The ‘Coincidence’ of CVS and Tobacco
Back in February, when CVS announced that it would stop selling tobacco products, I wrote thatCVS was looking for something in return: more access to the lucrative Affordable Care Act health care market.
Now the New York Times is reporting that the “drugstore chain seeks to redefine itself as [the] health care destination for consumers.”
February’s CVS announcement looked suspicious because it was coordinated with the White House. An hour after the announcement, President Obama congratulated CVS CEO and President Larry Merlo by name, saying, “I applaud this morning’s news that CVS Caremark has decided to stop selling cigarettes and other tobacco products in its stores, and begin a national campaign to help millions of Americans quit smoking instead.”
CVS gave up $2 billion in revenues by halting the sale of cigarettes, and its stock declined. The question was, what did CVS get from the administration in return?
Seven months later, the answer is clear. CVS spokeswoman Carolyn Castel told the Times that “the company opened 32 clinics last quarter and is on track to open 150 more this year.” Revenues at its clinics have increased by 24 percent in the second quarter of 2014 compared with the second quarter of 2013. CVS plans 1,500 clinics by 2017, up from 900 at present.
It is beneficial for people to have the option of inexpensive walk-in clinics staffed by nurse practitioners-with perhaps an occasional doctor added to the staff. But if a walk-in clinic gets special favors through aquid pro quo with the government, it smacks of cronyism.
With the federal government taking over a large share of the health care business through the new Affordable Care Act exchanges, providers such as CVS need to be in regulators’ good books. CVS’s drug business is at the mercy of regulators from the Food and Drug Administration, the Center for Medicare and Medicaid Services, and numerous other agencies within the Department of Health and Human Services and elsewhere.
The company is taking no chances that it could fall out of government’s favor. CVS spent $13 million on lobbying in 2013, according to the Center for Responsive Politics, over 17 times as much as the firm spent in 2007.
Not all drugstores are caving in to government pressure on cigarettes. Walmart, Walgreens, and Rite Aid, among others, continue to stock tobacco. But health care is a growing market, and a tough one. Sometimes it helps to have friends in high places.
With health care accounting for nearly one fifth of the U.S. economy, one often-overlooked consequence of government intervention is that businesses can compete for favors among government officials rather than on the basis of their value to consumers.
As the health care market shakes out, business could skyrocket for CVS’s walk-in clinics CVS. In one of four quarter page ads in Monday’s Washington Post, CVS announced, “We’re making health more affordable and accessible with MinuteClinic. In time, half of all Americans will have one within 10 miles of home, for affordable walk-in medical care.”
One obvious source of clients is the uninsured, who need an inexpensive place to go for a strep test when they have a sore throat. In a medical crisis, the uninsured will go to emergency rooms, but for routine care, they will increasingly turn to walk-in clinics as emergency rooms become overcrowded.
Even with the Affordable Care Act, 31 million Americans are projected by the nonpartisan Congressional Budget Office to lack health insurance in 2024.
There will be plenty of business from this group for the foreseeable future.
A less obvious source of revenue is people who have health insurance through the Affordable Care Act health care exchanges but who do not want to visit their doctors because of the high deductibles. In 2015 deductibles will be capped at $6,450 for singles and $12,900 for families, according to the IRS. For those who have to spend $6,450 before starting to collect, CVS is a better option than Johns Hopkins.
A third source of customers for the walk-in clinics are those with high-deductible plans offered by employers. A report by the National Business Group on Health estimates that a third of large employers will offer high-deductible plans in 2015.
CVS’s MinuteClinics have a substantial advantage: nurse practitioners can write prescriptions for patients, and then sell them the prescribed drugs on the spot.
This is true vertical integration. Many states have limits on the ability of doctors to sell pharmaceuticals out of their offices, because of possible conflicts of interest. Apparently regulators turn a blind eye to potential conflicts of interest at CVS, such as writing prescriptions that the company then fills.
This confers a substantial boon to CVS, and the unequal treatment puts doctors at a disadvantage. Even if CVS were not able to charge the government for the walk-ins, CVS can earn profits on selling more prescription and non-prescription medicines to the walk-in patients, much of it at government expense. It will be a lucrative business.
Now add the business of charging the government for walk-in visits, and CVS is making three types of profits on walk-ins:
(1) charge the government for walk-in visits;
(2) charge the government for prescription medications filled at the same pharmacy where CVS employees write prescriptions; and
(3) profits on non-prescription medications that the government-paid CVS employee may recommend to walk-in patients such as over-the-counter pain-killers or antibiotic ointments.
As CVS said in another Monday ad, “Anyone can get pills into bottles. We help get them into mouths.” Dropping tobacco sales is a small price to pay.
Originally written By Diana Furchtgott-Roth