CVS Caremark Drug-Benefit Turnaround Tied To Sharper Marketing

First Published Monday, 2nd August 2010 01:00 pm - © 2010 Dow Jones


By Dinah Wisenberg Brin

Of Dow Jones NEWSWIRES

CVS Caremark Corp. (CVS) is bouncing back from a rocky "selling season" last year that led to billions of dollars in lost accounts, thanks to a honed marketing message and competitive pricing in its pharmacy benefit management business.

Even before this week's coup--the announcement that CVS Caremark had reached a 12-year agreement to administer Aetna Inc.'s (AET) in-house pharmacy benefits operation--the company was winning high marks from benefit consultants and landing significant clients.

"Comparing CVS Caremark this year to CVS Caremark last year, they did a complete 180 in a good way," said John Malley, eastern region pharmacy practice leader at Towers Watson & Co. (TW).

The company and its pharmacy-benefit-manager peers Medco Health Solutions Inc. (MHS) and Express Scripts Inc. (ESRX) compete annually for large, multi-year contracts to provide services to employers and health plans. Unlike its largest rivals, CVS Caremark, formed in a 2007 merger, is a hybrid PBM and drugstore chain.

Chairman and Chief Executive Thomas Ryan said this week that, excluding the new Aetna contract, CVS has won $1.2 billion gross and $350 million net new business for 2011 and enjoys a more-than-98% client retention rate.

Late last year, the company disclosed it had lost some $4.8 billion in PBM business for 2010, citing several factors, including marketing missteps in which CVS representatives focused too heavily on emphasizing the role of the company's drug stores. This renewed doubts among critics of the merger and industry watchers about the company's retail-PBM business model.

The company has turned the message around on the synergies between retail and the PBM, telling potential customers this year that CVS could help Caremark save them money and effectively manage their drug plans--if it makes sense for the client--"and as a result they've been very competitive this year, at least with our book of business," Malley said.

Malley said the company is more effectively marketing its "maintenance choice" program, which allows pharmacy-benefit member patients to purchase 90 days of chronic medications at CVS stores for the same price they would pay at the company's mail-order facility. He has seen in his practice a "significant uptick" in clients interested in the program.

David Dross, partner and managed pharmacy practice leader at the Marsh & McLennan Cos. (MMC) Mercer LLC consulting business, said CVS Caremark's position "is a dramatic turnaround from where they were this time last year." In addition to sharpening its marketing message, he said, "their pricing's been very competitive as well out of the barrel."

CVS Caremark generally is considered a particularly strong competitor on pricing, given the purchasing power and scale of its retail and PBM operations.

Consultants say all three big PBMs are having solid selling seasons, without much movement among among the largest clients, an observation reinforced by the Express Scripts CEO's comment this week that big accounts generally are sticking with incumbent PBMs.

CVS Caremark's net new business reflects some small accounts that will terminate next year, a "wraparound effect" of contracts lost in last year's selling season and the transition of some $400 million of Health Net Inc. (HNT) business from operations the health insurer sold to UnitedHealth Group Inc. (UNH).

The wraparound effect refers to contracts that start or end midyear and therefore affect two years' worth of numbers.

Including the Aetna agreement, CVS Caremark has won $9.4 billion gross and $8.6 billion net in new business for next year, Ryan said.

Besides Aetna, other recent client wins include the Massachusetts Group Insurance Commission and Capital BlueCross in Pennsylvania. Express Scripts has been handling both accounts.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com

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