A few weeks back, we discussed how the Patient Protection and Affordable Care Act 2011, or Obamacare, as it is popularly known would impact our outlook for CVS in a note titled Obamacare Can Help CVS Reach Our $49 Valuation. However, there are some limiting aspects of Obamacare on CVS’s business that could result from stricter regulations governing physicians that expand their liabilities. As a result, some physicians have limited Medicare and Medicaid members’ access to their services according to one survey by The Physicians Foundation. This could limit the number of prescriptions filled and limit revenue growth for CVS’s retail pharmacy business, which is already suffering from the growing introduction of generic drugs, both of which are impacting CVS as well as peers such as Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD).
The U.S. healthcare system is undergoing a major change under Obamacare, and with a greater section of the population picking up prescriptions as they age, the company sees an opportunity to expand its role as a healthcare provider.  The expected growth in the pharmacy services business is already accounted for in our fair value estimate for the company.
Physicians Limiting Access To Medicare/Medicaid Patients
According to a recent survey conducted by The Physicians Foundation, over three quarters of physicians, about 77%, are pessimistic about the future of the medical profession. Almost 60% of physicians indicate that the passage of the Patient Protection and Affordable Care Act, or Obamacare, has made them less positive about the future of healthcare in America. About 27% of the physicians surveyed find the reimbursement issues and dealing with the Medicare, Medicaid and government regulations as the most taxing aspect of their jobs. 
The PPACA seeks to reduce Medicare fraud and over-payments as a cost savings measure. The law requires physicians to follow more stringent deadlines for identifying Medicare over-payments, exposes physicians to penalties for even unintentional violations of the law, and imposes a number of other compliance measures. With the regulations governing Medicare/Medicaid becoming more stringent under Obamacare, physicians are more likely to react negatively to changes that harm them in some way.
The survey found that over 52% of physicians have either limited Medicare patients’ access to their practices or are planning to do so. Another reason behind the limited access are provisions under Obamacare that impact the fees that Medicare pays to health-care service providers. Some may altogether refuse to accept new Medicare patients. According to the same survey, over 26% of physicians have closed their practices to Medicaid patients.
These actions could have a significant negative impact on the number of prescriptions filled in the country. The limited access could result in Medicare and Medicaid patients turning to costlier private health coverage or forgoing treatment altogether. The baby boomer generation is aging and is widely expected to drive growth in prescriptions filled annually in the country. Almost 30 million people are expected to join the ranks of insured patients on January 1, 2014 according to provisions of Obamacare and limited access could result in expected upside to prescriptions filled being negated.
$14,600 Cut For Medicare Per Member
Obamacare cuts Medicare by $716 billion between 2013 and 2022 in order to pay for part of the law’s $1.9 trillion in new healthcare spending for younger people over the same time frame.  About 16% of the total U.S. population is enrolled in Medicare which translates into approximately 49 million members.   This effectively means a $14,600 cut for every senior in the country. This could result in reimbursement pressure on CVS’ pharmacy benefits management business and a reduction in its margins.
We currently have a $49 Trefis price estimate for CVS Caremark stock, which is in line with the market price.Notes:
- CVS Caremark Provides Strong Growth Outlook for 2013 and Beyond, Announces 38% Dividend Increase and Outlines Strategic Growth Framework, CVS Caremark, December 2012 [↩]
- A Survey of America’s Physicians: Practice Patterns And Perspectives, The Physicians Foundation, September 2012 [↩]
- Regional Impact Of Medicare Fee For Service And Medicare Advantage Payment Reductions, Carlson School Of Management, September 2012 [↩]
- Total Number of Medicare Beneficiaries 2012, statehealthfacts.org, January 2013 [↩]
- Medicare Beneficiaries as a Percent of Total Population 2012, statehealthfacts.org, January 2013 [↩]