CVS to buy Medicare drug business of Universal American

CVS Caremark Corp., the No. 2 U.S. drugstore chain, agreed to buy Universal American’s Medicare prescription drug business for about $1.25 billion to expand in a growing segment of the pharmacy benefit market.

The deal will more than double the size of CVS Caremark’s business that provides prescription drug coverage under the Medicare Part D program. Medicare is the U.S. government’s healthcare program for the elderly.

Universal American shareholders are expected to receive about $12.80 to $13 per share in cash for the business, which accounted for less than half of the company’s total revenue in the first nine months of 2010.

The acquisition will make CVS a more formidable competitor to health insurers such as UnitedHealth Group Inc. and Humana Inc., both major participants in the Medicare business. CVS expects the deal to add to its earnings in its first full year.

“It’s a good move for” CVS, said Kemp Dolliver, an analyst with Avondale Partners. “They become a larger competitor in Medicare Part D in a short period of time.”

The deal comes just as the first of the postwar baby boom population becomes eligible for Medicare coverage.

Per Lofberg, president of Caremark Pharmacy Services, also cited the anticipated shift of retirees from employer-based coverage to Medicare under the new U.S. healthcare law.

Dolliver said the expanded healthcare coverage could also benefit CVS’s retail store operations.

People eligible for Medicare are “a population that generates a lot of foot traffic, so you start moving them around into your stores … [and] that makes a nice difference,” Dolliver said.

CVS’s move to expand its pharmacy benefits management operations comes as its chief rival, Walgreen Co., is seeking get out of the business. Walgreen, the No. 1 U.S. drugstore chain, hired Bank of America in October to sell its pharmacy benefits management unit.

Universal American serves about 1.9 million Medicare prescription drug plan members, while CVS Caremark serves about 1.2 million Medicare drug plan members.

CVS shares fell 23 cents to $34.77. Universal American, based in Rye Brook, N.Y., jumped $5.84, or 40%, to $20.45.