The Retailization of Medicare Advantage: What Costco’s Entry Means for Pharma

Medicare Advantage has become a tougher business just as Costco is preparing to enter it. That apparent contradiction is what makes Costco’s partnership with SCAN Group worth watching.

For years, Medicare Advantage was one of the most attractive growth businesses in healthcare. Enrollment climbed, insurers expanded geographically, and plans competed aggressively by adding dental, vision, hearing, transportation, fitness, over-the-counter (OTC) allowances, and other supplemental benefits.

The economics are now becoming more difficult. Higher medical utilization, changes in Medicare risk adjustment, growing scrutiny of plan practices, and changes associated with the Inflation Reduction Act are putting greater pressure on insurers.

Some established carriers have responded by reducing benefits, leaving selected markets, or becoming much more selective about where they compete. Costco is moving in at precisely that moment.

The retailer and SCAN, a nonprofit Medicare insurer, plan to offer jointly branded Medicare Advantage products in two states and a Medicare supplement product in another, subject to regulatory approval. The initial markets have roughly five million Medicare beneficiaries.

Costco is not building an insurance company from scratch, as SCAN brings insurance infrastructure, provider relationships, regulatory capabilities, and experience managing Medicare risk. Costco brings something very different: millions of consumers who already trust the company, and an existing healthcare footprint that includes pharmacy, optical, hearing, OTC products, and food.

That combination could tell us something important about where Medicare Advantage is heading.

Why Medicare Advantage Became Harder

The basic economics of Medicare Advantage are straightforward. Plans receive payments from the US Centers for Medicare & Medicaid Services (CMS), adjusted for the health status of their members. From that revenue, they must cover medical care, prescription benefits, supplemental benefits, and administrative expenses. The difficulty is keeping those pieces in balance.

CMS completed the transition to its newer risk-adjustment model for 2026, changing how the health status of Medicare Advantage members translates into plan payments. At the same time, medical utilization has increased and the redesigned Medicare Part D benefit has shifted more financial responsibility toward plans and manufacturers.

The result is greater pressure to manage costs, which is increasingly reaching pharmaceutical manufacturers. As Medicare Advantage economics tighten, payers are responding with greater formulary discipline, expanded use of prior authorization and step therapy, and stronger demands for manufacturer concessions.

These pressures are making market access more challenging even as manufacturers absorb a greater share of costs under the redesigned Medicare Part D benefit. Costco is entering Medicare Advantage at a time when the market is becoming more financially and operationally demanding.

Its strategy suggests that it sees an opportunity to compete differently—not simply through richer benefits or lower premiums, but by improving how consumers navigate and use those benefits. The bet is that Costco can combine SCAN’s Medicare expertise with its own trusted consumer relationship and established pharmacy, optical, hearing, and retail infrastructure to create a simpler and more integrated healthcare experience.

From More Benefits to More Usable Benefits

Medicare Advantage has spent years competing on the number and richness of supplemental benefits. But there is an important difference between offering a benefit and making that benefit easy to use.

A beneficiary may technically have access to vision, hearing, OTC, food, or wellness benefits although still having to navigate different vendors, websites, cards, reimbursement procedures, and participating locations. For an older consumer managing several medications and chronic conditions, that fragmentation matters. The Costco-SCAN model could approach the problem differently.

A beneficiary might obtain prescription medications at Costco Pharmacy, use vision benefits through Costco Optical, access hearing services through Costco’s hearing centers, and potentially use other benefits for OTC products or nutrition within the same familiar environment. That moves Medicare Advantage from benefit accumulation toward benefit integration, which is a subtle but potentially significant change.

For years, plans have asked: What additional benefit can we add? The better question may increasingly become: How easily can the member actually use the benefits we already provide?

Costco’s Most Valuable Healthcare Asset May Be Trust

Costco has another advantage that is harder to put on a balance sheet: Trust. Choosing a Medicare plan is extraordinarily complicated, as beneficiaries must consider premiums, deductibles, provider networks, drug formularies, tiers, prior authorization, maximum out-of-pocket limits, supplemental benefits, and numerous other variables.

Most consumers cannot independently evaluate every dimension. Costco has built its retail business partly by reducing that decision burden.

Customers generally expect the company to offer products that meet a reasonable standard of quality and value. That reputation matters when Costco moves from selling groceries and appliances into healthcare.

Costco executives have said that they see older customers struggling with insurance issues at pharmacy counters, subsequently the Medicare partnership creates an opportunity to reduce some of that friction. In effect, Costco could become a curator of Medicare coverage rather than simply another place where Medicare insurance is advertised.

For insurers, that should be an important development, as traditional Medicare plans spend heavily to acquire members through brokers, television advertising, direct mail, call centers, and digital channels. Costco begins with an established consumer relationship.

Trust, in that setting, becomes a distribution asset.

The Emergence of the Healthcare Ecosystem

The larger strategic story goes beyond Costco. Healthcare has traditionally been organized around separate transactions: an insurance transaction, a physician transaction, a pharmacy transaction, a diagnostic transaction, and a retail transaction.

Consumers experience them as one healthcare journey, but the system rarely operates that way. Companies are increasingly trying to connect those pieces. Costco’s approach is particularly interesting because it’s not simply acquiring every component of healthcare, it’s combining its consumer-facing capabilities with SCAN’s insurance expertise.

If successful, the partnership could create a reinforcing cycle. Medicare enrollment brings consumers deeper into Costco’s health services, such as pharmacy, vision, hearing, and other interactions.

Greater engagement reinforces the value of membership and potentially strengthens loyalty to both the retailer and the health plan. Neither company has to reproduce everything the other already does well.

Therefore, this is not traditional vertical integration, it’s ecosystem integration.

Why Pharma Should Pay Attention

For pharmaceutical executives, this development has implications that extend beyond Medicare Advantage. Manufacturers have traditionally thought about market access primarily through payers and pharmacy benefit managers (PBMs).

The pathway is familiar: Manufacturer → payer/PBM → formulary → pharmacy → patient.

But what happens when the pharmacy, insurance benefit, OTC purchases, vaccinations, hearing services, vision services, and other healthcare interactions begin converging within a trusted consumer platform? The pharmacy becomes more than a dispensing endpoint—it becomes part of the patient’s healthcare interface, which creates at least three implications for manufacturers.

• First, access must increasingly include usability. Winning formulary coverage matters, but is not sufficient if patients encounter friction when they try to start or remain on therapy.
• Second, retail healthcare platforms could become increasingly important for adherence, vaccination, patient education, and chronic-disease management. These are areas where manufacturers traditionally have limited direct contact with patients.
• Third, manufacturers may eventually need to think beyond traditional market access toward what I would call ecosystem access.

Ecosystem access asks a broader question: Once a drug is covered, how easily can patients obtain it, understand it, initiate therapy, and remain adherent within the healthcare environments they actually use? That distinction becomes especially important as specialty medications and chronic therapies account for greater shares of pharmaceutical spending.

Costco Still Has to Solve the Healthcare Math

None of this means Costco has discovered a way around the fundamental economics of Medicare Advantage. Brand trust cannot compensate indefinitely for rising medical costs.

If the provider network is inadequate, consumers will notice; if prior authorization becomes burdensome, they will notice; and if promised benefits prove difficult to use, they will notice that too.

Costco may actually face greater reputational risk than a conventional insurer because consumers bring unusually high expectations to the brand. Therefore, the decision to begin with a limited rollout makes sense.

The real test will not be how many Costco customers initially consider the plan. It will be whether Costco and SCAN can translate consumer trust and integrated services into better engagement, higher benefit utilization, stronger retention, and ultimately sustainable healthcare economics.

The Retailization of Medicare Advantage

Costco’s entry points toward a larger change in Medicare Advantage. The traditional formula has been insurance, managed care, and supplemental benefits, whereas the emerging model may increasingly become insurance, trusted consumer platform, and integrated healthcare services.

I call this the retailization of Medicare Advantage, which does not mean retailers will replace health insurers. Insurance expertise, provider contracting, actuarial discipline, and medical-cost management remain essential; however, those capabilities may no longer be sufficient to differentiate one Medicare plan from another.

The next competitive battleground may be the connection between insurance and the everyday places where consumers actually experience healthcare. For pharmaceutical companies, that means watching more than formulary decisions and PBM negotiations, it also means understanding who owns the patient relationship, where healthcare decisions are being made, and which organizations are reducing or creating friction between coverage and treatment.

Costco’s Medicare experiment may succeed or fail and either outcome will be instructive. The larger question it raises is already relevant: In the next era of Medicare Advantage, will owning the trusted consumer relationship become nearly as important as owning the insurance product?

For pharma executives, that is a question worth watching closely.

About the Author

Dr. Thani Jambulingam is Dirk Warren ’50 Sesquicentennial Faculty Chair in Business and Professor of Pharmaceutical & Healthcare Business at Saint Joseph's University, where he teaches and research in pharmaceutical strategy, healthcare marketing, market access, healthcare supply chains, and AI applications in life sciences. His research focuses on pharmaceutical competitiveness, healthcare innovation, strategic market access, supply-chain resilience, and the evolving role of artificial intelligence in healthcare. He is also the originator of the Supply Chain Immunity Theory.