In Depth February 12, 2009, 5:00PM EST

CVS's Bold Bet on Health-Care Reform

(page 3 of 3)

Browse Issues

Story Tools

The customer base has expanded of late. The Caremark deal thrust CVS deep into the world of pharmacy benefit management (PBM) companies, which all major chains have set up in the past decade. But just three—Medco (MHS), Caremark, and Express Scripts (ESRX)—dominate, running automated mail-order facilities that fill prescriptions faster than drugstores can.

PBMs have encouraged their corporate clients to save money by filling recurring prescriptions in 90-day quantities through the mail at a reduced per-pill cost. One in four employer-sponsored prescription plans has such a "mandatory mail" program, says benefits consultancy Hewitt. This eats into a drugstore's bread-and-butter prescription revenue and also affects higher-margin "front-end" sales, since people who receive drugs by mail have little reason to swing by CVS for other products. Before the merger, "the mail guys were taking business from us," says Ryan. "We were fourth in a three-man race."

The idea to combine a national drug chain with a PBM—essentially, a merger of adversaries—was novel, and some still question it. "I'm not willing to say it was a great move at this point," says Morningstar (MORN) analyst Mitchell Corwin. The proof may well depend on how broadly Obama and his team promote the cost benefits of managing chronic diseases. Certainly, they're on the same page as Ryan about the role medical records and databases could play. This is a hot topic for Harvard professor David Cutler, one of Obama's top health-care advisers: "Greater use of information technology is one key to a more efficient health-care system," he says.

Ryan contends a combined CVS/Caremark is uniquely positioned to speed the evolution of America's health-care IT. His databases already show which patients are taking their pills. And CVS is investing millions to upgrade the systems, ultimately providing pharmacists with a patient's complete drug history, so they'll know whether a customer has stopped taking a medication entirely or is just buying it at a different chain.

Armed with that knowledge, CVS has begun an experiment. If a PBM patient has stopped taking his drugs, a CVS pharmacist may phone and remind him to order refills. This sounds intrusive. But as the public learns more about the medical and economic importance of compliance, sensitivities toward such tactics could change. "We have to find a way to help people think about this," says Ryan.

MONEY-LOSERS

In-store medical care will also help Ryan's cause. CVS has more than 500 "MinuteClinics" at its outlets staffed by nurse practitioners who both collect patients' information and motivate them to comply with treatment. There's a huge opportunity here: In 2005 there were nearly 99 million physician office visits for conditions considered to be "low-acuity," such as sore throats. Some CVS clinics are even on the campuses of Caremark's corporate clients, such as AT&T (T). That should help reduce absenteeism and lower overall health-care costs.

Trouble is, the clinics are money-losers for the first few years. They don't generate enough business to cover their fixed costs, according to the Deloitte Center for Health Solutions. Worse, the American Medical Assn. is hostile to in-store clinics, arguing that they provide subpar service. For those reasons, CVS slowed the rollout of clinics last year, though Ryan says he is still committed to the program.

Ryan is also gambling on a new project, Maintenance Choice, that offers the savings of mail-order prescriptions but lets patients pick up pills at CVS. Horizon Blue Cross Blue Shield of New Jersey is rolling out the program to its 3.6 million members. But David Snow, CEO of rival Medco Health Solutions, says CVS may lose the ability to garner mail-based discounts from drugmakers if it funnels customers through its retail stores. Ryan concedes there are concerns about Maintenance Choice and about Caremark's performance, which has trailed its peers since the merger.

Nevertheless, Ryan says the merger is central to his push into prescription compliance and clinics, which has expanded CVS's influence in the $3 trillion health-care arena. "The discussions we are having with General Electric (GE) and AT&T are ones we have never had before," he says. "Before, they looked at CVS as just another dispensing hub. Now, CVS is a partner in lowering health-care costs." When Obama calls for a roundtable on health-care reform, he predicts, "we'll be called."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

'Clinical Groupware'

CVS's CEO Tom Ryan has tapped into a major trend in health-care reform: the use of electronic health records. In a Feb. 8 post on thehealthcareblog.com, David Kibbe, a former director at the American Academy of Family Physicians, calls for the creation of "clinical groupware"—software that would let patients and their doctors track patients' progress and share data.

Boyle is deputy Corporations editor for BusinessWeek.