Evaluating the Aetna, CVS Caremark PBM Deal

August 3, 2010

I’m going to give Aetna the benefit of the doubt on its decision to hang onto its pharmacy benefit management unit while handing CVS Caremark a 12-year deal to administer drug benefits for 9.7 Aetna PBM members.  The goals: lower drug costs, lower overall medical costs through enhanced integration of medical and pharmacy programs, and ultimately more competitive premium rates.

But I don’t blame investors for being spooked at least initially, pushing Aetna shares down 3% on the announcement, while shares in CVS rose 3%.  (Aetna shares subsequently bounced back amidst a broad market rally). 

First, the arrangement is complex.  Aetna will continue to negotiate and retain rebates for drugs on its formulary.  CVS will handle fulfillment of mail order and specialty drugs from its own inventory, taking advantage of its bulk purchasing efficiencies.  CVS is also providing Aetna with pricing guarantees.

Aetna continues to own its PBM and both its mail-order and specialty pharmacies.  Aetna will also continue to handle clinical program development, sales and account management, pricing and underwriting, formulary management and clinical protocols.  CVS – in addition to mail order procurement and fulfillment – will handle network contracting, claims processing, customer service and member engagement.  Aetna will transfer 800 of its 1800 PBM employees to CVS.

How complex is the arrangement?  Aetna will take up to $50 million to $60 million in pretax charges — reflecting the cost of structuring a transaction in which it didn’t sell its PBM unit.

Extended coverage appears in the Aug. 2 issue of Carl Mercurio’s Health Plan Market Trends Letter.

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