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.”
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].