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PBMs: Caremark sneaking out at the top? with UPDATE

CVS has noticed that big PBMs are now making all their money on mail-order pharmacy, particularly from dumb clients who can’t be bothered to cross check what the PBM is charging for mail-oder generics with the price they can get at (say) Drugstore.com. So the chain stores “logical” next step is to buy the second biggest mail order pharmacy — Caremark —and get the attached smoke screening benefits management organization thrown in with the deal. The NY Times (surprise surprise) is focused on the wrong end of the deal, thinking that Caremark is a “middleman”. But the key is that all the profitability of PBMs comes from their mail order pharmacies, now that the rebating game is drying up.

And that profit comes from selling generics with huge mark-ups. So when Wal-mart puts CVS’ margins on their retail store cash business under threat, it’s not a stupid defensive move to acquire a big mail order house. On the other hand they’d better hope for better luck than the last time (part of) Caremark — the then PCS— was bought by a drug store. Rite-Aid bought PCS in 1998 for $1.5 billion, and sold it for $1 billion to Advance Paradigm in 2000.

But the Medpartners/Caremark guys, ten years after their disastrous foray into physician management, aren’t dumb. The generic mark-ups are about the last place the PBMs have to run to maintain their incredibly profitable business. And that party will end too, when the employers wake up.

Cmx

Given what the stock has done since they changed their focus to the small PBM they found that they owned by accident in the late 1990s, it looks to me that they’re sneaking out at the top.

UPDATE: Apparently the top wasnt quite as high as some punters this morning thought it was. Caremark opened at 54 spent most of the day at 51 and then fell when the final offer was revealed at 48 and change.

Cmx_1_day

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S.L. HuntBob NeaseMatthew HoltAdam J. Fein Recent comment authors
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S.L. Hunt
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S.L. Hunt

How many people are aware that Guardian Health Care does
not allow 2 courses of antibiotics after being prescribed
by your doctor? How outrageous is that! They are making decisions affecting a patients health and overruling the doctor. When will this end…

Bob Nease
Guest

Hard to see how the CVS/CMX deal makes much sense. In the past, network size (i.e., number of stores) was a good surrogate for access. With the explosion of retail chains (e.g., Walgreens), that is no longer the case. The retail side of the business is ripe for deeper discounts via enhanced competition (i.e., much tighter networks). A merged CVS/CMX will have to favor CVS in retail, robbing CMX of a potent tool for driving cost savings.

Matthew Holt
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Adam–we’ll just have to agree to disagree about the 60 year history of the wisdom of America’s health care purchasers–but methinks that one can have a thriving businesss that takes advantage of dumb customers…or have you not heard of check cashing centers, casinos or lotteries?

Adam J. Fein
Guest

Matt, Remember that PBMs’ heritage was in transaction processing, which was at one time a valuable service. As it became commoditized, they moved on to more complex services, such as formulary design. Like all intermediaries, innovative services often become part of core expectations, so further innovation is needed or disintermediation is at hand. I think you are suggesting that PBMs have reached the end of the line innovation wise, so it’s time for a (sort of) graceful exit. That’s certainly possible, but I’m skeptical of the “PBMs add no value” thinking because it is at odds with the marketplace. The… Read more »

Matthew Holt
Guest

Adam–have read your articles, and they’re really interesting. My point is that PBMs have basically failed to do anything other than push generic subsitution, which as you point out is very profitable for all pharmacies (store or mail order) Eventually end payers (e.g the government and employers) will figure out that they’re getting killed on generic pricing–but for now, why wouldnt CVS et al want to get a bigger share of that market; and for that matter, when main street and Wall Street figure out what PBMs do (i.e. not much), their valuation will fall to something like that of… Read more »

Adam J. Fein
Guest

The relative proftiability of generics is why Wal-Mart has everyone running scared.
I discussed the logic behind a chain-PBM merger back in June. My original analysis is referenced in my post from this morning:
CVS + Caremark: I called it!
Adam