CVS-UAM: Part D Powerhouse with a Surprising Alliance

Welcome to 2011, the year with the third numerical palindrome (11-02-2011) of the 21st century.

The year's consolidation activity got started with a bang when CVS Caremark (NYSE:CVS) acquired Universal American's (NYSE:UAM) Medicare Part D Business. Read the press release.

The deal exemplifies the ongoing PBM consolidation trend that I have been predicting for a few years. Scale matters for Medicare Part D prescription drug plans (PDPs), too. (See data below). Profits from the coming generic boom create even more deal momentum. CVS Caremark even gets some bragging rights by taking one of Medco Health Solution's (NYSE:MHS) biggest Part D clients—a reversal of recent trends for these two competitors.

I want to highlight an intriguing but little-noticed angle on the deal. Starting in January 2012, the National Community Pharmacists Association (NCPA) will become business partners with its arch-nemesis CVS Caremark. Strange bedfellows, indeed!

Questions for CVS Caremark shareholders: How important is NCPA’s support of the Universal American Part D plans? Will the alliance reduce NCPA's anti-CVS lobbying to Congress and the FTC, thereby lessening political pressure on CVS Caremark?

THE PART D LANDSCAPE

Kaiser Family Foundation published a very informative report last September called Medicare Prescription Drug Plans In 2010 and Key Changes Over Five Years: Summary Of Findings. Here are two highlights.

The top 10 firms offering Medicare Part D Plans represented 69.2% of total enrollment in 2010. Universal American is the third largest firm offering a Part D plan (with 7.4% share of enrollment) and CVS Caremark is the fifth largest firm (with 4.3% share of enrollment). The combined business would have been slightly larger than Humana (NYSE:HUM) in 2010. We'll see what happens in 2011 given Humana's Walmart partnership. See Walmart-Humana: An Inevitable Surprise for Pharmacies and PBMs.

The Community CCRx Basic PDP is the fourth largest Part D plan. (A firm can offer multiple plans.) CCRx has a 90 Days at Retail/No Mail Order model. It's not comparable to CVS Caremark’s Maintenance Choice program, which is not offered in Part D plans anyway.

THE CCRx SITUATION

The Community CCRx PDP is a strategic alliance with NCPA and MemberHealth LLC, Universal American’s Pharmacy Benefits Manager (PBM). Read the agreement.

Medco currently provides prescription benefits management to MemberHealth, but announced yesterday that its contract will end on December 31, 2011. See Medco Announces Update on Status of Agreement With MemberHealth, LLC. CVS Caremark will take over the business in 2012.

So, the same NCPA that is engaged in a holy war against CVS Caremark will now be business partners with CVS Caremark. (Read the anti-CVS vitriol on NCPA's blog.) Fascinating.

Here's what NCPA Executive Vice President and CEO Kathleen Jaeger said about the deal:

"NCPA will need to examine the agreement before we can reach any definitive conclusions. We understand that CVS Caremark is committed to maintaining the same plan design that Universal American-Member Health has had with independent community pharmacies for at least the next two years, including no mail order component. That’s two years from now – so, right now, we are dealing with the status quo; in that the Community CCRx plan should remain true to its roots as a plan that utilizes community pharmacists first and foremost to improve health outcomes and lower system costs."

I checked NCPA’s Form 990—the publicly available tax return filed by all non-profits that you can download for free from Guidestar. NCPA had total assets of $20 million at the end of its fiscal year ending June 30, 2009. However, NCPA reported only $51 in income and $5,253 in assets from the CCRx relationship. (See Schedule R of the Form 990.)

Since the CCRx relationship provides only a trickle of money to NCPA, I wonder if someone is regretting the fact that NCPA helped turn CCRx into one of the biggest Part D plans.

Anyway, the arrangement is worth more to CVS Caremark than NCPA. It will be interesting to see how this relationship evolves, especially with the projected growth of Part D and the closing of the donut hole.