Contract Shell Game: Switching Providers (MHS, CVS)

It is a tale you have heard before… driving down prices or capping hikes by bidding contract renewals out in what feels like a Dutch auction.  Today’s daily hat trick comes in a fight between MedcoHealth Solutions Inc. (NYSE: MHS) and CVS Caremark Corporation (NYSE: CVS).  CVS has emerged the winner at Medco’s expense after winning a $3 billion contract to provide pharmacy benefit management to U.S. Federal government employees.

It is Blue Cross Blue Shield that was transferring the pact in 2012 in a deal through 2014.  Unfortunately, this was almost 5% of Medco’s 2010 revenues.  Large clients, particularly in healthcare now, are encouraged to lower costs now by switching providers or taking in new aggressive bids for renewals.  It is done in every aspect of insurance and healthcare now if it can be done. 

This round went to CVS but it should be known that these two companies do win away business and it can go back in time.  It is just two years, but a costly two years.  Don’t be overly shocked if CVS issues a press release in 2014 that it lost the Blue Cross Federal worker contract.  That is no prediction, but it is easily possible.

CVS Caremark stock is up 2.3% at $39.04, but MedcoHealth Solutions stock is down 11% at $57.35.  Winning the contract may be at lower profitability.  Those are details we would assume but have not seen as they are buried inside a contract.

JON C. OGG