Aetna, CVS Strike Deal

Last week, health insurer Aetna Inc

Last week, health insurer Aetna Inc. (AET) announced that it has entered into a 12-year agreement with pharmacy benefit manager (PBM) CVS Caremark (CVS ).

Pursuant to the agreement, Caremark will act as a PBM of Aetna's prescription drug program for its Pharmacy Benefit Unit. In the United States, a PBM is a third-party administrator of prescription drug programs who are mainly responsible for processing and paying prescription drug claims.

Caremark will take on responsibility for 9.7 million of Aetna's members, besides being responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

The agreement will help Aetna lower medical costs for its members on the back of price discounts from retail pharmacies, rebates from pharmaceutical manufacturers, and the efficiencies of mail-service pharmacies. Thus, customers will be able to enjoy more attractive pricing along with access to Caremark's vast network.

Turning to numbers, for the rest of 2010, the company expects to incur 6 cents per share as a one-time cost. The arrangement will eventually boost Aetna's profit after the completion of integration at the end of 2011. Management anticipates the pact to add 30 cents to earnings per share once the service is fully functional in 2012.

From Caremark's point, the agreement might turn out to be the light at the end of its tunnel after losing business last year. Besides Aetna, other recent client additions were the Massachusetts Group Insurance Commission and Capital BlueCross in Pennsylvania, both of which were handled by competitor Express Scripts Inc. (ESRX).

Last month, CVS Caremark announced a multiyear agreement with the Walgreen Co. (WAG), the largest drug retail store in the U.S., in which Caremark would provide pharmacy benefit services to Walgreen's.

CVS, originally a drugstore chain, became a key player in the PBM business when it acquired Caremark for $27 billion in 2007. The merged company manages a prescription drug program for 2,200 corporate clients, representing 53 million people in the United States.

Aetna, CVS Strike Deal

By: Abhishek

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