CVS Caremark: Time to Cut the Knot – Is PBM Divestiture Best for Patients, Payers AND Shareholders?

With CVS Caremark’s third quarter 2010 investors call this week and Walgreens’ reported plans to sell off its pharmacy benefit management business, it’s an appropriate time to (again) ask: Would divestiture of the PBM Caremark be in everyone’s best interests?

Community pharmacists and consumer groups have long argued and continue to maintain that the merger of the giant retail chain pharmacy CVS with Caremark, a major pharmacy benefit manager (PBM), has apparently compromised health care outcomes, reportedly driven up costs for payers and robbed consumers of fair competition on a level pharmacy playing field. The Federal Trade Commission, 24 state attorneys generals, and the Senate Aging Committee are investigating the anti-consumer conduct by CVS Caremark, and a recent private suit charges RICO and other federal violations.  Certainly the armies of lawyers defending CVS Caremark are prospering, but the company is paying a stiff price in legal fees and the energy necessary to defend a seemingly flawed business model.

The merger’s merits from the shareholder standpoint also appear to be questionable.

The CVS Caremark “integrated model” begs the question, can a PBM serve two masters – a parent that focuses on the bottom line and growth requirements of a national retail pharmacy business and its PBM clients?  After all a PBM is supposed to be an “honest broker” securing the lowest prices from all the pharmacies – Caremark can’t be an honest broker with CVS.

Many of CVS Caremark’s recent legal and litigation issues have had at their core this basic conflict. It is not surprising – in the 1990s drug manufacturers acquired PBMs expecting buckets of new profits from this integrated model, only to find that the market did not want to buy into a PBM with a conflict of interest.

In 2007 the CVS Caremark union was announced, promising many “synergies” for pharmacy patients, payers and shareholders.  It would seem that few of these much heralded synergies have actually materialized.  At the time, some analysts expressed doubt, aside from the obvious increased purchasing power of the consolidated companies.

Those questions continue, as evidenced by this analysis just published on “From the top level fundamentals, we cannot be certain yet whether the merger was a mistake. However we see it as a worrisome development. The merger brought $30 billion of goodwill and intangible assets to the CVS Caremark balance sheet. That’s right – Caremark had no tangible equity. And neither does CVS now.”
Previously, Drug Channels’ Adam Fein observed that CVS Caremark CEO Tom “Ryan’s earlier-than-expected departure acknowledges the tough reality: the premise behind the deal is still unproven.” Ryan took the helm of CVS Caremark on the platform of “the transformative combination of a major pharmacy chain with a major PBM.” Ryan’s transition reveals a symptom of the failed promises of the integrated model and unseen revenue synergy.

Regarding Walgreens, it is important to note that the company did not seek to buttress its PBM business by acquiring a major PBM such as Express Scripts or Medco. Instead, the company appears to have decided that operating a PBM was at odds with its core business and that it can compete effectively against CVS Caremark absent a PBM capability.

So what has the CVS Caremark produced?

  • CVS Caremark Profits up but Loses Big Contracts,” the Associated Press reported in November 2009, chronicling doubts about the integrated model.
  • In 2010, CVS Caremark’s focus on what was best for its stores vs. what was best for patients and payers exploded onto the front pages as Walgreens took steps to pull out of CVS Caremark’s pharmacy network. To no one’s surprise, the two giants reached an agreement, but not before payers and patients spent some anxious moments worried about access issues.
    • At the recent CVS Caremark Analyst Day, the company indicated it would have improved revenues for 2011. But the numbers were hardly stellar. Remove the $8.2 billion Aetna contract as a one-time deal closer to an acquisition than a standard PBM contract, and the 2011 gains were extremely modest. Wins in the employer space account for $800 million, Blues/Health Plans total $600 million and government wins were $200 million. Total new wins sans the Aetna deal equaled $1.6 billion. Total revenue lost from plans that didn’t renew was $1.1 billion. Results like this explain why some CVS Caremark insiders refer to synergies of the integrated model as “selling the dream” rather than generating results.

Things are not getting better for CVS Caremark. The PBM recently announced the closing of its Birmingham Mail Facility and four Specialty Sites. Three hundred additional layoffs were just disclosed. Losses to Medco and Express Scripts continue unabated. The integration of the Aetna business continues to place strain and pressure on the PBM operations. The PBM leadership is looking to reduce costs by $225-$275 million annually while acknowledging that improvements and streamlining are needed in its mail order intake systems as well as dispensing and back-end processes.  The Minute Clinics have yet to turn a profit. Litigation continues to mount, including the RICO suit in Texas.

The business model of a major PBM in the service of a national drug store chain has been discredited and invalidated due to its many obvious conflicts of interest. Walgreens repudiation of this model should be the last acknowledgement that the model does not work for payers, patients and the shareholders of the companies that participate in such business models.

Perhaps it’s time to relegate this failed business model to the dust bin of history.

1 Response to “CVS Caremark: Time to Cut the Knot – Is PBM Divestiture Best for Patients, Payers AND Shareholders?”

  1. 1 adamjfein November 2, 2010 at 2:43 pm

    Thanks for including a link to Drug Channels.

    One clarification: You link to my February 2009 article regarding the limited revenue synergy. However, my subsequent articles have highlighted how the Maintenance Choice program has been beneficial to CVS’ retail same-store pharmacy revenues. For example, see “CVS Grows While Legal Storm Clouds Gather” ( from June 2010.

    While your article is predictably sensationalistic, we do agree that there appear to be limited business synergies for Caremark’s PBM business from the merger. Here is my most recent post from October 2010: “CVS Caremark: More Happy Talk, But Hard Work Remains” (


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