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Lower drug costs may result from CVS/Caremark combination

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NASHVILLE, Tenn.—The merger of one of the biggest pharmacy retailers and a major pharmacy benefit manager should result in lower prescription drug pricing and may foreshadow a future trend of consolidation in the PBM industry, benefit managers and consultants say.

PBM Caremark Rx Inc., which buys drugs directly from manufacturers and distributes them through a network of 60,000 pharmacies as well as through mail-order, and major pharmacy chain CVS Corp. announced last week that they will merge in a $21 billion deal that would create an integrated pharmacy services provider.

The merger will result in significant benefits for employers and health plans through more effective cost management and innovative new programs, Caremark and CVS executives say.

The combined entity should be a positive development for employers as it may have greater leverage in price negotiations with prescription drug manufacturers, benefit managers say. The merged company may be able to pass on discounts to CVS customers and employers and employees that use Caremark.

"I think it can probably only be a good thing," said Juliet Vestal, the Las Vegas-based director of health care management for Harrah's Entertainment Inc. "Perhaps there are some synergies they can recognize."

Another possible advantage of the merger that may benefit employers and their employees is the ability of the combined company to cross-promote services offered by the previously separate entities. For example, Caremark members may now be able to obtain additional services at CVS stores, such as using onsite health care clinics.

"Hopefully, (Caremark members) will have access to some specific CVS cost initiatives," said Sean Brandle, a vp at The Segal Co. in New York. "For Caremark clients, I think they can expect to see some enhanced service offerings in CVS stores, hopefully some reduced pricing."

A key issue arising from the merger, though, is the loss of one of the checks and balances in the prescription drug delivery system, Mr. Brandle said. Caremark has been driving lower pricing from retailers, and now CVS may not have an incentive to continue to offer deep discounts through Caremark, he said.

"I think plan sponsors are going to have to keep a close watch on how this whole thing shakes out and what it means in terms of pricing and service," Mr. Brandle said.

CVS and Caremark executives cited the ability to improve clinical outcomes and better control health care costs for employers and health plans as a key advantage of the merger.

Payers will get more value for the dollars spent in terms of medical compliance and disease management programs, said Mac Crawford, who will be chairman of the combined company and now is Nashville, Tenn.-based Caremark's chairman, president and CEO.

"The payers are looking for solutions," he said during a conference call last week. "They want help. They want better health care for their employees and their families."

The ability of the new company—to be called CVS/Caremark Corp.—to bring together more information about consumers will help eliminate negative drug interactions, which will benefit plan sponsors, Ms. Vestal said.

The merger may give the combined company an advantage in its ongoing competition with Wal-Mart Stores Inc., which recently began offering $4 generic prescription drugs in several states, some say (BI, Sept. 25).

"They need to have the largest possible leverage as a merged company to get the lowest generic pricing from drug manufacturers," said Jim Crockett, manager of risk and benefits at Denver Water.

CVS and Caremark executives denied that either Wal-Mart's generic drug pricing program or a proposed settlement of a class action lawsuit related to the average wholesale pricing system for pharmaceuticals (BI, Oct. 16) had any influence on the decision to merge.

"These were actually just distractions during our discussions," said Tom Ryan, who will be the president and CEO of the combined company and now is the chairman, president and CEO of Woonsocket, R.I.-based CVS. "We've been talking about this for a long time."

Some independent observers, though, believe the deal was at least in part a reaction to Wal-Mart's recently launched generic program.

"For CVS, I think it played a pretty big part," Mr. Brandle said. "I think it puts some pressure on the other big retailers."

CVS stands to benefit tremendously because it had been facing significant migration of prescription drug services to the mail-order business and now it will have a major mail-order delivery system, said Lisa Zeitel, a principal and a member of the managed pharmacy practice of Mercer Health & Benefits L.L.C. in Norwalk, Conn.

For Caremark, the move to consumer-driven health plans was likely a major part of the merger's appeal because the combined business will be better able to move services closer to consumers, she said.

The merger will likely put pressure on other retailers and PBMs to consider a similar move.

"I think other major retailers are going to be impacted by this and thinking about whether it makes sense for them to acquire a PBM. It could be a new form of industry consolidation," Mr. Brandle said.

Some, though, worry that the continuing consolidation in the health care industry could end up hurting employers.

But others say that the merger could put pressure on other retailers to be competitive on pricing.