CVS 2010 Annual Report Download - page 18

LETTER TO SHAREHOLDERS ( CONTI N UED)
We Are Streamlining Operations and Are
Strategically Positioned in High-Growth Businesses
While we expect to see a decline in PBM operating
profit in 2011, we are optimistic about our PBM’s
long-term prospects and believe we are well-positioned
to navigate the challenges and opportunities facing the
industry in the coming years. Among our priorities, we
have begun implementing a PBM streamlining initiative
to improve our workflow and align our cost structure
more closely with peers. The PBM, much like CVS on the
retail side, went through significant acquisition activity
over the past decade, and there are still many opportu-
nities to build a more cohesive, efficient, and streamlined
organization. This PBM initiative is expected to deliver
more than $1 billion in savings between 2011 and 2015.
We also have all the capabilities in place to increase
our revenues and expand our market share. For
example, let’s take a look at specialty pharmacy. We
currently generate more than $11 billion in specialty
pharmacy revenue annually, making us the largest
specialty pharmacy provider in the U.S. Through our
industry-leading Specialty Guideline Management
program, we facilitate appropriate utilization across
disease states and help clients control their specialty
spending. Specialty is also the fastest-growing phar-
macy sector, with a compound annual growth rate
of approximately 12 percent expected over the
next five years.
CVS Caremark is also a very significant player in the
Medicare Part D business, one of the fastest-growing
areas of the PBM space. While our 2010 results reflect
the negative impact from a disappointing Medicare Part
D competitive bidding process for the 2010 plan year
and regulatory changes that reduced our profitability, we
view Medicare Part D as an integral part of our long-term
strategy. A growing portion of the population will
receive its prescription drug coverage under Medicare
plans, driven by age demographics and the anticipated
shift of retirees from employer-based coverage to
Medicare. In fact, we expect the Medicare Part D market
to grow 8.5 percent annually, on average, from 2010
through 2020. Our size and capabilities position us to
capitalize on this opportunity, and we have a dedicated
group with new leadership to focus our efforts.
In anticipation of this continued growth, we recently
announced an agreement to acquire Universal American’s
Medicare Part D business for approximately $1.25 billion.
This transaction is subject to customary closing condi-
tions, including regulatory approval, as well as approval
by Universal American shareholders. Upon closing, it
would more than double the size of our prescription
drug plan (PDP) business to more than three million
members and make us a strong #2 player in Medicare
Part D. The deal is expected to close at the end of the
second quarter of 2011. We expect to benefit from the
addition of Universal American’s Medicare Advantage
Prescription Drug Plan (MA-PD) insurance business
beginning in 2011 and to begin servicing the PBM
contracts for both the PDP and Universal American’s
MA-PD business beginning in January 2012.
Pharmacy Advisor Utilizes Our Retail Footprint
to Improve Care and Control Costs
We are very excited about the rollout of our Pharmacy
Advisor program early in 2011. It will help us add value
for our PBM clients and improve the health of plan
members. Leveraging our retail presence—unique
among major PBMs—we can offer chronically ill
patients the benefit of face-to-face counseling in our
pharmacies to improve their medication adherence
rates and close gaps in care. Based on our research
and the pilot program for diabetes patients that we
completed in 2010, in-store counseling helps close
gaps in care at nearly twice the rate of phone counsel-
ing alone. Using Pharmacy Advisor, a PBM client with
50,000 employees whose population has an average
prevalence of diabetes could save approximately
$3.3 million a year in medical expenditures.
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CVS Caremark 2010 Annual Report