Philadelphia, Pennsylvania. Joining Friedman is a faculty of 27 other leading national and international experts in molecular imaging, molecular diagnostics, and healthcare informatics.
Speakers from such organizations as Massachusetts General Hospital, Stanford University Medical Center, MD Anderson Medical Center, UCLA Medical Center, Siemens, and the Institute for Systems Biology will provide the latest innovations in the integration of in vivo and in vitro diagnostics. Last year’s Molecular Summit attracted 225 attendees, along with editors and reporters from 15 healthcare publications. This upcoming Molecular Summit has compelling case studies of how molecular diagnostics, when integrated with molecular imaging and other data sets, is giving clinicians powerful new insights for making diagnoses, identifying appropriate therapies, and monitoring patient progress.
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Whether laboratory medicine is ready or not, Big Pharma is ready to crowd its way into the laboratory testing marketplace. The world’s largest pharmaceutical companies are recognizing that the success of their prescription drugs will increasingly depend on a clinically-useful companion diagnostic test. Since pharma companies like control over their products, Dark Daily predicts that deals between pharma companies and in vitro diagnostics (IVD) firms will soon be announced.
As this happens, laboratory medicine is likely to be influenced and transformed in ways that will be difficult for pathologists to control and influence. That’s because Big Pharma has tens of billions of dollars to invest in research, clinical trials, and development of products that support the introduction and clinical acceptance of new therapeutic drugs.
This development is directly linked to advances in genetics and molecular diagnostics. Researchers are identifying populations of patients with genetic attributes that either make them prime candidates to respond to a therapeutic drug or a lead pipe cinch to get no therapeutic benefit and even negative side affects. As this occurs for specific cancers and diseases, pharmaceutical firms are recognizing that, for their new drugs to accepted by clinicians and payers, it will need to have a companion diagnostic lab test that affirms that the patient will benefit. Of course, the most recognized example of a companion diagnostic is when the breast cancer patient is tested for the HER2neu mutation. Only if the patient is positive for HER2neu is she a candidate for the drug Herceptin.
Evidence of Big Pharma’s pending move into in vitro diagnostics comes from public statements at various scientific meetings and investor conferences. For example, last month, at the annual meeting of the Society of Clinical Oncology (SCO) in Chicago, discussion of promising new drugs in development invariably included mention of how bio-markers for companion diagnostics were part of the drug development and clinical trial process. Reporters Ron Winslow and Marilyn Chase of The Wall Street Journal covered this meeting, and wrote that research presented at SCO “highlights an important shift in cancer treatment and in attitudes of pharmaceutical and biotechnology companies toward ‘personalized medicine,’ in which treatment is tailored to an individual based on his or her genetic makeup. Companies are beginning to accept a smaller market for some medicines in return for a better chance that those who use them will have a good result.”
The key point to emphasize here is that Big Pharma has the potential to radically transform laboratory medicine as we know it today. Armed with the cash flow from $200 billion in prescription drug sales in the United States alone, Big Pharma has the clout, both financially and politically, to pursue its agenda with vigor.
Further, it should not be overlooked that imaging giants Siemens (NYSE: SI) and General Electric (NYSE:GE) are actively staking out their presence in the in vitro diagnostics sector. In the past 24 months, Siemens invested more than $14 billion to become the world’s second largest IVD manufacturer. On the pharma side, earlier this year, drug and IVD giant Roche Holdings AG (VTX:ROG.VX) invested $3 billion to acquire Ventana Medical Systems, Inc. and its $300 million in annual revenue.
Should the considerable activity of the imaging companies to enter the laboratory testing marketplace be matched by equal or greater activity from Big Pharma, then the traditional profession of laboratory medicine as we know it today is likely to undergo a far-reaching transformation. Lots of money generally implies lots of influence. If pathologists have been worried about how Siemens and GE, with their imaging revenues anchored in radiology, might change the collegial specialty of pathology, then think what can happen as Big Pharma starts pouring some of its billions into in vitro diagnostics with the goal of controlling bio-markers and pointing research into directions that serve their corporate objectives.
