CVS Caremark Targets Opportunity In Filling Medicare Part D’s Doughnut Hole

by Trefis Team
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CVS Caremark (NYSE:CVS) is striving to acquire a leading position in the Medicare Prescription Drug Plan (PDP) business in the U.S. It aggressively grew its Pharmacy Benefits Management (PBM) business in 2011, winning multiple high-profile contracts including Universal American that had a 10% Medicare Part D enrollment share in 2011. It also recently bought the Medicare PDP business from health insurance firm Health Net. It now has more than 20% market share in the Medicare Part D business, which it sees as a significant growth opportunity to grow its PBM and retail businesses.

CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD) in prescription drugs, OTC drugs and general merchandise. It also competes with UnitedHealth, Humana and Express Scripts-Medco Health Solutions in the pharmacy benefits management segment.

View our detailed analysis for CVS Caremark

CVS’s PBM Enjoyed Significant New Contracts and High Client Retention Rates in 2011

CVS Caremark aggressively expanded its PBM business in 2011 by securing high profile contracts from CalPERS, AetnaFEP and Universal American, which turned around the company’s outlook for the business. CVS also succeeded in retaining more than 98% of the business for 2012 through contract renewals. Even though contract renewals come with margin compression, it is expected to be offset over time by strong top-line growth and the company’s PBM streamlining initiative announced last year, which is expected to save more than $1 billion cumulatively through 2015.

Strong Growth Expected in Medicare Part D

Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries (primarily Americans ages 65 and older) in the U.S. Medicare business and is set to get a boost from the aging U.S. population and health reforms that would significantly increase prescription utilization and help plug the Medicare Part D coverage gap, or doughnut hole. The segment is expected to grow in double digits annually over this decade.

The government is rapidly emerging as the major payer for prescription drugs in the United States. It is expected that Medicare and Medicaid could be paying for as much as two-thirds of all U.S. prescriptions by 2020, up from about one-third today.

CVS’s PBM Targeting Leading Presence in Medicare Part D Plans

CVS has been trying to acquire a leading position in Medicare Part D that represents a significant growth opportunity for its PBM and retail businesses. Pursuing this, CVS Caremark acquired the Medicare PDP business of Universal American in April 2011 and recently bought the Medicare PDP business from health insurance provider Health Net.

In 2012, CVS Caremark’s share has grown by 2.1 million persons enrolled, primarily due to the contracts with Universal American and HealthNet, plus organic growth of 207K enrolled. It now serves over 4 million, just marginally behind United Health, which lost almost half a million enrolled last year. Humana follows with 3 million, with new half-a-million enrolled added last year through its alliance with Walmart. [1]

The company’s integrated business model with a 7,400-strong drugstore network gives it an added advantage to serve its market. Also, because mail order utilization is relatively low with Medicare, Part D also brings significant prescriptions business to CVS’s stores, particularly in key sun-belt states of the U.S.

We have a $45 price estimate for CVS Caremark, which is about 4% ahead of the current market price.

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Notes:
  1. The 2012 Part D Market: The Big Get Bigger, Drug Channels, February 2012 []
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