CVS to buy Caremark

Amy Scott Nov 1, 2006

KAI RYSSDAL: So sorry to do this to you on what’s otherwise an entirely pleasant midweek afternoon. But we’ve got a buzzword to introduce today: Integrated pharmacy services. Integrated’s the key word here. Vertically integrated, to be specific. CVS, the country’s second-largest drugstore chain, announced a $21 billion acquisition today. Not another run-of-the-mill drugstore. It’s buying a company called Caremark — related, but different. Marketplace’s Amy Scott reports.

AMY SCOTT: CVS is your typical drugstore chain, selling cosmetics and candy alongside prescription drugs. What Caremark does is a little more complicated. It’s known as a pharmacy benefit manager, or PBM. It handles prescription drug benefits for health insurers and large corporations. It also sells discounted drugs by mail order.

CVS already has its own PBM, called PharmaCare. Drugstore analyst Mark Husson with HSBC says the merger helps CVS expand a profitable business that’s cheaper to run.

MARK HUSSON: If you have a pharmacy benefit management company, you don’t need to have huge amounts of real estate littered around the country. You just need to have a head office and some mail order distribution centers.

CVS is under price pressure from retailers like Wal-Mart and Target. But it’s also being squeezed by companies like Caremark. Because PBMs represent millions of customers, they have the clout to negotiate steep discounts from retail pharmacies. Stuart Schweitzer teaches health economics at UCLA. He says the merger may be one of those If you can’t beat ’em, acquire ’em deals.

STUART SCHWEITZER: They may be pinched by the PBMs, but at least they can get the best of the bad deals by actually joining one of those PBMs.

The upside for consumers may be lower prices. But Schweitzer says people covered by Caremark may soon be forced to fill their prescriptions at CVS.

In New York, I’m Amy Scott for Marketplace.

RYSSDAL: CVS was the most heavily traded stock on the Big Board. Almost 29 million shares changed hands. Most of them selling, it should be said. CVS off a bit more than seven percent today.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.