CVS Caremark Should Split in Two, Consumer Groups Tell FTC

The four-year-old CVS Caremark Corp. (CVS) merger hurt customers by reducing competition and increasing prices, five consumer groups said, adding pressure on the drug retailer after some investors called for a split-up.

The Woonsocket, Rhode Island-based company has used patient information from Caremark, a pharmacy-benefits manager, to steer customers to CVS pharmacies, the groups said in a letter yesterday to Federal Trade Commission Chairman Jon Leibowitz.

“There is strong evidence that the CVS Caremark merger has harmed consumers,” the groups said in the letter, urging the FTC to require that CVS divest Caremark. “By reducing choice, raising prices and violating patient privacy, the combination of CVS Caremark poses profound problems for consumers.”

The FTC is investigating CVS Caremark for antitrust behavior, along with attorneys from 24 states. Some investors including SunAmerica Asset Management Corp. and Cambiar Investors LLC have said separating the drugstore and pharmacy- benefits units may help increase shareholders’ value.

The groups are Consumer Federation of America, representing organizations with more than 50 million individual members; Community Catalyst, an advocacy group; Consumers Union, the publisher of Consumer Reports; National Legislative Association on Prescription Drug Prices, a non-profit group founded by state legislators; and U.S. Pirg, an advocacy organization.

‘Maintenance Choice’

The company’s Maintenance Choice program forces consumers to fill prescriptions through CVS or pay an increased co-pay at rival pharmacies, they wrote in the letter. Caremark’s confidential patient information enables CVS pharmacists to encourage non-CVS customers to fill their prescriptions at the company’s stores, they said.

Maintenance Choice program is “good for clients, members and the health care system because it helps manage pharmacy costs and improves medication adherence,” Carolyn Castel, a company spokeswoman, said in an e-mail. CVS Caremark uses patients’ information internally for “appropriate purposes and in accordance with applicable privacy laws.”

“We have nothing to hide, and we’re cooperating fully with the Commission’s inquiries,” Castel wrote.

In 2009, the FTC started an investigation into business practices related to the merger, and more than 24 states are also probing the company. FTC spokesman Mitchell Katz confirmed the receipt of the letter and said he couldn’t comment further.

CVS’s $27.2 billion acquisition of Caremark was the largest ever by a drugstore in 2007, adding a business that negotiates prices for prescription medicines with pharmacies and drugmakers on behalf of health insurers and their customers.

Medicaid Settlement

CVS Caremark today said it will pay $17.5 million to the federal government and 10 states to resolve a civil complaint brought by the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services and several state Attorneys General. Those complained CVS Caremark’s pharmacy unit submitted reimbursement claims in certain states for prescriptions filled for patients who have coverage under both Medicaid and a third party insurance plan, according to a statement.

The states involved included Alabama, California, Florida, Indiana, Massachusetts, Michigan, Minnesota, New Hampshire, Nevada and Rhode Island, CVS Caremark said.

The FTC and state probes are ongoing and CVS Caremark “cannot predict with certainty the timing or outcome these investigations,” Castel said in an e-mail.

CVS Shares

CVS Caremark rose 26 cents to $35.87 at 4 p.m. in New York Stock Exchange composite trading, valuing the company at $49 billion. CVS Caremark could be worth about $25 billion more if the company split itself up, according to data compiled by Bloomberg last week.

Since the deal closed on March 22, 2007, the stock has gained 4.5 percent -- compared with a 58 percent rise at rival Medco Health Solutions Inc. (MHS) and a 165 percent surge at Express Scripts Inc. (ESRX), which had also bid for Caremark.

“I don’t think there is any dispute that investors would believe that this company should be broken up,” John Massey, a portfolio manager at SunAmerica Asset Management, said earlier this month. “The two entities separate are more valuable currently than the whole.”

SunAmerica Asset Management owns about 1.2 million CVS Caremark shares among its $13 billion in assets in Jersey City, New Jersey.

To contact the reporter on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net.

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net.

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