(CVS) CVS Caremark to Manage CalPERS PPO

Recently, the California Public Employees’ Retirement System (CalPERS) selected CVS Caremark (CVS) to manage pharmacy benefits for its preferred provider organization (PPO) health plans, catering to more than 346,000 members.

The three-year contract, to be effective from January 1, 2012, represents about $565 million in annual drug spending. The contract also has the option of two one-year extensions.

Prior to CVS, Medco Health Solutions (MHS) has been managing the business from July 1, 2006, which is dated to expire on December 31, 2011. CalPERS is presently working with both Medco and CVS to ensure a smooth transition for its members and physicians.

This contract is significant for CVS as its pharmacy benefit management (PBM) business has been witnessing several challenges over the past few quarters. CalPERS, which spends approximately $7 billion a year, is the largest purchaser of public employee health benefits in California, and the second largest in the country after the federal government.

This contract with CVS comes soon after it won a three-year contract to provide integrated pharmacy benefit services for the Blue Cross and Blue Shield Government-wide Service Benefit Plan or Federal Employee Program (FEP).

Since 1993, CVS has been serving the retail PBM program including network contracting and management of a complete set of highly-customized clinical programs of FEP. Under this new contract, the company will also provide mail order pharmacy services and specialty pharmacy services to more than 5 million federal employees, retirees and dependents covered under FEP.

After delivering sluggish performance over the past several quarters, the PBM segment of CVS recorded an 18.4% surge in revenues to $14 billion during the first quarter of fiscal 2011. The growth was primarily attributable to the 12-year contract with Aetna (AET) for providing PBM services to its customers.

We expect CVS to post substantial improvement in this segment on the back of the recent contracts. Moreover, the recent acquisition of the Medicare Part D business is a good move by the company to boost its PBM segment further.

We are currently Neutral on the stock, which also corresponds to the Zacks #3 Rank (Hold) in the short term.

AETNA INC-NEW (AET): Free Stock Analysis Report

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MEDCO HLTH SOL (MHS): Free Stock Analysis Report

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