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CVS Caremark Cuts Medicare Bids to Regain Business

CVS Caremark Cuts Medicare Bids
A CVS store in Houston, Texas. Photographer: Aaron M. Sprecher/Bloomberg

CVS Caremark Corp., the largest U.S. buyer and seller of prescription drugs, is cutting proposed prices for some Medicare services, aiming to recapture business lost to rivals.

Each year, CVS Caremark bids on the right to provide drugs to Americans covered by Medicare Part D, a federal program that subsidizes medicine for retirees. The results for 2011 contracts are due this month, said Per Lofberg, who runs the pharmacy-benefits manager. He declined to say how much the company cut the price.

Last year, the company lost about 35 percent of its enrollees after bidding more than rivals in some regions, he said. The lost business clipped 4 cents from an estimated $2.99 profit per share for 2010, the average of 20 analyst estimates compiled by Bloomberg before the company reported the setback.

“We were cutting it too close and set the prices too high,” Lofberg, 62, said in a telephone interview. “This year we made our best guess and lowered prices.”

The Medicare Part D business will become more crucial to CVS Caremark as more employers switch their retirees to public plans, according to Jefferies & Co.’s Scott Mushkin.

Mixed results from the Medicare contracts prompted CVS Caremark to alter earnings forecasts for two straight years, said the New York-based analyst, who rates the shares buy.

“It’s like a yo-yo,” Mushkin said. “One year they’re pricing up, the next they’re pricing down. It’s been an ongoing issue about getting this right.”

The shares of CVS Caremark, based in Woonsocket, Rhode Island, rose 32 cents to $28.94 at 4 p.m. in New York Stock Exchange composite trading. They have dropped 10 percent this year.

Lofberg’s Moves

Lofberg became chief executive officer in January, not long after the pharmacy-benefits manager lost $4.8 billion in 2010 contracts not related to the Medicare Part D business. Since then he has revamped how Caremark handles Medicare and hired executives with expertise in winning contracts.

“We cover a lot of enrollees today, and this is an important growth engine for us,” he said. “We need to stay in the forefront of that area.”

CVS Caremark provides the Medicare services through its SilverScript and Accendo brands. The PBM, which acts as a middle man between drug companies and corporate and government clients, is having a successful 2011 selling season, Lofberg said.

CVS Caremark announced last month that it won a contract to handle $9.5 billion of annual drug spending from Aetna Inc., serving 9.7 million members. The company lowered its forecast for 2010 profit to at least $2.68 a share, partly because of costs to implement the Aetna agreement.

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