Caremark Rx, Inc.

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Caremark Rx, Inc.

3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
U.S.A.
Telephone: (205) 733-8996
Fax: (205) 733-0704
Website: http://www.caremark.com

Public Company
Incorporated: 1979 as Home Health Care of America
Employees: 4,037
Sales: $6.81 billion (2002)
Stock Exchanges: New York
Ticker Symbol: CMX
NAIC: 422210 Drugs and Druggists’ Sundries Wholesalers

Caremark Rx, Inc. is a pharmaceutical services company offering comprehensive prescription benefit management programs as well as specialized pharmaceutical services to 1,200 health plan sponsors, including major corporations, unions, insurance companies, government agencies, and managed care organizations. Operating a state-of-the-art mail-order pharmacy service and a national network of retail pharmacies, Caremark is a leading provider of healthcare solutions to more than 20 million plan participants nationwide.

Establishing a New Name in Healthcare: 1979

Caremark was established in 1979 as Home Health Care of America, based in Newport Beach, California. James M. Sweeney, a former executive of the giant healthcare firm Baxter Travenol Laboratories, founded the company to provide home care for the seriously ill, prompted by advancements in technology and increasing interest in alternative site care. Many patients, particularly the elderly, preferred to receive care in their homes, whenever possible, and, as the elderly population in the United States began to burgeon after 1970, the federal government found that home care was a cost-effective way to treat its Medicare and Medicaid patients. Many private insurers concurred and began covering the costs of treatment at home, making home care a viable alternative to increasingly more patients. In the early 1980s, the home healthcare market grew by approximately 20 percent a year, and Home Health Care of America soon expanded. By 1985, when its name was changed to Caremark, the company ran 33 home care centers across the country.

During this time, the company became the first to offer at-home infusion therapy to its patients, and it formed a Hospital Partnership Program, offering its home healthcare services to patients of other providers. Acquiring Federal Prescription Service Inc., a $7.5 million mail-order prescription business, the company continued to expand its offerings, and prescription drugs quickly became a major part of Caremark’s business. In 1985, the company acquired the Health Data Institute, which sold software and management services to insurers and employers who wanted help controlling their healthcare costs. The Institute’s clients included such large corporations as Chrysler and General Motors.

Caremark Under the Ownership of Baxter Travenol: 1987–92

Caremark grew explosively as alternative site care became the medical industry’s fastest-growing segment, with overall annual revenues estimated at $10 billion. Caremark’s own revenues climbed to around $250 million in 1987, almost double those of the year before. Moreover, the company had more than doubled its number of home healthcare outlets, from 33 in 1985 to 70 by 1987, and its success in this lucrative market soon made it an appealing acquisition. In 1987, Caremark was acquired by Baxter Travenol Laboratories (later Baxter International), a diversified healthcare supply company with revenues of $5.5 billion. Seeking to shore up its holdings in the home care market, Baxter paid for Caremark in a stock swap valued at an estimated $528 million, or nearly 37 times Caremark’s 1987 earnings. Caremark then became a subsidiary of Baxter, and the strengths of each proved complementary to the other.

Baxter’s small network of American home healthcare centers, which had generated about 15 percent of its revenues, were bolstered by Caremark’s national presence; while Baxter was the leading manufacturer of devices for home intravenous drug use, Caremark was a leader in the service side of the same industry. Through Caremark, Baxter gained control of approximately 30 percent of the home infusion therapy market. Moreover, Baxter had just begun its own mail-order pharmacy, and with the addition of Caremark’s established business, Baxter gained ownership of the second largest mail-order pharmacy in the country. Baxter was reportedly even more interested in Caremark’s Health Data Institute, recognizing the strategic advantages of offering managed cost containment to some of its largest healthcare customers. Both Baxter and its new subsidiary prospered after the acquisition. By 1991, Baxter’s sales were nearly $9 billion, while Caremark’s had more than doubled in the four years since the merger, to $600 million.

During this time, around $130 million of Caremark’s revenues came from the federal government’s Medicare and Medicaid programs. When a doctor referred a patient to Caremark for home care, Caremark would then pay the doctor anywhere between $12 and $150 for monitoring the home treatment; if a patient was on Medicare, then Medicare reimbursed Caremark for the fee. However, in 1991, the Department of Health and Human Services began an investigation into Medicare payments to Caremark. The investigation concerned whether the reimbursement represented a legitimate fee-for-service arrangement or an incentive or “kickback” to encourage doctors to refer their patients to Caremark. This investigation surfaced in September 1991, and while new federal regulations regarding kickbacks to physicians were scheduled to go into effect October 1, the regulations did not address the particular home care situation in which Caremark was involved. Caremark complained that the law was too vague, denied allegations of wrongdoing, and ceased making the disputed payments. Nevertheless, the investigation of Caremark intensified in 1993, focusing on payments to doctors at a Minnesota hospital, and it had yet to be settled in 1994.

Although competitors emerged in the home care market, and, by the early 1990s, ten medium-sized companies and dozens of smaller home care practices had been established, Caremark continued to dominate the industry. Caremark contributed some 15 percent of total revenues to Baxter, and its mail-order pharmacy business was the parent company’s fastest-growing area. In 1992, however, Baxter announced plans to spin off Caremark as a public company, hoping to use the cash to reduce its own large debt. Moreover, Baxter hoped to appease its large hospital customers, who had their own home care units and resented competition from Caremark.

Becoming an Independent Company: 1992

The spinoff was formalized on November 30, 1992, and the Caremark unit became Caremark International, a mail-order pharmacy business and operator of traditional home care centers. Later in the year, Caremark launched an initiative to expand into managing large clinics, signing an agreement with Houston’s Kelsey-Sebold clinic to take over the administrative and financial end of the multi-physician practice. Caremark soon signed another large clinic, the Oklahoma City Clinic.

That year, Caremark reported net revenues of $1.46 billion, up 22 percent from the previous year. Moreover, the company had a 20 percent share of the home infusion market, the top share in the industry. With its expertise in home infusion therapy, the company was able to work with pharmaceutical manufacturers to bring new treatments to patients at home. In an alliance with Genentech, for example, Caremark distributed a human growth hormone for home infusion to patients with growth disorders.

In alliance with Sandoz Pharmaceutical Corporation, Caremark also began distributing Clozaril, a new drug for treating schizophrenia. Because the drug had a potentially deadly side effect involving a blood disorder, Clozaril users required weekly blood monitoring to ensure safe use. Sandoz and Caremark thus established an agreement under which Clozaril patients were required to purchase Caremark’s blood monitoring service. The combined cost of the drug and Caremark’s blood testing made Clozaril one of the most expensive drugs in the world; and a lawsuit ensued, filed by 33 states, charging Sandoz and Caremark of an illegal tie-in that made the price of the drug thousands of dollars higher than if hospitals performed their own blood testing. The suit was settled in late 1992 with no admission of wrongdoing by Caremark, and the two companies returned $10 million to individuals and hospitals using Clozaril.

Home infusion represented about 25 percent of Caremark’s business in 1992, and overall patient care provided about 60 percent of the company’s revenues. Nevertheless, Caremark worked to expand its other businesses. By 1993, its prescription pharmacy service had enrolled nearly 900 corporations and insurance companies, including Sears, Roebuck & Co., United Airlines, Martin Marietta, PepsiCo, and Prudential Insurance. Moreover, Caremark’s new chairperson, Lance Piccolo, moved the company more solidly into managed care, which he regarded as the most likely growth area for the future. Piccolo announced plans in 1993 to acquire as many as 20 clinics over the next three years, which Caremark would manage. Also that year, the company acquired the Regional Kidney Disease Program of Minneapolis, a network of 23 kidney dialysis centers. By the end of the year, the company predicted that the patient care division would grow by only about 10 percent in the coming year, but that the managed care division (which included the mail-order prescription business) would increase revenues by 40 percent.

Company Perspectives:

We will be the premier health management solution provider, enabling individuals and plan sponsors to optimize their healthcare investment.

By early 1994, Caremark, and the home infusion industry as a whole, came under pressure from insurers and other managed care providers to contain costs. Toward that end, Caremark purchased the struggling infusion division of the second largest home care provider in the industry, Medical Care America, Inc. In March 1994, Medical Care America sold the unit to Caremark for $175 million, allowing Caremark to expand its patient services and cut costs in the process. Caremark seemed particularly well-positioned to respond to demands for cost containment as well as the healthcare reforms suggested by President Bill Clinton.

On the prescription drug front, Caremark capitalized on the pressure for cost containment by forging strategic alliances with major pharmaceutical companies in 1994, most notably Bristol Myers Squibb, Pfizer, and Rhône-Poulenc Rorer, to distribute all or portions of their drug portfolios. In collaboration with the drug companies, Caremark would compile exhaustive pharmaceutical and medical data to develop treatment guidelines for doctors and conduct “outcomes analysis” to compare the relative costs of different treatment plans.

The Strategic Shift to Physician Practice Management: 1994–98

Later in 1994, Caremark began to implement a major shift in its growth strategy, moving away from its home infusion business while aggressively building up its physician practice management business, through which it oversaw administrative and financial aspects of physicians’ practices in order to help them keep healthcare costs low. While home infusion had constituted more than 40 percent of Caremark’s revenues in 1990, this number dwindled to 18 percent in 1994. Not only had Caremark suffered from increased competition in this area, its reputation had been compromised by a federal investigation over illegal kickbacks Caremark had allegedly paid to doctors in exchange for patient referrals. Just as these charges were being filed in August 1994, Caremark made its most major acquisition to date in the rapidly consolidating arena of physician practice management with the estimated $125 million purchase of southern California-based Friendly Hills Healthcare Network, a group practice comprising upwards of 180 doctors and servicing more than 100,000 patients.

Identifying physician practice management (PPM) as its new area of focus and needing to raise capital for a number of other planned group practice acquisitions, Caremark began to sell off its other business interests at a rapid rate. In January 1995, it sold its troubled home infusion business to Coram Healthcare Corporation, whose chief executive, James M. Sweeney, had originally sold Caremark to Baxter in 1987. Caremark received an estimated $310 million in cash and securities for the sale. Over the next year, the company sold its Clozaril patient management business to Health Management for $34 million, its wholly owned orthopedic services subsidiary to HealthSouth Corporation for $127.5 million, and its nephrology business to Total Renal Care Holdings, Inc., for $40 million. The proceeds of these sales were earmarked for strategic growth. Randall Huyser, a healthcare analyst for Furman Selz and Co. told Modern Healthcare in February 1995, “This is [Caremark] clearing the decks.”

Caremark’s long-range plan was to pare down to four major avenues of business: physician practice management, pharmaceutical services, disease management, and international operations. As it sold off extraneous businesses, it continued its aggressive campaign to acquire group practices, including the purchases of Diagnostic Clinic in Largo, Florida, and Cigna Medical Group in southern California. By mid-1996, Caremark was managing a network of roughly 1,600 physicians who provided care for more than a million patients in six major metropolitan areas of the United States. Moreover, revenues from Caremark’s PPM business had reached $450 million in 1995, about 20 percent of the company’s total revenues.

Continuing the consolidation of its physician practice management business, Caremark merged with the nation’s other largest PPM company, MedPartners/Mullikin, Inc., in May 1996. Valued at $2.5 billion, the transaction was carried out as a stock swap. Operating under the MedPartners name, the merged enterprise, managed by representatives from both companies, boasted a combined roster of roughly 7,250 physicians with contracts for the care of $1.5 million patients. With plans for many more acquisitions, Larry R. House, the founder and CEO of MedPartners, told the New York Times at the time of the merger, “We want to be the superconsolidators.”

Pharmaceutical Services Becoming Core Business: 1998–2002

Three years later, however, MedPartners changed directions radically when it decided to divest itself of all physician management assets. In November 1998, the company announced that it had changed its name to Caremark Rx to identify pharmaceutical services as its core operation. By 2002, Caremark Rx had become one of the largest providers of pharmaceutical services in the United States, having averaged 30 percent growth in annual sales since 1999. Furthermore, net revenues for the year had reached $6.8 billion. With outcry over the high cost of prescription drugs strong as ever, Caremark’s ability to buy drugs in bulk and offer them to customers at reduced rates gave it a marked advantage over traditional retail pharmacies.

Principal Subsidiaries

Caremark Inc.; Caremark International Inc.; MP Receivables Company.

Key Dates:

1979:: Caremark is established in 1979 as Home Health Care of America, with headquarters in Newport Beach, California.
1985:: The company changes its name to Caremark.
1987:: Caremark is acquired by Baxter Travenol Laboratories (later Baxter International).
1992:: Baxter spins off Caremark as a public company, whereby the Caremark unit becomes Caremark International, Inc., a mail-order pharmacy business and operator of traditional home care centers.
1993:: Caremark Rx is organized under the name MedPartners, Inc.
1996:: MedPartners acquires Caremark International, Inc.
1998:: MedPartners begins to discontinue all non-pharmaceutical services operations, adopting Caremark as its name and focus.