December 11, 2023

According to our 2024 Large Employer Health Care Strategy Survey, 91% of employers are concerned or very concerned about pharmacy cost trends. This isn’t a surprise, as already high pharmacy costs are expected to rise about 9% for both 2023 and 2024. In 2022 employers saw 24% of their health care dollars being spent on pharmacy benefits, up from 21% the year before. There are multiple and complex reasons for rising drug costs; however, recent policymaker pressure from Capitol Hill put eyes squarely on pharmacy benefit managers (PBMs) for their role in contracting and distribution.

The concerns about drug prices and opaqueness of the model are not new. A report issued by Business Group on Health in July of 2021, upon culmination of a two year multistakeholder effort of our Pharmaceutical Supply Chain Leadership Forum, recommended numerous market and policy based reforms.

A similar sentiment is echoed across the industry in the demand for increased transparency and new terms for rebates, prices and contracts, making this space ripe for disruption. “Transparent PBMs” such as Capital Rx and Navitus, among others, offer simplified contracting and rebate-free models, but have struggled to win business, as they compete against larger and more established “traditional PBMs” and the rebate-based evaluation models typically in place.  In the meantime, patients and providers seek to navigate the complexities of the pharmacy benefit with trust and confidence that medications are not overpriced and access to them is not unnecessarily narrowed. Notably, efforts such as Mark Cuban's venture into the pharmacy space with the Mark Cuban Cost Plus Drugs Company (MCCPDC) made a splash by aiming to reflect these patient and payer priorities.

Now the largest two PBMs are bringing to market seemingly comparable models, at least at first glance.

On November 14, Express Scripts (ESI), a subsidiary of Cigna, unveiled their ClearNetwork, under which clients would pay an estimated acquisition cost for a drug, plus an undisclosed dispensing fee and associated service costs. The ClearNetwork will be available in over 65,000 retail pharmacies in early 2024. This price model will apply to all prescription drugs on a plan sponsor’s list of covered generic, brand, and specialty medications. Subsequently on December 5, CVS Pharmacy announced their CostVantage model, which will be available for commercial customers in 2025 at its roughly 9,500 retail pharmacies. This model somewhat mirrors that of Express Scripts, as it allows pharmacies to be reimbursed for prescriptions based on pharmacy acquisition costs plus an undisclosed percentage margin and a flat fee for pharmacy services.

One difference between the two models is that while ESI’s ClearNetwork will use predictive acquisition cost, national average drug acquisition cost (NADAC), or wholesale acquisition cost (WAC) to determine the acquisition costs of individual drugs, CVS will rely on an internally computed “acquisition cost index” that will not be disclosed, unless via audit. Additionally, instead of keeping a flat markup rate fee for all payors, as MCCPDC does, CVS will establish the mark-up percentage through negotiations with individual payors, reducing transparency of this model.

Both new offerings, available exclusively at retail pharmacies, may drive more volume and dispensing fees to this channel. This, in turn, can improve access to community pharmacists for patients by addressing a commonly voiced concern about economic challenges faced by retail pharmacies.

An additional announcement from CVS Caremark details the launch of their TrueCost program, which will work in tandem with CostVantage to use acquisition-cost based reimbursement for retail pharmacies. CostVantage appears to be an effort towards providing transparency of net costs post-rebates to clients while encouraging plan sponsors to allow point-of-sale rebates.

Why Your CEO May Care

While there is no immediate impact on employers until these programs go into effect and may be adopted, your CEO may want to better understand the current state and the prospect of these alternatives, including what opportunities have been considered – as well as which should be considered – for your organization. Pharmacy costs are continuing to increase, and recent announcements from two of the largest PBMs, now offering alternative acquisition options, promise greater transparency. These announcements, along with continued market discussions about the rising cost of drugs, may prompt your CEO to push for a reassessment of the contract with your PBM and to further engage on the design, financial structure and vendor selection process. Conducting due diligence to evaluate what these programs would look like against your current pharmacy claims could also be informative and help prepare for future discussions and decision-making. Additionally, your CEO may ask your CFO to explore alternatives to the rebate models and the financial implications of moving to rebate-free arrangements for your plan and for members.

Your CEO may also care if members are finding options outside of your health plan increasingly more attractive. Certain financial features and fixed out-of-pocket cost designs within some current plans have created situations where cash prices may be lower (and more transparent) for patients. Members may increasingly consider cash-pay alternatives, such as GoodRx and other discount cards (which notably do not accrue towards satisfying the deductible) to avoid the full cost of medications during the deductible phase. The cost-plus based models may offer more comparable prices at retail and still allow member payments to apply to their deductible. Potential impacts on cash-pay alternatives may be forthcoming due to employers adopting these new programs. Additionally, it will be interesting to monitor what, if any, effect they have on CVS Caremark’s existing alternative, their Caremark Cost Saver program, launched earlier this year in partnership with GoodRx, which enables patients to apply their cash discounts available at member-preferred in-network pharmacies to claims adjudicated under their plan.

As mentioned above, the ESI ClearNetwork and CVS CostVantage programs will only apply to retail pharmacies. Similar to MCCPDC, they will mainly impact generic and a limited number of brand drugs, representing the large volume of transactions but a fraction of the total cost. One tool currently used by employers to control costs are plan designs that mandate or steer towards mail order and offer specialty drugs exclusively through mail specialty pharmacy. These factors may significantly limit the expected financial impact of the recently announced programs, as they will not touch specialty drugs, accounting for approximately half of pharmacy spend but impacting less than 10% of patients. It is also worth noting that none of this applies to the growing share of overall pharmacy benefit cost coming from highly specialized medications adjudicated under the medical plan.

Since rebates are predominantly seen in the brand and specialty drug space, CVS Caremark’s TrueCost may facilitate movement away from the rebate model with the leverage of a large PBM backing the approach. However, rebates have become so entrenched in prescription drug payment arrangements that movement away from rebates by a larger number of employers will require demonstrating to their C-suite positive financial impact and for some require managing the loss of predictability offered by rebate guarantees within their current contracts.

Elimination of the prescription drug rebate model, coupled with increased transparency of the PBM business model, are two steps that are necessary to realign financial incentives across the pharmaceutical supply chain and help employers prioritize consideration of lowest cost options.

What Employers Can Do

• Explore your options: As you consider changes to your PBM and drug purchasing model, evaluate whether recently announced programs are beneficial to your membership and can control costs while offering an appropriate level of transparency. As part of this effort, employers need to ask (and demand) that their consulting partners more effectively quantify the short- and long-term impact of these newer models.
• Understand what level of disruption you are willing to tolerate: Determine whether certain programs will be more disruptive than others for your members’ experience and the budgeting and cost allocation processes within your organization. Assess how any disruption can be offset by clear and proactive communications, cost transparency tools, coupled with less complexity and your plan regaining the status of lowest cost option for your members.
• Engage your CEO and CFO in strategic and financial conversations about the cost of prescription drugs, the difficulties with gross to net models and related contractual provisions. Breaking away from the status quo and moving towards sustainable transformation will cause disruption and upend reliability on rebates. HR/Benefit leaders need to proactively consider these issues with their executive leadership to be better positioned for adopting alternatives as they emerge.
• Ease member navigation and improve transparency: New payment models and programs can mean new ecosystems your employees and their families will need to navigate. Offer tools for your members and their providers that improve medication cost transparency and enable members to take advantage of the new programs. Provide methods to help them compare options at different retail pharmacies and identify instances where mail order is either mandated or represents the lowest cost option.
• Evaluate old claims repriced under new models: Engage your partners to review the benefits of newer models and alternative programs and consider comparing costs by repricing claims from the previous year under prospective programs.
• Push manufacturers and PBMs for reasonable pricing on new treatments that reflect their clinical effectiveness. Consider outcomes-based contracting for medications that drive a disproportionate share of cost increases.

While the complexity of prescription drug pricing can be overwhelming and difficult to comprehend entirely, the key reason for this upsurge in recent market activity has been precipitated by disruptors and the unsustainable rise in overall drug cost for plans and patients, as well as the lack of transparency of cost, rebates and contract guarantees. Hence the call for lower prices, rebate elimination and greater transparency.  

Employers must evaluate these models as they emerge through a simple lens: do they deliver lower cost with adequate access to needed medication?  For that to happen, financial arrangements and incentives need to change and the entire supply chain needs to be simpler and more transparent.

More broadly across the Rx landscape: while still developing, Mark Cuban’s model aims to eliminate intermediaries and simplify pricing; transparent PBMs offer greater visibility; low net-cost formularies drive down rebates. The new models announced by both CVS and ESI offer new methods to calculate prices based on different cost benchmarks. For the time being, the list of more transparent choices in the pharmacy benefit space is getting more diverse, but it is not immediately apparent how this may lower costs for employers, employees and their families.

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