CVS to buy UAM - Good for Investors - Bad for RPh

Universal American (UAM) has announced that it will sell it's Medicare Part D business to CVS/Caremark (CVS) for $1.25 billion. It was just a few short years ago (2007) that UAM announced the acquisition of MemberHealth, a PBM that experienced significant success with the launch of Medicare Part D in 2006 with a retail-only Part D plan (CCRx).  UAM paid only $630 million for MemberHealth on 2007, so it will turn a nice profit on a short 3 year investment.

Private equity firms actually helped finance the purchase of MemberHealth in 2007, so the return here for them is pretty quick, and substantial. Stock holders of UAM will receive about $13 a share in cash (stock was trading at just north of this amount before the announcement) plus 1 share of a new UAM stock, which will represent the remainder of the business (Medicare Advantage and traditional insurance). So, investors get to "cash out" on the stock, and get another set of shares, which will be in a company with no debt.

There are a few things to consider. The sale comes almost exactly a month after a CMS mandated suspension of marketing for UAM. Not a good thing to say the least. In fact, UAM was prevented from enrolling new members for almost half the Part D selling season for the 2011 plan year. There are undoubtedly major things wrong with the management of the Part C and D businesses for this to occur - likely compliance in nature. So, with compliance issues apparent and ongoing, CVS is buying damaged goods of sorts, paying a little more than $650 a head for the membership. I don't know what the annual "value" of a Part D member/life is on average, so hard to say if it's a discounted buy or not, but this added membership more than doubles CVS/Caremark's Part D business (currently about 1.2 million lives - UAM represents about 1.9 million lives), which they have struggled to grow like I'm sure they wanted to. In the end, good for both parties. CVS grows (taking eyes off, momentarily, the lack of synergies shown in the CVS/Caremark merger of a few years ago) and UAM gets rid of some of their CMS compliance issues.

But, don't forget UAM has the Medicare Advantage (MA) business as well. In fact, they have somewhere in the neighborhood of 240,000 MA members, and this business is also under the shadow of a "do not sell" restriction from CMS.  What will become of this part of UAM?  According to the news releases, this business will be part of the new UAM.  More likely? I'd guess UAM will sell this business as well, once it finds the right buyer.  The MA space is being squeezed by premium cuts mandated by healthcare reform, and consolidation is inevitable, expected to accelerate considerably in 2011.  With plans flush with cash likely looking to buy membership (scale will help ensure profitability), and UAM management struggling under CMS scrutiny, a sale seems a likely outcome.  


While UAM had other Part D plans, the majority of the membership on it's way to CVS is in the CCRx plan.  This plan is unique (and popular with community pharmacists) due to the fact that is contains no mail-order benefit.  CCRx was arguably successful due to the understandable, yet not quite allowable preference community pharmacist have for the CCRx plans.  Community pharmacists have for years been fighting the growth of mail-order pharmacies, and the CCRx plan capitalized on this embedded marketing of sorts.  Though pharmacists are not technically supposed to "steer" patients to one plan or another, it's easy to see that pharmacists would like the idea of not fighting mail order to keep their patients... and thus the success of CCRx.  Combine that with the fact that CCRx also leveraged their pharmacist network for Medication Therapy Management (MTM) services, where other plans may use call centers of company-employed nurses or pharmacists, and you get a double-whammy of preference.


The 2011 Part D plan year benefits are not really modifiable at this point, and the CVS/UAM management will likely keep the ship steady-as-she-goes for 2011.  However, I can see major changes on the horizon for 2012 - or at least whatever changes CVS thinks they can get away with and not piss-off the membership directly.  What will be changed is obviously a guess at this point, but I would suspect a close review and possible modification to the CCRx stances on mail-order and MTM, both of which are counter to CVS/Caremark culture.  This will be bad for community pharmacists, and in the short term, it will be hard for pharmacists to "suggest" other plans and have a huge impact (membership in CCRx was built over 5 years - it won't disappear in one Part D selling season, no matter how upset pharmacists are about the changes). It's also hard to say there are really any viable "pharmacist-friendly" options left.  That is, unless someone else partners a plan with community pharmacists for 2012.


So, if you bought stock in UAM as late as last week, you could really make out - especially if UAM sells the MA business and cashes out further.  If you're a community pharmacist, that previously quietly (or not so quietly) supported the CCRx Medicare Part D plan, you're likely not going to make out quite as well, and in fact should be looking for a new partner in the Part D space.  Based on the National Community Pharmacist Association's (NCPA) feeling about the Humana/Walmart plan for 2011 (here's another blog that I often read that speaks about it), I'm pretty sure who I would bet it won't be...