Cuban’s model stirs CVS to change
A Texas billionaire’s prescription drug-pricing revolution has brought the nation’s largest pharmacy chain to heel, introducing desperately needed transparency and potentially lower prices into the U.S. health care system.
CVS announced Monday that its pharmacies would stop using secret formulas to determine retail prices and begin charging a simple markup from the wholesale price plus a dispensing fee. In other words, the drug store will behave like most retail outlets, adopting a business model introduced by a Dallas billionaire when he launched the Mark Cuban Cost Plus Drug Co.
CVS cautioned that while many drug prices will go down, some will increase. But in the horribly opaque world of health care price-setting, the move will hopefully cascade throughout the industry.
Pharmaceutical companies spend years and billions of dollars developing and patenting drugs. Companies typically price the medication based on the cost of existing therapies, not how much the drug costs to create. A cancer cure, for example, might have a retail price just under the cost of surgery and chemotherapy.
Almost no one pays the retail price, though. Insurance companies hire a pharmaceutical benefits manager to determine which drugs are the best for specific health issues and negotiate a discounted price. The PBM also handles the transactions.
PBMs pocket some of the discount and pass the rest to the insurer or corporation paying for a patient’s treatment. What price the PBM negotiates for what drugs and how that relates to the patient’s deductible or copay is one of the industry’s great secrets.
CVS is not only the nation’s largest pharmacy chain, but it also bought a PBM called Caremark in 2007 for $21 billion. The company reported filling 2.2 billion prescriptions, accounting for a quarter of the U.S. market in 2021.
PBMs have sparked controversy for years. Most large companies directly pay for employee health benefits and only hire insurance companies to administer the programs. Corporate leaders have long wanted to know how much
PBMs keep for themselves and how much savings they pass on.
Pharmaceutical companies claim PBMs cut into their profits and force them to raise retail prices. They are also frustrated when a PBM will not include their product on the authorized list of medications, known as a formulary, because the discount is not high enough.
Both Republican and Democratic politicians have demanded investigations into PBMs, accusing them of driving up usage of medications and bilking consumers.
Cuban’s company offered an alternative. For those without insurance or a very high deductible, Cost Plus Drug reveals the price it pays and sells the medication at a 15% markup plus $5 to the pharmacist for filling the prescription.
“We started this company as an effort to disrupt the drug industry and to do our best to end ridiculous drug prices,” Cuban wrote in the company’s mission statement.
In August, Cuban scored a massive coup when nonprofit insurer Blue Shield of California dropped CVS/Caremark and tapped Cost Plus Drug and Amazon Pharmacy to supply most medications. CVS got the message.
“We are leading with an approach that will shift how our retail pharmacy is compensated by implementing a more transparent and sustainable model that fairly aligns pharmacy reimbursement to the quality services we provide,” said Prem Shah, CVS Health’s executive vice president and chief pharmacy officer. “It provides our PBM and payor clients a foundational step towards more pricing clarity for consumers.”
Cuban promised to disrupt pharmaceutical delivery when he launched Cost Plus Drug in January 2022, and less than two years later, he succeeded.
PBMs may have lost this battle, but it’s only a small front in a massive war on health costs. Prescription drugs accounted for 9% of the $4.25 trillion the U.S. spent on health care in 2021. Hospitals took 31%, and doctors took 14%, according to the latest National Health Expenditure data.
Amazon and CVS are now trying to disrupt the model for primary care providers, the frontline folks who try to keep people from falling ill. Elsewhere, specialists are setting up surgical clinics to drive down the cost of routine procedures outside the hospital system.
Americans spend twice as much on health care than European nations with healthier populations and longer lifespans. The toll on the economy is growing and will only worsen as the U.S. population ages.
Our for-profit system is supposed to encourage competition but instead exploits people in a time of need. We can spend less and live longer, but without congressional action, we need more disrupters like Cuban.
Chris Tomlinson, named 2021 columnist of the year by the Texas Managing Editors, writes commentary about money, politics and life in Texas. Sign up for his “Tomlinson’s Take” newsletter at HoustonChronicle.com/TomlinsonNewsletter or Expressnews.com/TomlinsonNewsletter.