Caremark PCS Merger Wins Big Customer; Blues Move FEP Mail From Medco

Caremark will take over the mail service pharmacy program for the Blue Cross/Blue Shield Association Federal Employees Program effective Jan. 1.

The Blues have selected Caremark to replace Medco Health as the mail service provider for the 3.9 mil. member program. AdvancePCS, which is in the process of merging with Caremark, already manages the retail side of the FEP contract. The mail contract involves about 10 mil. scripts annually.

BCBSA's decision offers a strong endorsement of the Caremark PCS merger, which is expected to close in March (¹ , p. 15). AdvancePCS said in January that the enhanced mail service capacity of the combined company would enhance its bid for the FEP contract (² (Also see "AdvancePCS Expects Merger To Enhance Bid For Federal Employees Benefit" - Pink Sheet, 2 Feb, 2004.), p. 15).

Medco said Feb. 17 that it was disappointed by BCBSA's decision, "given their historically high member satisfaction rate."

Medco, however, has acknowledged recordkeeping problems in managing the contract for BCBSA.

The PBM changed management at one of its Tampa mail facilities after learning of falsified documentation supplied to BCBSA. The record-keeping issues were publicly detailed in a False Claims Act suit filed against Medco by the Philadelphia U.S. Attorney in September (³ (Also see "Medco Audit Finds “Minor” Compliance Problems; How “Isolated” Are They?" - Pink Sheet, 6 Oct, 2003.), p. 29).

Medco maintains that it disclosed the problems to BCBSA and made appropriate restitution. One of the company's defenses against the suit, in fact, is that any damages were caused to BCBSA, not the federal government (⁴ (Also see "Medco Prosecutor Exceeds Boundaries Of False Claims Act, PBM Says" - Pink Sheet, 22 Dec, 2003.), p. 33).

Medco's recent emergence as a stand-alone PBM may also have had an impact on the bidding process. Under the original BCBSA contract, Merck guaranteed Medco's performance; Merck will not provide any further guarantees for renewals.

BCBSA said it put the contract out for bid as part of a three-year review. The RFP went out Sept. 12.

Medco reduced its earnings per share guidance for 2004 from a range of $1.75-$1.86 to a range of $1.64-$1.75. The change is a result of increased amortization expense on intangible assets.