In 2012, DSN presented an in-depth report on CVS Caremark’s integrated pharmacy business model — part big retail pharmacy chain, part big PBM, part big retail clinic operator — and the innovative products and solutions that were coming out of the organization, particularly where the three parts of the business came together, its “integration sweet spots,” as company executives referred to them. It was clear at the time that the company had emerged as a “category of one,” which was the cover theme of that special issue.
Now, a year later, as the company completes its 50th year in business and the country awaits a period of change in health care unlike anything seen in at least that time, CVS Caremark executives are quite confident that its unique hybrid structure and its ability to leverage the three core parts of its business — either individually or together, in varying combinations to serve a multitude of needs — aligns more effectively with the long-term trends in health care and puts the company in a unique position at a singular moment in history.
In an exclusive interview with DSN, CVS Caremark president and CEO Larry Merlo talked about what that means, why it’s important to both public and private payers of all sizes, health plans, patients and providers, as well as how the company is using behavioral economics and predictive analytics to more effectively engage clients and customers and how they are building new clinical capabilities to address the new models of care, new customers and new quality standards that will guide the new payment models that will emerge through health reform.
“We’re going to see more change in the healthcare industry over the next 10 years than we will have seen in the past several decades,” Merlo said.
Call it the New New Math: One plus one plus one equals one. That’s more or less the formula behind CVS Caremark’s channel-agnostic, enterprise-driven growth strategy. That’s the power of one.
Its Maintenance Choice program is a prime example. A traditional standalone PBM with a mail-order business would typically work hard to keep patients bound to mail. But for CVS Caremark, even if the PBM loses some mail-order scripts, it still captures those lives to manage, and CVS/pharmacy gets the scripts; CVS Caremark the enterprise wins. Meanwhile, its PBM customers — and their members — save money and maintain access to retail pharmacy.
In today’s market, with the headwinds currently facing the nation’s healthcare system and the massive changes to come, that’s a powerful message.
It is no newsflash that America is facing a massive shift in health care, changing the way care is delivered, who gets it, how it is paid for and who pays for it as a result of health reform and other forces. With or without the Patient Protection and Affordable Care Act, health care had already been on a trajectory of mass retailization, driven by the economics of consumer-directed health care. This is only expected to intensify under health reform; with the growth that is expected in the individual plan market, millions more people will have a lot more skin in the game. And this will sharply influence the choices they make.
Consider some of the changes that will occur in health care in the years ahead.
America is aging rapidly — 15 million more seniors will enter Medicare by 2020, with Medicare drug spending expected to rise more than 8% in that time. The average senior, ages 65 years to 74 years old takes about 27 prescriptions a year; those 75 years and older average more than 31 prescriptions a year.
Obesity and chronic disease continue to spike out of control. By 2015, it is estimated that 149 million people — roughly half the country — will suffer from one or more chronic conditions. Patients with chronic disease spend five times as much as the average person, with chronic disease accounting for more than 84% of total healthcare costs.
And the $300 billion a year adherence problem continues to leak avoidable costs from the system.
Specialty pharmacy spending continues to climb. By 2016, it is projected that 8-of-the-top-10 branded drugs will be in the specialty class — up from 3-of-10 in 2010. Currently, specialty drugs represent about 20% of the total drug spend, and it is expected to reach more than 30% by 2016, growing at 13% a year.
Health reform will result in newly covered lives, new sources of funding and massive shifts between patient segments that will play out over the next few years. By 2016, it is expected that 17 million of the previously uninsured will enter the healthcare system either through the private exchanges or Medicaid, which is expected to grow 24% in that time, adding 11 million more lives.
It also is expected that a number of employers will begin to shift retirees into Medicare and move current employees into the private exchanges, further contributing to the rise in the Medicare population — expected to grow 18% in the next few years to 52 million — and resulting in a huge spike in the individual payer market, expected to grow 150%, adding 21 million lives by 2016.
New care and payment models already are emerging. More than 4-of-10 physicians believe they will be reimbursed under a pay-for-performance model in the next few years — some of them already are being compensated that way to some degree. Both government and private payers are pushing the development of such new delivery systems as patient-centered medical homes and accountable care organizations. These models also require providers to assume more risk.
In a frank and wide-ranging discussion, Merlo explained why he likes his company’s chances to be able to pivot against each of these challenges, levering and ratcheting up and down its offerings in varying configurations as needed to serve the changing needs of payers and health plans.
“We believe our enterprise model can deliver services and capabilities that would be very difficult for a standalone PBM or standalone retail pharmacy to offer on its own,” Merlo said in late November. “When you think about the new customer groups emerging, ... obviously the government becomes a growing customer segment with the growth in Medicare and the expansion of Medicaid. We’re well positioned. We currently have the No. 1 share in the managed Medicaid space — with about 30% market share — and we expect that segment to grow [about] 40% between now and 2016. We’re in a very good place when you look at the assets that we have to manage the Medicare population; we have our own SilverScript Med D plan, but also we manage the pharmacy benefit for our health plan clients with their respective MAPD businesses.”
And the opportunities that will arise are not exclusive to the PBM business, Merlo explained. “When you think about the emergence of the exchanges, whether it’s public or private exchanges, we will participate in those segments,” he said. “And our participation is not limited to our PBM. It spans across the entire enterprise, including our retail pharmacies and MinuteClinic.”
The exchanges will provide an interesting opportunity for CVS Caremark to again prove its value at the patient level, as an estimated 17 million “active selectors” hit the market in the next two years alone — this group will be voting with their wallets. CVS Caremark plans to participate in the private exchanges both through “a carve-in basis through our health plan clients, as well as on a carve-out basis as a standalone PBM where we have direct prescription benefit offerings on the exchange products,” Merlo told analysts, during te CVS/pha Nov. 5 earnings call.
Additionally, its PBM will “participate in the public exchanges through our health plan clients on a carve-in basis, where the health plan offers integrated medical and pharmacy benefits and we provide the PBM services,” he added.
But there is another very good reason that Merlo is so bullish about the company’s future: its recent past.
The fact is its unique, integrated structure and the offerings that have come out of it thus far, particularly Pharmacy Advisor — the company’s clinical program, which is designed to alert its pharmacists, both in its mail facilities and in its stores, to adherence issues and gaps in care — and Maintenance Choice, have resonated powerfully with patients and payers in recent years. It shows up in the amount of captive PBM business CVS Caremark has running through its retail pharmacy division — the growth since the two companies came together has been staggering. In 2007, CVS/pharmacy’s total share of the retail pharmacy market stood at 16%, and its stores processed about 18% of all Caremark retail pharmacy network claims. By 2012, its share of the pharmacy market had grown to 21%, but it controlled 31% of all retail scripts processed by its PBM business. That is another very strong testament to its “power of one” enterprise growth strategy.
And there is a very good reason why its PBM clients are engaging with a greater number of its services. As CVS Caremark grows its share of a client’s pharmacy volume, the client’s per-member costs tend to go down. The company uses the example of two PBM clients — both are using CVS Caremark’s specialty offering, but only one, Client A, also is using Maintenance Choice and Pharmacy Advisor. Client A achieves a generic dispensing rate of 77%, an average medication possession ratio (i.e., the key metric used to measure patient adherence) of 83.5% and gross costs per member of $2,305. By comparison, Client B achieves a generic rate of 68.4%, an MPR of 80.3% and spends $2,697 gross per member as a result. In these scenarios, CVS Caremark manages 86% of Client A’s total prescription volume versus just 55% for Client B.
What’s more, CVS Caremark still has a lot of runway to grow those numbers even higher, as it continues to woo payers and health plans in each new selling season. For about 18% of its PBM customers, more than 80% of total prescription volume runs through either CVS Caremark’s mail order or its retail channel. For another 22%, it delivers 60% to 80% of all prescriptions in-house.
In addition to the differentiated offerings and services that the company is able to develop as a result of its unique model and enterprise growth strategy, there is another very basic economic edge its model affords: purchasing power. Between its retail pharmacies and its PBM, CVS Caremark is the largest purchaser of pharmaceuticals in the United States, filling more than 1 billion scripts a year. According to CVS Caremark, this is about 25% more than its biggest retail competitor and twice that of its biggest PBM competitor.
And with its new 50/50 joint venture with Cardinal Health, announced Dec. 10, which will source and negotiate generic drug supply contracts for both companies, CVS Caremark picks up even more scale in the thick of the generic wave. In the next two years, it is expected that nearly $30 billion worth of blockbuster drugs will go generic, including Nexium, Copaxone and Celebrex in 2014 and Abilify, Namenda, Lovaza and Androgel in 2015. Pembroke Consulting president Adam Fein estimates the CVS Caremark-Cardinal Health generic drug joint venture has combined purchasing power of about $10 billion.
Another area in which the company recently added some heft is in its specialty pharmacy business, with its $2.1 billion acquisition of the Coram specialty infusion services and enteral nutrition business from Apria Healthcare, in late November. While specialty pharmacy already had been a large and growing business for the company — estimated to reach more than $20 billion in revenue in 2013, and growing over the last several years at about 23% — the Coram deal lands CVS Caremark squarely in the center of one of the fastest-growing segments within specialty pharmacy. The $11 billion home infusion services market is growing at about 10% a year, with infusion-based drugs accounting for the majority of new drugs in the pharmaceutical pipeline in the years to come, Merlo told DSN.
“So the acquisition is consistent with the CVS Caremark strategy of core businesses that will help direct growth,” he explained. “But if you dig a little deeper, this becomes another component to being a full-service specialty provider.”
What does that mean, exactly? “Specialty pharmacy today can be covered through the medical benefit, or it can be covered through the pharmacy benefit, depending on the site of care, whether the patient chooses to have infusion [therapy] performed in the physician’s office, a hospital or perhaps at home. Our approach is to bring the most complete set of services to clients and patients, ... and we want to bring new approaches to the market that improve the management of specialty pharmacy costs across the entire spectrum of care.”
Site of care management is a critical cost-savings strategy in the specialty pharmacy business. Getting an infusion-based therapy at the hospital can be twice as expensive as delivering the service in the home or the physician's office.
Prior to the deal, CVS Caremark had been a relatively small player in the infusion services business, Merlo said.
As it continues to make each of its businesses stronger, the truest demonstration of the power of its enterprise-driven, integrated model is in the areas where the three businesses come together — the integration sweet spots — and where CVS Caremark is able to seize on its clinical capabilities and strong insights, both at the PBM client and the retail customer levels, to deliver innovative solutions. Meanwhile, the changes in health care also are leading to new customer relationships with healthcare providers.
As health reform evolves, providers will not only move more to a pay-for-performance model, they will be required to assume more risk. Some of the lowest hanging fruit for them lies in improved patient adherence, which strikes at the heart of the CVS Caremark operation.
One strong example is the work CVS Caremark currently has underway in Hawaii in partnership with HMSA, the state’s Blue Cross Blue Shield program. HMSA is moving to a patient-centered medical home model. CVS Caremark, which became the PBM for HMSA about a year ago, is working with providers and case managers that are affiliated with HMSA’s medical home system to share adherence and gaps in therapy data captured via Pharmacy Advisor by Longs retail pharmacists — CVS/ pharmacy still operates under the Longs Drug Store banner in Hawaii — through the HMSA information network.
In addition to its retail pharmacies, the partnership also leverages MinuteClinic in a new way. CVS Caremark opened its first clinics in Hawaii this summer, and its seven MinuteClinics on the island of Oahu are linked to HMSA’s medical homes, helping to coordinate acute and chronic care. All patient interactions are captured and shared through the HMSA provider information network.
Executives have stated that the company will look to create more of these types of collaborations, leveraging multiple parts of its business to help providers better manage risk and meet their quality measurement goals. “From our viewpoint, provider risk should turbocharge our efforts to ensure patients are getting and taking the right medications, and none of our competitors in the PBM space or the retail worlds can match these programs,” CVS Caremark chief medical officer Dr. Troyen Brennan has stated.
While the design and construction of some of its offerings can be quite complicated, Merlo brings the conversation back to the patient level. Consider again the aging of America — the average senior with chronic conditions takes anywhere from 13 to 19 prescriptions daily. Fewer than 50% of seniors are up to date on preventive health services. And each year, the average senior sees seven doctors across four practices.
Merlo talks about a patient the company calls “Maria.”
“She’s 68 years old,” he explained. “She suffers from three chronic conditions: diabetes, high cholesterol and rheumatoid arthritis. When you [think about it], you’re going to say, ‘You know what? I know a Maria.’”
Merlo explained the range of challenges Maria has managing her medications. She forgets to refill her medications. She is unsure when there is a change in her therapy. She doesn’t always remember to get the lab tests she needs. She uses multiple pharmacies. And when she does see each of her doctors, she has a hard time describing any changes or updates in therapy that any of her other doctors may have made.
How does CVS Caremark leverage the total enterprise to help Maria? First, she gets a text message when she’s due for a refill; she can then choose whether she wants to pick it up at her local pharmacy or have it mailed to her for the same co-pay. Either way, the CVS Caremark pharmacist, in the store or at the mail facility, will use Pharmacy Advisor to receive alerts about Maria. In this case, the pharmacist gets a message to counsel Maria about an adherence issue with one of her medications. Pharmacy Advisor also prompts a referral for Enbrel counseling and a cholesterol test.
Maria goes from the pharmacy counter to MinuteClinic, where she gets a cholesterol test, and in 20 minutes, the nurse practitioner is reviewing her results with her and providing counseling on diet and self-care. Since Maria’s test results are elevated, the NP also writes a prescription for a higher dose statin. Maria picks up her new prescription 15 minutes later.
CVS Caremark captures all of that patient information and shares it with Maria’s primary physician via the new health information exchanges. Maria’s physician sees CVS Caremark as a care partner in the virtual medical home.
That is the power of one, and that is how CVS Caremark sees its future.
In a series of exclusive interviews with Merlo and key members of its leadership team — including SVP merchandising Judy Sansone, chief marketing officer Rob Price and newly appointed president of CVS/pharmacy Helena Foulkes, who officially assumes leadership of the company’s retail business on Jan. 1 — DSN examines the core parts of CVS Caremark’s business, including an in-depth look at its front-store business and a series of new personalization initiatives that is reshaping every aspect of its retail business.