Future is healthy for PBM business

Remember back in 2009, when some on Wall Street swore the sky was falling as Caremark came off a tricky selling season? Oh, how times have changed.


“Everything we’ve seen this year demonstrates that CVS is a stable company that is well-positioned to take advantage of growth opportunities in the industry,” stated Barclays Capital analyst Meredith Adler in a recent research note.


The pharmacy healthcare provider has no doubt hit its stride with its portfolio of unique, integrated offerings that sweep across the entire spectrum of pharmacy care. As it relates to its PBM business, the company credits its deep clinical expertise in enabling it to deliver a wide spectrum of best-in-class services and innovative plan designs for clients and members. And the proof of its success is in the numbers.


Total revenue in the pharmacy services segment rose nearly 25% in 2011, generating net revenues of $58.9 billion versus $47.1 billion in the year-ago period, but that’s just the beginning.


Its client retention rate for 2012 was approximately 98%, while its book of business grew significantly. The 2012 selling season yielded more than $7 billion in net new sales, along with another $5.5 billion related to PBM contracts that came with its 2011 purchase of Universal American’s Medicare Part D business. In fact, when combining the 2011 and 2012 selling seasons with the Universal American acquisition, CVS Caremark increased its book of business by 50% compared with 2010.


Today, much of the focus is on the opportunities in mid-2013 and 2014 and, so far, all signs are pointing to continued growth.


“As previously reported in the marketplace, we experienced some contract losses earlier in the selling season. However, I’m happy to report that we have continued to win new business along the way, with gross wins totaling $3.5 billion, resulting in net new business of $640 million to date, and that is on a 2013 impact basis,” Larry Merlo, CVS Caremark president and CEO, told analysts during its second quarter conference call on Aug. 7. “Our new client wins include major Fortune 100 companies as well as regional health plans in both the commercial and Medicare or Medicaid segments.”


Meanwhile, the company has indicated that its PBM is seeing an increased interest in limited networks as clients eye the potential savings of 1% to 3%.


“Clearly, the ESI-Walgreens event created a lot of momentum around narrower networks and, as an example, 20% of the new business we will be bringing on board in 2013 are going to opt for a narrow network,” Jonathan Roberts, EVP and president of CVS Caremark Pharmacy Services, told attendees of the Morgan Stanley Healthcare Conference in New York City in September. “We see many flavors of narrow network, from simply taking retailers out, which is one flavor, to creating incentives to go to specific retailers in the form of lower co-pays. So, I think it is another way for clients to save money. I think it was demonstrated that it is very minimal customer disruption to move to a narrow network.” 


Merlo also noted the increased interest during the company’s second quarter conference call and told analysts that “the clients adopting limited networks are a mix of both employers and health plans. So while we are not seeing a watershed change in the adoption of limited networks, it’s clearly a factor in the selling season, and it will continue to be on the table as a cost-savings opportunity for clients.”


The company’s flagship programs — such as Maintenance Choice and Pharmacy Advisor — are no doubt gaining significant traction and fueling growth, but the growing Medicare Part D and managed Medicaid segments continue to be of great importance.


For CVS Caremark, the Medicare Part D business undoubtedly represents a growth opportunity as the aging of the U.S. population, coupled with healthcare reform, is expected to be a significant driver of prescription utilization in the coming years.


The reality is that the number of people in the United States ages 65 years or older is projected to rise to 55 million by 2020, up 36% from 2010. On average, this population fills three times more prescriptions than people ages 64 years or younger. As a result, it is expected that Medicare drug spending will increase 8.5% annually over the next decade.


CVS Caremark began 2012 as the insurer for approximately 3.6 million covered lives across its PDPs (that number now stands at more than 4 million lives), and it also supports the Medicare business of approximately 40 PBM clients who sponsor their own PDPs and Medicare Advantage Prescription Drug programs.


And because mail-order utilization is relatively low with Medicare, the company’s more than 7,300 pharmacy locations and its leading retail market positions in key sun-belt states well-position it to serve the Medicare Part 
D population.


“Caremark has put a big emphasis on Medicare Part D and managed Medicaid, and this makes it different from most of its competitors. Both businesses are expected to show substantial growth in future years now that healthcare reform — or most of it — is moving forward,” Adler stated in a research note. “Many states will be expanding their Medicaid rolls to cover those currently uninsured, in part because they will be getting lots of financial support from the federal government initially. Meanwhile, pharmacy coverage for retirees is likely to shift to Part D over time.”