CVS to Manage CalPERS PPO - Analyst Blog
June 21 2011 - 12:30PM
Zacks
Recently, the California Public Employees’ Retirement System
(CalPERS) selected CVS Caremark (CVS) to manage
pharmacy benefits for its preferred provider organization (PPO)
health plans, catering to more than 346,000 members.
The three-year contract, to be effective from January 1, 2012,
represents about $565 million in annual drug spending. The contract
also has the option of two one-year extensions.
Prior to CVS, Medco Health Solutions (MHS) has
been managing the business from July 1, 2006, which is dated to
expire on December 31, 2011. CalPERS is presently working with both
Medco and CVS to ensure a smooth transition for its members and
physicians.
This contract is significant for CVS as its pharmacy benefit
management (PBM) business has been witnessing several challenges
over the past few quarters. CalPERS, which spends approximately $7
billion a year, is the largest purchaser of public employee health
benefits in California, and the second largest in the country after
the federal government.
This contract with CVS comes soon after it won a three-year
contract to provide integrated pharmacy benefit services for the
Blue Cross and Blue Shield Government-wide Service Benefit Plan or
Federal Employee Program (FEP).
Since 1993, CVS has been serving the retail PBM program
including network contracting and management of a complete set of
highly-customized clinical programs of FEP. Under this new
contract, the company will also provide mail order pharmacy
services and specialty pharmacy services to more than 5 million
federal employees, retirees and dependents covered under FEP.
After delivering sluggish performance over the past several
quarters, the PBM segment of CVS recorded an 18.4% surge in
revenues to $14 billion during the first quarter of fiscal 2011.
The growth was primarily attributable to the 12-year contract with
Aetna (AET) for providing PBM services to its
customers.
We expect CVS to post substantial improvement in this segment on
the back of the recent contracts. Moreover, the recent acquisition
of the Medicare Part D business is a good move by the company to
boost its PBM segment further.
We are currently Neutral on the stock, which also corresponds to
the Zacks #3 Rank (Hold) in the short term.
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