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.
Plans by several national retail pharmacy chains to expand primary care services and even some clinical laboratory test offerings may be delayed because of financial woes
Times are tough for the nation’s retail pharmacy chains. Rite Aid Corporation, headquartered in Philadelphia, closed 25 stores this year and has now filed for bankruptcy. In a press release, the retail pharmacy company announced it has “initiated a voluntary-court supervised process under Chapter 11 of the US Bankruptcy Code,” and that it plans to “significantly reduce the company’s debt” and “resolve litigation claims in an equitable manner.”
Rite Aid may eventually close 400 to 500 of its 2,100 stores, Forbes reported.
Meanwhile, other retail pharmacy chains are struggling as well. CVS Health, headquartered in Woonsocket, Rhode Island, and Walgreens Boots Alliance of Deerfield, Illinois, are each closing hundreds of stores, according to the Daily Mail.
They are each experiencing problems with labor costs, theft, being disintermediated for prescriptions by pharmacy benefit managers (PBMs), and probably building too many stores in most markets.
This is a significant development, in the sense that Walgreens, CVS, and Walmart are each working to open and operate primary care clinics in their stores. This is a way to offset the loss of filling prescriptions, which has migrated to PBMs. Primary care clinics are important to the revenue of local clinical laboratories, but retail pharmacy chains do not yet operate enough primary care clinics in their retail pharmacies to be a major influence on the lab testing marketplace.
“With the support of our lenders, we look forward to strengthening our financial foundation, advancing our transformation initiatives, and accelerating the execution of our turnaround strategy,” said Jeffrey Stein (above), Rite Aid’s CEO/Chief Restructuring Officer, in a press release. Clinical laboratory leaders may want to closely monitor the activities of the retail pharmacies in their areas. (Photo copyright: Rite Aid.)
Multiple Pharmacy Companies at Financial Risk
Rite Aid Corporation (NYSE: RAD) confirmed it continues to operate its retail and online platforms and has received from lenders $3.45 billion in financing to support the company through the bankruptcy process.
However, according to the Associated Press (AP), Rite Aid has experienced “annual losses for several years” and “faces financial risk from lawsuits over opioid prescriptions,” adding that the company reported total debts of $8.6 billion.
Additionally, the US Department of Justice (DOJ) filed a complaint “alleging that Rite Aid knowingly filled unlawful prescriptions for controlled substances,” explained a DOJ press release.
Rite Aid is not the only retail pharmacy brand dealing with unwelcome developments. Fortune reported last year that Walgreens and CVS paid a combined $10 billion to 12 states for “involvement in the opioid epidemic.”
Walgreens intends to close 150 US and 300 United Kingdom locations, its former Chief Financial Officer James Kehoe shared in a third quarter 2023 earnings call transcribed by Motley Fool.
And in a news release, CVS announced plans to close 900 stores between 2022 and 2024.
Pharmacy Companies’ Investment in Primary Care
Though they are experiencing difficulties on the retail side, Walgreens and CVS have significantly invested in primary care.
In that same ebrief, we reported on CVS’ acquisition of Oak Street Health, a Chicago-based primary care company, for $10.6 billion. CVS plans to have more than 300 healthcare centers by 2026.
“We looked at our business, and we said, ‘We’re seeing an aging population.’ We know people don’t have access to primary care. We know that value-based care is where it’s going. We know that there’s been a renaissance in home (care). So that’s kind of how we approached our acquisitions,” Karen Lynch, CVS Chief Executive Officer told Fortune.
Other Challenges to Retail Pharmacies
It could be that these major pharmacy chains are hoping entry into primary care will offset the loss of sales from prescriptions that have migrated to PBM organizations.
In addition to reimbursement challenges, retail pharmacies are reportedly experiencing:
High labor costs,
Competition from online, bricks-and-mortar, and grocery businesses, and
Effects from the work-at-home trend, among other struggles.
“I think there’s a number of challenges which are coming to a head. One, you have ongoing reimbursement pressure. The reimbursement level for drugs continues to decrease, so profit margin on the core part of the business is under pressure,” Rodey Wing, a partner in the health and retail practices of global strategy and management consulting firm Kearney, told Drug Store News.
Additionally, the pharmacy’s drug sales need to be high enough to retain pharmacists, who are difficult to recruit in a post-pandemic market, Drug Store News explained.
And in the retail space where products are displayed, some pharmacies struggle to compete with Amazon on convenience and with “dollar” stores on price. And with more people working from home, retail pharmacies are seeing less foot traffic, Drug Store News noted.
Retail pharmacy companies also have competition from pharmacies conveniently situated in grocery and big-box stores, Forbes reported. These include:
Walmart, for its part, reduced operating hours of pharmacies at more than 4,500 sites, Daily Mail reported.
Thus, medical laboratory leaders would be wise to keep an eye on market changes in their local retail pharmacies. Some locations are equipped with clinical laboratory services and a closure could give local labs an opportunity to reach out to patients and physicians who need access to a new testing provider.
With the majority of Americans living just a few miles from a Walmart, how might independent clinical laboratories compete?
Retail giant Walmart (NYSE:WMT) plans to install 4,000 primary care “supercenters” in stores by 2029 that will include clinical laboratory testing services. This is on top of the dozens of Walmart Health locations already in operation in Georgia, Florida, Arkansas, Illinois, and Texas.
Clinical laboratories already have growing competition in the healthcare marketplace from pharmacy chains CVS (NYSE:CVS), Walgreens (NASDAQ:WBA), and Rite Aid (NYSE:RAD) which have installed in-store healthcare clinics in their retail locations—many of which offer limited, but common, medical laboratory services—as well as from existing Walmart Health locations.
Now, Walmart is poised to become a much bigger healthcare player. According to MedCity News, Walmart is “looking beyond traditional retail clinics as it seeks to create ‘supercenters’ with comprehensive healthcare services.”
Presumably, this includes an expanded menu of clinical laboratory testing services—along with the EKGs, vision care, dental care, and more—that Walmart Health locations currently provide for children and adults.
And though Becker’s Hospital Review reported in March that Walmart’s “plan is in flux,” the major national retailer continues to disrupt healthcare in significant ways.
We reported that Walmart Health’s list of services included:
Primary care,
Dental,
Counseling,
Clinical laboratory testing,
X-rays,
Health screening,
Optometry,
Hearing,
Fitness and nutrition, and
Health insurance education and enrollment.
However, the new Walmart Healthcare supercenters differ from Walmart Health clinics and the clinics operated by Walmart’s retail competitors Target, CVS, Walgreens, and Rite Aid.
Those clinics are designed to draw customers into existing retail setting. Walmart has a different goal with its healthcare supercenter concept.
“There’s a big difference between offering healthcare services to drive more people to your store and offering healthcare services because you’re in the healthcare business,” said former President of Health and Wellness for Walmart, Sean Slovenski, during a panel hosted by the American Telemedicine Association. “We’re in healthcare,” he continued, “We’re not in retail healthcare. We’re recruiting physicians in all of these areas and bringing them in.”
Providing Transparency with Clear, Consistent Pricing
In response to consumer demand for transparency, Walmart is taking a different approach to charging patients for healthcare services. The cost of an appointment for primary care is $40 for an adult and $20 for a child. The patient can choose to bill insurance or not, and people without insurance can pay out-of-pocket.
Prices for individual services are equally transparent. Explaining why Walmart is becoming a player in the healthcare industry, Marcus Osborne, Senior Vice President Walmart Health, told Fierce Healthcare, “It’s issues of affordability. That people can’t afford the care they need for themselves and their families. It’s issues of access … That really is the business that we’ve been in. Walmart’s business has been about helping people afford the things they need, getting them in a more accessible, convenient way, and doing it in ways that are simple. Healthcare’s no different in that regard.”
According to STAT, some 35 million Americans were uninsured in 2020. Thus, the idea of transparent pricing and walk-in affordable care should appeal to a sizable market. Walmart is banking on that. Considering that 90% of Americans live within 10 miles of a Walmart, the potential success of the healthcare supercenters becomes clear, Becker’s Hospital Review noted.
Walmart’s Other Healthcare Moves
In addition to opening 20 Walmart Health Centers, and its plans for 4,000 healthcare supercenters, Walmart has made other moves that indicate its intention to disrupt the healthcare industry.
Walmart Insurance Services, for example, partnered with eight payers during the open enrollment period in 2020 to sell its Medicare products. Through a partnership with Clover Health, a Preferred Provider Organization (PPO), and a Health Maintenance Organization (HMO) with a Medicare contract, Walmart made its insurance plans available to 500,000 people in Georgia, Becker’s Hospital Review reported.
“We’re going to have a consumer revolution in retail for point of care,” John Sculley, former Apple CEO and current chairman at RxAdvance (now called nirvanaHealth), told CNBC. “Why? Because if the Walmart tests are successful, and I suspect they will be, people will be able to go in and get these kinds of health services at a lower cost than if they had health insurance.”
“A lot of the opportunity is just about bringing what we’re doing to more people. I think about Walmart Health and what we launched a little over a year ago in Georgia and the impact we’ve seen in the communities where it launched. I think one of the biggest things to do is how do we continue to find ways to make that model work so we can reach more people with it in more communities,” Marcus Osborne (above), Senior Vice President Walmart Health, told Fierce Healthcare. Walmart certainly has experience in disruption. The retailer upended the grocery industry from the moment it entered the market, and it was the first to offer $4 prescriptions, which disrupted long-standing retail relationships consumers had with their pharmacies. Clinical laboratories should realize that Walmart will likely make similar waves in the healthcare sector. (Photo copyright: Consumer Goods Forum.)
How Will Clinical Laboratories Compete?
Change is constant. Clinical laboratories that cannot adapt to changing market forces are ill-equipped to withstand the coming “consumer revolution.” However, labs that have already begun to plan for more direct-to-consumer interactions will be better positioned to adjust as changes come.
“My goal is that we have done the work on Walmart Health as a model, to really get it to work from a consumer perspective and get it to work in a way that it scales effectively, that we are able to reach more people,” Osborne told Fierce Healthcare.
Clinical laboratory leaders should understand that this trend is being driven by consumer demand for convenience, lower costs, and price transparency. Labs that don’t prepare to address those forces will be left behind as Walmart provides what consumers want.
Consumers can access a physician anytime, anywhere on a computer or mobile device using a downloadable Walgreens app
As the national pharmacy chains take progressive steps to add more health services inside their retail stores, the day draws ever closer when they may want to add medical laboratory testing services to their menu of in-store clinical services.
At the moment, telemedicine physician consults is one healthcare service finding favor with several of the nation’s largest pharmacy chain companies. Recently, Walgreens (NYSE:WBA) of Deerfield, IL, signed an agreement with telemedicine vendor MDLIVE of Sunrise, Florida, to provide virtual doctor visits.
With this agreement, Walmart becomes the latest national pharmacy chain to offer telemedicine services within its retail stores. However, unlike competitors Rite Aid (NYSE:RAD), CVS (NYSE:CVS), and Walmart (NYSE:WMT), which are currently implementing in-store telemedicine services, Walgreens is providing this service via a downloadable app. Walgreens says this allows customers to access board-certified physicians and mental health specialists anytime and anywhere from a computer or mobile device—not just from within a Walgreens pharmacy. (more…)
New generation of private telemedicine kiosks are popping up at Kaiser Permanente, Rite Aid pharmacies, giving pathology groups opportunities to do consultations
Coming soon to a pharmacy, school, retail store, or employer near you is a new generation of walk-in telemedicine kiosks. These kiosks are specifically designed to allow consumers to have private medical consultations with physicians. For that reason, pathologists and their medical specialty associations may find it timely to engage the company offering these kiosks with the goal of incorporating pathology consultations in the service mix offered by this new generation of telemedicine kiosks.
No less than the famous Mayo Clinic has become the latest healthcare provider to partner with HealthSpot, the company that designed this new telemedicine kiosk. This pilot program will be called the Mayo Clinical Health Connection and Mayo Clinic is placing these kiosks in its facilities in Austin and Albert Lea, Minnesota, specifically for use by employees of the Mayo Clinical Health System. Mayo officials hope that the use of these kiosks will contribute to reduced healthcare costs and improved access to medical services.
In a parallel pilot project, Mayo Clinic is placing its Mayo Clinic Health Connection kiosks in public schools in Austin, Minnesota. Plans are to eventually offer the service at university, employer, and retailer locations. (more…)
