CVS Caremark turns to innovation to capture a growing healthcare market
With healthcare reform on track to bring 32 million more Americans into the healthcare system in 2014, and with payers and patients looking for solutions to curb costs as the nation battles a shortage of primary care physicians and access to quality care, CVS Caremark’s role in reinventing pharmacy through its distinctive business model couldn’t be more imperative than it is today.
“When you think about the business that we operate, we have a $120 billion enterprise; we have about 7,400 CVS/pharmacy stores; we operate one of the leading pharmacy benefit management companies in Caremark; and MinuteClinic … plays an important role in healthcare delivery. So, we think about those three businesses operating as best-in-class business units,” president and CEO Larry Merlo told Drug Store News in an interview earlier this year.
Take each of those business units, place them in a circle and where they overlap is what the pharmacy innovation company refers to as its “integration sweet spots” — essentially those products and services that no stand-alone PBM or stand-alone pharmacy retailer can provide to its clients, members or customers. It’s those “sweet spots,” a top-notch leadership team, and a robust network of pharmacy and retail clinic locations that is helping to further catapult the company from its roots as a go-getting New England-based regional player to the pharmacy healthcare giant that it is today.
Merlo has talked a good deal about the integration sweet spots, and the results are clearly demonstrating success and resonating not only with patients and payers, but also with Wall Street.
CVS Caremark has hit its stride, turning the PBM business from a decline in operating profit in the first half of 2011 to growth in the back half, and now the powerhouse is rolling out differentiated products and services (e.g., Maintenance Choice and Pharmacy Advisor) that are proving to be a success in the marketplace.
“Our retail operating profit increased 18.5%. Our PBM operating profit jumped 14.3%. Both at or above our expectations,” Merlo told analysts during it second quarter conference call on Aug. 7. “So, we’re very pleased with this strong operating performance.”
Furthermore, Merlo has expressed optimism for a strong second half of the year and confidence in retaining a large portion of the prescription volume gained from the Walgreens-Express Scripts impasse. Walgreens re-entered the broadest Express Scripts network on Sept. 15.
While the company has developed a retention strategy, the reality is that, without even taking any action, it has a number of factors working in its favor: the “stickiness” of a pharmacy customer, the fact that many customers have already entrenched themselves in CVS and its convenient retail locations.
“The pharmacy customer is the hardest person to lose, but once you lose them, it is the hardest person to get back. The pharmacy transfer process is cumbersome and time-consuming, and we believe there are a large number of people who don’t want to go through that whole process a second time, especially if they have switched from one major chain to another,” Merlo told attendees of the Morgan Stanley Healthcare Conference in New York City in mid-September. “When this impasse started — while we put together an acquisition strategy — we also believe that retention strategy was equally important to have in place.”
Merlo said the company benefited from focusing on the retention component of the opportunity. For example, the company learned that 70% of those new customers live within two miles of CVS/pharmacy; 55% of those customers have enrolled in the automatic prescription refill program; and more than 83% have enrolled in the retailer’s ExtraCare loyalty program.
Those are impressive numbers, especially as it relates to those customers who have enrolled in the ExtraCare loyalty program. It’s particularly interesting given the fact that Walgreens just rolled out in September its new Balance Rewards loyalty program.
“We believe we are going to hit a retention run-rate as we approach the end of the year. We think that those customers who will migrate back to Walgreens will do so in the first couple of months and, again, as we approach the end of the year; and perhaps early next year, we will be at the retention level of a more permanent nature,” Merlo told conference attendees.
In light of the impasse, CVS Caremark estimates that it will generate an additional benefit of approximately 5 cents per share in the second half of the year. That estimate assumes that, in the fourth quarter, CVS Caremark retains at least 50% of the prescription volumes gained from the impasse. In addition, the 5-cent-per-share additional benefit is net of estimated investments the company will make to maximize retention.
Given its strong results year-to-date, the company raised and narrowed its guidance for the full year. It now expects to achieve adjusted earnings per share for 2012 in the range of $3.32 to $3.38. This is up from its previous range of $3.23 to $3.33 and up roughly 15 cents from its initial 2012 guidance of $3.15 to $3.25, which it provided in December 2011 at its Analyst Day.
While the Walgreens-Express Scripts impasse did benefit both CVS Caremark’s pharmacy and front store business, there’s no doubt that it is a small — very small — slice of CVS Caremark’s strong performance.
The reality is that there’s a seismic shift taking place in the provider market fueled by such factors as healthcare reform; a physician shortage; a $300 billion annual drain on healthcare due to medication nonadherence; an alarming rise in such chronic conditions as obesity; and a “Silver Tsunami,” as it is called, whereby 10,000 baby boomers turn 65 years old every day for the next 20 years.
Refusing to wait along the sidelines for change, CVS Caremark continues to aggressively leverage its unique assets to solidly position itself on the frontlines of health care. With its multiple touch points, innovative flagship patient care programs and army of more than 22,000 retail pharmacists and 1,800 nurse practitioners and physician assistants, CVS Caremark is innovating and reinventing pharmacy.
Retail clinics vs. urgent care — it’s a numbers game
A few months ago, I found myself commenting on another website focused on healthcare-related news about the future growth potential for retail clinics versus urgent care centers. Actually, I was on the verge of a full-on debate with some other user, saved only by the grace of a site error. It is an ironic example of how technology can make humans more efficient — even if by mistake.
So in a way, I was kind of happy when I saw the report Marketdata Enterprises released in late September, “The market for retail health clinics and urgent care centers." It gave me a legitimate, work-related reason to revisit this issue.
First, it’s important to note that this isn’t really so much a debate — it’s not necessarily a matter of either retail clinics or urgent care centers. There are more than enough patients to go around — and, I’m not even just talking about the 32 million patients who currently don’t have insurance.
According to the Department of Health and Human Services, nearly 67 million people in the United States live in a primacy care shortage area. “And for Americans who do have a regular physician, only 57% report having access to same or next-day appointments and 63% [have] difficulty getting access to care on nights, weekends or holidays without going to the emergency room. … 20% of adults waited six days or more to see a doctor when they were sick in 2010,” Marketdata noted.
Certainly both models are capable of expanding access and improving cost, and in a relatively small percentage of instances, urgent care centers are the most appropriate site of care. But if the question is “which model has the greatest potential to significantly improve cost and access to care?” — it’s kind of a no-brainer.
While urgent care centers significantly outpace retail clinics today in both locations and annual revenues, you’d be fooling yourself to think that couldn’t and won’t change dramatically in the coming years. When CVS, Walgreens, Kroger, Target, Walmart and others decide to flip the switch and go full-bore on clinic expansion, these companies will be able to roll out new clinics at a much faster clip than urgent care operators. It will even force many urgent care centers to close.
Why? It’s a simple numbers game.
First, these retailers are already sitting on some of the best real estate in America — tens of thousands of stores, to which they can just add a clinic tomorrow. Even now, with retail clinics still in the very early stages, this advantage plays out pretty clearly in the current figures. The top three clinic operators — CVS/MinuteClinic (569), Walgreens/Take Care (360) and Walmart (150) — outnumber almost 2-to-1 the three leading urgent care chains Concentra (310), U.S. HealthWorks (135) and MedExpress (77).
Right now, according to the Marketdata study, the average cost to open a retail clinic is about $20,000 to $100,000 for the host retailer to make the existing space ready, and about $25,000 to $145,000 for the clinic operator to construct the actual clinic, depending on the number of exam rooms. By contrast, it costs anywhere from $750,000 to $1 million to open an urgent care center.
Then factor in the additional labor costs. Retail clinics require physician oversight, but that doesn’t mean you need to have a doctor on-site. In two-thirds of all urgent care centers there is at least one physician on-site at all times. According to the American Academy of Urgent Care Medicine, in 2006 the average urgent care physician made anywhere from $155,000 to $208,000 a year. The average nurse practitioner working in a retail clinic makes about $90,000 a year.
It’s a numbers game. In the end, it’s going to be a lot more cost- effective for retail clinics to provide all this extra care America is going to need to make healthcare reform work — regardless of what shape it takes or what you call it.
Rob Eder is the editor in chief of The Drug Store News Group, publishers of Drug Store News, DSN Collaborative Care, and Specialty Pharmacy magazines. You can contact him at [email protected].
Wasson, Magnacca discuss vision for transformation
As part of its exclusive Executive Viewpoint video series, DSN editor Rob Eder interviewed Walgreens president and CEO Greg Wasson and president of health and daily living solutions Joe Magnacca for DSN.TV. In this special three-part installment, sponsored by Jubilant Cadista Pharmaceuticals, Wasson and Magnacca discuss the vision that is guiding the transformation of Walgreens’ business and its stores, and what it all means for patients, payers and suppliers.
For part 1 of DSN’s interview with Greg Wasson, click here.
For part 2, click here.