The CVS-Caremark Merger and the Coming Preferred Provider War

Lawrence W. Abrams
2006 Social Science Research Network  
A disaggregation of CVS's income statement for the last six years is presented to support the contention that there is a significant disparity in operating income of CVS's pharmacy business versus the rest of its business known as the front store. We contend that CVS has sought out this merger in order to motivate Caremark to name CVS as its exclusive retail preferred provider. This would help CVS weather a new era of price competition by generating greater traffic without store expansion to
more » ... set lower margins on retail prescriptions. By comparing state maps of drugstore concentration with maps of the dominant healthcare plan by state, it is possible to derive a number of insights into the coming drugstore preferred provider war: (1) The pairing of CVS and Caremark makes sense, but the merger seems defensive rather than designed to expand CVS's share in swing states. (2) Rite-Aid will be the biggest loser of market share. Second will be supermarket pharmacies. Community pharmacies are still needed to satisfy coverage requirements and will not lose market share. (3) Walgreen does not need to partner with any of the Big 3 PBMs to win the coming preferred provider war. (4) WellPoint is the single most important strategic partner of the war.
doi:10.2139/ssrn.1805982 fatcat:ewkge7lc55hqxeujd3xemvbxf4