Maintenance Choice Update: CVS Gain, Caremark Same

A key theme in my Pharmacy Industry Economic Report and Outlook is the trend toward more restrictive preferred pharmacy networks. CVS Caremark’s (NYSE:CVS) Maintenance Choice program is an example. A consumer can obtain maintenance medications and choose the channel—brick-and-mortar pharmacy or mail pharmacy—but must use either a CVS retail pharmacy or a Caremark mail-order pharmacy.

On Monday, we learned Maintenance Choice is growing rapidly as a benefit design option, demonstrating that payers are willing to accept more restricted pharmacy networks in exchange for savings and control. The Caterpillar-Walgreens-Walmart arrangement provides another compelling data point. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network. The outcome for the pharmacy industry will be more rapid consolidation, especially as these programs increase market share for the “preferred” providers of pharmacy services.

At the same time, I still wonder if Maintenance Choice provides enough competitive differentiation to help Caremark win new Pharmacy Benefit Manager (PBM) business. See Per Lofberg's comments on this point at the bottom of this post.

As always, Pembroke Consulting retainer clients and Gerson Lehrman Group clients can schedule phone calls with me for additional comments beyond what I discuss in this post.

CHOOSING CHOICE

CVS Caremark provided a lot of detail about its Maintenance Choice offering during Monday’s earning conference call. Listen to the call or read the transcript.

Here’s what CEO Tom Ryan told us about the program’s rapid growth:

• Currently 412 PBM clients (5.1 million lives) vs. 130 clients at the start of 2009
• 70 PBM clients (400,000 lives) are in the process of being implemented

Another interesting factoid: 41% of the lives adopting MC in 2010 came from voluntary mail plans. This a key area where MC provides hard dollar savings because CVS receives the mail reimbursement for 90-day scripts dispensed from a CVS retail pharmacy. Thus, the PBM client and consumer both save money when the consumer fills a 90-day prescription at CVS pharmacy instead of three 30-day scripts at a non-CVS pharmacy.

RETAIL GAIN

CVS’ same store pharmacy sales grew by 7.3% in the fourth quarter. Maintenance Choice again helped CVS’ retail pharmacies achieve this above-market growth.

In fact, MC’s impact on same store sales grew throughout 2009 as 282 PBM clients (412 minus 130) adopted the program. Here’s the impact of Maintenance Choice on CVS Caremark’s retail same-store pharmacy sales by quarter:

• 2009:Q1 +120 basis points
• 2009:Q2 +190 basis points
• 2009:Q3 +250 basis points
• 2009:Q4 +270 basis points

The chart below updates my ongoing measurement of how important the Caremark PBM business has become to the brick-and-mortar CVS pharmacies. My last update was in November’s CVS Caremark: Pharmacy Gain, PBM Pain.

As you can see, CVS retail pharmacies are getting an increasing share of prescription revenues from claims processed by Caremark’s PBM business. In the fourth quarter of 2009, 22% of prescription revenue at CVS pharmacies came from Caremark, up from 16.2% in the fourth quarter of 2008.

Unknown: Will Caremark's contract losses hurt this growth?

PBM GAIN?

I’m still sorta skeptical on the long-term ability of Maintenance Choice to be a deal-winner for the Caremark PBM. Nonetheless, the program is clearly benefiting the pharmacy while likely also saving money for Caremark’s PBM clients (because of the mail/retail reimbursement structure).

So, it’s a “win” in that sense, but doesn’t logically provide an overwhelming advantage for Caremark versus other PBMs. Looking forward, other areas have bigger potential benefits for PBM clients, particularly specialty drug management and (over time) pharmacogenomics.

The new head of Caremark, Per Lofberg, seemed to reinforce this view during Monday’s call:

“I don’t think there’s any issue that customers have with the integrated model per se. I think customers are first and foremost interested in how can they save money on their benefits programs, how can they get good service for their members. And they don’t really care that much if we are also a retail pharmacy chain in addition to being a PBM. Obviously if we can add value, if we can save them money or improve member experience through the combination, that’s sort of gravy or icing on the cake if you will. First and foremost, they’re really interested in the core PBM functionality and that’s really where the company is centered at this point.” (emphasis added)

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So, what do you think?

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Check out the view from my office yesterday afternoon at 4 PM. Downtown Philly is deserted!