Healthcare costs are out of control — but the most bitter pill to swallow for everyday Americans has been the rising cost of prescription drugs, which have increased 5.6% year-over-year (YoY). Lawmakers have tried to rein in drug costs but have largely ignored the intermediaries who set the prices in backroom negotiations. So, insurers are taking matters into their own hands…

No more shell game: In August, one of California’s biggest insurers abandoned CVS Health (NYSE:CVS) in favor of the cheaper and more transparent Amazon Pharmacy and Mark Cuban’s Cost Plus Drug — hoping to save $500M in annual drug costs. That’s forced CVS to change how its pharmacy business prices drugs, which will take effect in the first half of 2024.

• CVS will do away with complex formulas, and price drugs using a clearer model called CostVantage — which includes the drug’s cost plus a markup and fee for its services.
• Drug Channels Institute’s CEO Adam Fein told WSJ, “It’s a fundamental change in how pharmacy services are priced” and is “a legitimate step toward transparency.”

The change is expected to have a positive impact on CVS, stabilizing its pharmacy operations — and allow Caremark, its pharmacy benefit management business, to continue setting the drug prices sold by its pharmacy services.

Companies are fed up with high costs, too

Employers pay an average of $14.6K per employee in healthcare premiums, but this doesn’t cover all the costs of doctor visits or drugs, which is getting worse. Benefits consultants expect “medical inflation” to push employer healthcare costs up 8.5% in 2024, and employers are fighting back:

• Health Transformation Alliance’s CEO estimates that 15% of companies have begun negotiating “best price” clauses into contracts with insurers, taking advantage of a new price transparency law to demand better terms.
• Employers are also renegotiating contracts with their pharmacy benefit managers (PBMs), scrutinizing rebates and drug pricing — which allowed some companies to push drug costs down as much as 9-10%.

Penny-pinching: If companies don’t push back, employees may pay. According to Berkeley’s Labor Center research, higher premiums will be passed along to workers, eating into raises intended for employees.