CVS moved its 9,000 pharmacies to cost-plus drug pricing to stop flatlining revenue

What was changed

At its December 2023 investor day, CVS announced CostVantage, a new way of pricing prescription drugs across its more than 9,000 retail pharmacies: each drug is priced at what CVS paid for it, plus a defined markup and an additional fee covering the pharmacist's cost of handling and dispensing. The move targets the antiquated US pharmacy reimbursement system, in which pharmacies are paid through complex formulas and use higher rates on some medicines to subsidise losses on others.

Chief pharmacy officer Prem Shah said that model — cross-subsidisation — had been effective for a decade but reached an inflection point as branded drug costs rose and payer reimbursement fell, flattening revenue. Without change, CVS's retail pharmacy division expected a 5% drop in adjusted operating income the following year; CostVantage should hold it flat instead, and executives said it should not raise drug prices — some could come out lower. It should also end the anomaly of insured patients finding it cheaper to pay cash than use their benefit.

Rollout was to start in 2024 with consumers paying cash via certain drug discount cards, before expanding to commercial payers — 750 million prescriptions a year — in 2025. CVS paired it with TrueCost, a transparent PBM product priced on the net cost of drugs with clear administrative fees, to be offered to employers and other clients in 2025. The reforms echoed Mark Cuban's Cost Plus Drugs and followed Express Scripts' cost-based pricing announcement; GoodRx shares fell 8% on the news, against a backdrop of an FTC investigation into PBM practices.

Why it worked

Cross-subsidised reimbursement had stopped covering costs, so the revenue model needed re-pricing rather than another round of cost cuts.

Publishing a simple formula — cost, markup, fee — rebuts the opacity criticism regulators and clients were levelling at PBMs.

Moving first let the largest US pharmacy chain adopt the cost-plus benchmark discount-card disruptors had been using against incumbents.

Pairing pharmacy pricing with a transparent PBM product (TrueCost) addressed both sides of the business clients were threatening to leave.

What can be applied

When a pricing model stops working, publishing the math — cost plus a stated markup and fee — can reset the economics and steal the reformer's clothes at scale.

Aftermath

CostVantage was to roll out from 2024 to cash-pay customers and reach commercial payers in 2025; TrueCost was set to reach employers in 2025. The December 2023 source reports no post-launch results; GoodRx shares fell 8% on the announcement.