In case you missed our prior post, this video interview of John Gorman of Gorman Health Group outlines which segments of the Medicare Advantage program are fading and which are poised for gains. From the Oppenheimer Healthcare Conference in New York, Nov. 4, 2009.

The health insurance industry posted mixed results in the third quarter of 2009, with Medicare lines delivering solid performance while commercial and Medicaid lines struggled. In this video, Carl McDonald of Oppenheimer and Carl Mercurio of CRG comment. From the Oppenheimer Healthcare Conference in New York, Nov. 3, 2009.

Healthcare reform still has a way to go, and there are a lot of flaws even in the more liberal House legislation.  But no matter which side you’re on, you have to admit the House vote in favor of healthcare reform is historic.  Scott Fidel of Deutsche Bank comments:

While passage of the House bill was a milestone for HC reform, the real surprise was probably how close the vote ended up being; the Dems had almost no margin for error in the final vote. We saw two noteworthy political themes emerge from the vote. First, a number of “Blue Dog” Democrats ended up voting in favor of the bill, thus once again proving that while they advertise themselves to the public as independent “fiscal conservatives”, they typically end up voting along straight party lines. The second theme is that the abortion issue is emerging as one of the real potential areas of controversy in the reform process, along with the public plan. Indeed, Speaker Pelosi needed to make an important last minute concession around abortion to get the approval of certain pro-life Dems. We suspect we haven’t heard the last of the abortion issue as it relates to health reform.

Both the American Medical Assn. and AARP announced yesterday their support for the House version of healthcare reform, and to me this is a big deal. 

Seniors enrolled in Medicare Advantage plans will almost certainly face benefit reductions or higher premiums following reform because of funding cuts to the program.  The cuts may be fair and justified, but that doesn’t mean there won’t be a backlash among the 10 million or so seniors enrolled in Medicare Advantage plans (I called AARP for comment, but didn’t hear back by presstime).  AARP’s support means the organization will be on the front lines educating members why reform is necessary and why it’s good for the 50-plus crowd.  Says AARP:

Today’s endorsement marks the first time in this legislative battle that AARP has put its full weight behind a comprehensive health care reform package. In the coming days, AARP will be informing its members about the health care reform package through its publications, paid advertising and more than 5 million calls and e-mails to its grassroots activists.

AARP notes the House bill would eliminate the Medicare Part D donut hole and allow the government to negotiate drug prices (two things I’ve been calling for since the Part D program’s inception), strengthen the financial status of the Medicare trust fund, expand preventive care for Medicare, lower insurance costs for AARP individuals age 50 to 64 (i.e., those not yet eligible for Medicare) and create a voluntary long-term care insurance program.  That’s a pretty good sell; that said, there will be seniors in Medicare Advantage plans who need convincing.

As for AMA, it’s support of the House legislation is tied to the Medicare payment fix for physicians — which is actually a separate bill from the reform legislation.  In other words, docs are signing on in exchange for not having to deal with the perennial issue of looming cuts to physician payments from Medicare.  So the question is will AMA still support the House bill if it doesn’t get the physician fix?  AMA doesn’t offer a clear answer.  But healthcare attorney Bruce Merlin Fried of Sonnenschein, Nath & Rosenthal does: he says AMA won’t get the fix, but will still end up supporting the legislation.

I hate to say I told you so, but back in 2006 when CVS announced the acquisition of Caremark I wrote in an opinion piece “history has shown time and again that the marriage of a pharmacy benefit manager like Caremark with a drugstore chain or drug manufacturer is a formula for disaster.” 

Shares in CVS fell 20% today after the company announced another $2 billion in lost business at its Caremark PBM unit — which means the company won’t hit it’s 2010 profit targets.  In fact, the company expects operating profits at the PBM unit to fall 10% to 12% in 2010.  Contract losses included Chrysler, Coventry and Horizon Blue Cross Blue Shield of New Jersey (Clarification, Nov. 11, 2009: CVS Caremark lost the contract to serve the New Jersey state health benefit plan PBM business through Horizon, but maintains Horizon’s commercial PBM business).  The company also took a big hit from losses in Medicare Part D membership.  CVS chairman Tom Ryan continued to defend the combined retail-PBM model during a conference call with Wall Street analysts, noting “if you look at these contracts that we lost, none of them was because of the model.”  Instead, he blamed the losses on varying reasons, including price, service and the company’s marketing message.  But Wall Street has its doubts.  Notes Matt Perry of Wachovia:

The negative share price reaction is due to obvious disappointment in the 2010 outlook, but also due to broader questions about the company’s integrated retail pharmacy and PBM model.  Since the merger, the PBM segment has underperformed its peers dramatically. We had thought that performance was stabilizing as 2010 approaches, but we were wrong. CVS continues to lose PBM contracts to Medco and other PBMs. With a shrinking PBM customer base, management must show a plan to stabilize the business.

Or as a frustrated Robert Willoughby of Bank of America said on the call, “How do we look at the revised PBM outlook as anything but proof that no real synergy does exist here?…Does it make more sense to spin the thing now?”  Selling the PBM unit now makes additional sense, Willoughby suggests, given that the company also announced on the call the retirement of Caremark president Howard McLure.  Ryan, who says a PBM spin-off isn’t in the cards right now, will serve as interim head of Caremark.  The company also named Len Greer senior vice president of marketing; he was most recently with Aetna’s ActiveHealth.

“The Caremark message doesn’t always fit what the client wants to buy,” says Michael Jacobs of benefits consulting firm Buck Consultants.  That sales message — which Ryan admits needs to change — has stressed the company’s Maintenance Choice product, which is designed to drive traffic to CVS stores in part by making 90-day prescriptions available at retail and offering price breaks.  “They kind of left their PBM message as secondary,” Jacobs says.  The problem is Maintenance Choice is a niche product, Jacobs says, at best attracting 10% to 20% of the market.

Get the picture?  Tom Ryan has this grand vision of changing the way healthcare is delivered by integrating drugstores, pharmacy benefits and other services like retail clinics.  Then the company gets so wrapped up in the CEO’s vision that they mismanage the core PBM business, sinking company profits.  Now they need less vision and more back-to-basics.  Hardly the revolution Ryan articulated.  Btw, for those of you having trouble sleeping, below is my original opinion piece on the CVS-Caremark merger

Investors Still Aren’t Buying a CVS-Caremark Merger, and Frankly Neither Are We

by Carl Mercurio (originally published Nov. 15, 2006)

It’s been nearly two weeks since CVS Corp. (Woonsocket, RI) announced a definitive agreement to merge with Caremark Rx Inc., and investors still aren’t embracing the concept.  Shares in both companies are down since the deal was made public on Nov. 1.

The speculation on Wall Street is that investors don’t like the deal because it is a “merger of equals,” rather than a clearly defined acquisition of Caremark by CVS.  Others complain that Caremark is selling out when its shares are somewhat depressed—and worse selling out to a company with a slower rate of growth and a lower rate of return.  Still others fear that Caremark chief executive Mac Crawford is in a panic that the introduction of $4 generics from Wal-Mart and other trends driving down drug prices will cut into company profits (he says these developments had nothing to do with the deal).

All of the above are viable investor concerns.  I’ll add another.  The deal is a dumb idea.  Am I being too cavalier?  All right, then here are three more grounded reasons:

1.  History has shown time and again that the marriage of a pharmacy benefit manager like Caremark with a drugstore chain or drug manufacturer is a formula for disaster.  Strategic conflicts abound.  PBMs make their living trying to control drug costs. Drugstores and pharmaceutical companies make their living selling drugs.

In the 1990s, drug makers Eli Lilly and SmithKline lost billions of dollars in disastrous PBM deals.  Drugstore chain Rite-Aid lost hundreds of millions of dollars acquiring—and later selling—a PBM operation.  Another bought and sold PBM—Medco Health Solutions—was saddled with $1 billion in debt as part of its separation from drug maker Merck & Co.  Medco was also forced to keep pushing the drugs of Merck for years or face stiff financial penalties.

A merged CVS-Caremark would have to address strategic conflicts of its own.  Can the merged entity successfully push mail order drugs through Caremark and retail drugs through CVS outlets, including 90-day retail scripts?  How would a merger affect Caremark’s relationship with other drugstores in its network and CVS’ relationship with other PBMs?  CVS chairman and chief executive Tom Ryan argues that the company already has a PBM operation and has dealt with these conflicts before.  That’s true, but nowhere near on the scale of what’s involved with the Caremark deal.

2.  The potential for huge revenue growth through the introduction of new products and services—touted by Ryan as a central driver of the merger—is a pipedream.  I must confess to smirking as Ryan listed some of the benefits of the merger on a conference call with investors and Wall Street analysts.  Members who want mail order scripts but also want to talk to a retail pharmacist first will have that option, he said.  Members will be able to have 90-day mail scripts delivered to retail outlets instead of their home.  They can also pick up starter doses of 90-day mail drugs at retail outlets.

Conveniences to be sure, but is this the stuff of big revenue growth?  In fairness, Ryan may have been playing things close to the vest; although he tipped his hand a bit when he said one goal will be showing clients how appropriate drug utilization can reduce overall medical costs (read: push more drugs).  But the fact is that a combined CVS-Caremark will still have to compete in the same cutthroat retail and PBM markets against the same tough competitors.  I see little in this deal that significantly enhances the ability of these two companies to win new business in their respective markets.

3.  Finally, the success of the CVS-Caremark merger will hinge on the ability of the combined organization to own the patient experience—a tricky proposition.  Ryan had already signaled his intention to build out CVS’ healthcare capabilities through the acquisition of MinuteClinic, which operates about 100 mini clinics in various retail locations including CVS stores and plans a big rollout next year.  Nurse practitioners at the clinics treat a handful of relatively minor conditions, such as bronchitis, sinus infections, and pink eye for $49 to $59 per visit.  It sounds like a good idea, but as healthcare analyst Efrem Sigel points out, “Never underestimate the difficulty of delivering cookie-cutter health services to consumers in mass market volumes.”

One positive of a CVS-Caremark merger is the prospect of annual cost savings of $400 million through operating efficiencies and purchasing clout. That’s a significant number, but to put it in perspective, the savings will equal about 0.5% of organization’s combined revenues of $75 billion.  That’s a smaller percentage than the savings Anthem and WellPoint targeted—0.7% of combined revenues of $36 billion or $250 million—when they merged in 2004 in the biggest deal in managed care history.

But then this deal isn’t supposed to be about cutting costs.  It’s supposed to be about changing the way healthcare is delivered by giving customers what they want and dramatically increasing revenues and profits in the process.  To get there, Ryan and company better have a few tricks up their sleeves.

As we pointed out in a prior post, Wall Street has viewed the positive third-quarter results at Centene Corp. as something of an outlier given the poor performance of other pure-play Medicaid plans such as Amerigroup and Molina.  That characterization has clearly gotten under the skin of Centene chief executive Michael Neidorff, who defends the company’s performance and prospects.  “We call it as we see it….We’re a managed care company.  We’re not a victim,” Neidorff told attendees at the 20th annual Oppenheimer Healthcare Conference in New York, adding,  “I think there are a couple of other people that are outliers, not us.”  Centene senior vice president of finance Ed Kroll noted, for example, that the company is doing a good job of projecting flu costs, which tripped up Amerigroup and Molina.  He also said the company has done a better job than its peers in accruing for experience-related rebates in Texas.  While he acknowledged the tight environment for state Medicaid reimbursement rates, he said the company has visibility well into 2010 for 2% to 3% rate increases in Texas, Florida and Georgia.  “The word out there seems to be that we’re in denial,” Kroll said, adding, “Not all health plans are created equal.”

More from the 20th annual Oppenheimer Healthcare Conference in New York.  Top Medicare Advantage consultant John Gorman of Gorman Health Group spoke this morning about the future of the program given looming funding cutbacks.  His overall message to plans and investors, “Don’t panic.”  Here are some other key comments from his presentation.

On industry consolidation: The total number of Medicare Advantage plans could easily fall by a third to about 500 from 750 today, Gorman says.  “There’s some significant consolidation coming.”  But Gorman said government projections that Medicare plan membership will fall by half to under 5 million are too dire.

On industry profit prospects: “These plans got fat and happy.”  Gorman remembers that cutbacks in the early 1990s brought Medicare Advantage reimbursement rates to about 95% of traditional Medicare, as opposed to 100% under proposed reforms.  “There were plenty of companies making money at 95%.”

On membership growth prospects: “Private fee for service is sinking like a rock,” special needs plans are “unsustainable,” and Medicare HMO is flat, Gorman says.  However, he sees gains in Medicare PPOs and group enrollment as employers off-load retiree coverage.  “The group business is going to be a monster one-time opportunity for this industry.”  Gorman also sees big growth potential in managed long-term care. 

On Medicare Advantage benefit design: “You will start to see a lot of zero premium products go away in the out years of this legislation.”  Plans that pay providers largely on a fee-for-service basis are raising premiums or cutting benefits $40 to $80 per member per month, Gorman says.  Plans that pay largely capitation, however, were able to jam through provider payment cuts, he says.

On the best strategy for success: “Plans now have to justify their existence,” Gorman says, by proving they can manage costs, coordinate care and engage physicians.

On Congress’ attitude toward Medicare health plans: “Right now, they hate us.”  But he adds, legislators need to remember that “this is the industry that delivered Part D for $100 billion less than Congress thought it would.”

Speaking at the Oppenheimer healthcare conference in New York today, Aetna president Mark Bertolini said his company is “somewhat insulated from reform” because 85% of the company’s membership is in large groups (i.e., 50+ employees).  Most of the impact of reform will be felt by companies with lots of individual and small group members, such as Blue Cross Blue Shield plans.  About 6% of Aetna’s membership is in small groups (2-49 employees) and 2% is in individual.  This backs up an argument put forward in The Wall Street Journal (see prior post)  suggesting that the varied interests of health plans has caused an indudtry rift over whether to support or oppose reform.  Bertolini also pointed to some challenges the company faces in 2010, including the potential for additional in-group attrition and COBRA uptake related to the economy, medical cost and pricing pressures, uncertain risk membership, lower Medicare reimbursement and increased selling, general and administrative costs.  The company maintains a “bias toward profitability over growth,” he said, meaning Aetna will sacrifice membership for margins.

I’ll be posting today from the Oppenheimer healthcare conference at the Waldorf in New York.  First up, an excellent assessment of the status of healthcare reform by Bruce Merlin Fried of Sonnenschein, Nath & Rosenthal.  Some key comments:

On the likelihood of reform passing this year: “Unlikely.” Fried notes the Senate bill probably won’t go to the floor until Nov. 19 and then will be debated three to four weeks, which takes us close to Christmas.  More likely, legislation will be ready “in time for the President’s State of the Union speech.”

On the public plan: “I actually do presume…a public plan to be in the bill.”  But Fried is unclear whether it will have an opt-out, trigger or other fallback provisions.  Fried thinks Senate Majority Leader Reid may still be able to get the necessary 60 votes — including possible support from Sen. Lieberman.  “It’s all about the endgame,” he says.

On the impact of a public plan on private insurers:  “There’s an open question as to whether the public plan can compete effectively.”  For example, Fried wonders who will run the plan and how will rates be negotiated.  He adds, “There has to be a concern about positive margins otherwise we’re going to be subsidizing this thing forever.”

On the $6.7 billion managed care tax: “Congress, the Senate, needed more money and so voila there’s a fee.”  But Fried pointed to the “idiocy of imposing a fee on plans that operate government programs,” which amounts to driving up the cost of something you’re going to subsidize.  “If they could tax the end-user they would.  They want the managed care organizations to be the bad guys.”

On the animosity of many in Congress toward health insurers: “I’ve been at this a long time.  I’ve never seen this level of anger and distrust.”  Fried says it’s been building for years: care denials, options backdating, rescissions in California, and finally the poorly timed release of the AHIP-PriceWaterhouse study on the negative impact of reform.  “There needed to be a bad guy in this debate, and the insurance industry was deemed to be the bad guys.”

On Medicare Advantage: There will be significant reductions in benefits, Fried says.  States with big Medicare Advantage populations, e.g., California, Florida, New York, Pennsylvania, will be impacted.  The Democrats have forgotten the lessons of the Balanced Budget Act, Fried says, which resulted in retrenchment of Medicare Advantage plans.  Consolidation is likely, he adds.

There is an irony in the recent financial results of leading publicly traded managed care companies.  Managed Medicaid plans — which are expected to see substantial membership gains following healthcare reform — have performed poorly.  Medicare Advantage plans — which are expected to see payments slashed by reform — performed better than expected. 

Molina Healthcare, a top Medicaid plan, reported a 48% decline in third-quarter profits, which company chief executive Mario Molina, M.D., blamed on an “unprecedented confluence of factors,” i.e., flu costs were up and state budgets are squeezed.  Same for Amerigroup.  Its profits were down 41% in the third quarter for mostly the same reasons.  Centene did better.  Its profits rose in the third-quarter; but Wall Street considers the strong performance an outlier and is watching closely for a slip.   Now consider Medicare Advantage.  Aetna, Humana, UnitedHealth and WellPoint all posted strong third-quarter results. 

So here’s the scenario.  Healthcare reform puts the squeeze on commercial business, while at the same time increasing enrollment in struggling Medicaid lines and cutting funds to Medicare, this quarter’s saving grace.  And you’re worried about a public plan.