Caremark International Inc.

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Caremark International Inc.

2215 Sanders Road #400
Northbrook, Illinois 60062-4791
(708) 559-4700
Fax: (708) 559-4648

Public Company
Incorporated: 1979 as Home Health Care of America
Employees: 6,500
Net Revenues: $1.7 billion
Stock Exchanges: New York
SICs: 8082 Home Health Care Services

Caremark International Inc. is Americas leading provider of health care products and services to patients requiring alternate site (out of hospital) treatment. The companys primary offering is infusion therapy, in which patients receive medication or fluids through a catheter for treatment of cancer, AIDS, cystic fibrosis, digestive disorders, and other conditions through 93 infusion therapy facilities nationwide. Caremark is the largest private provider of HIV/AIDS care in the United States and operates a network of 12 ambulatory care centers for the treatment of cancer patients. More than half of Caremarks branch care centers include a variety of health services specifically for women, particularly those involved in high risk pregnancies. Some Caremark facilities offer physical therapy and rehabilitation, and the company is also the largest provider of support services to people with hemophilia and other blood disorders, having been the first to offer these patients treatment in their homes. In addition to patient care, Caremark is a leader among mail-order pharmacy businesses in the country, providing prescription drugs at a discount to large corporate customers. Moreover, a pioneer in managed care for clinics, Caremark oversees the administrative and financial aspects of physicians practices, helping these facilities keep health care costs low. Caremark manages several large clinics in the continental United States and runs one of the largest health cost management organizations in Puerto Rico, while its alternate site services have been established in Canada, Germany, the Netherlands, and the United Kingdom.

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 health care 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 health care 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 health care 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 Caremarks 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 health care costs. The Institutes clients included such large corporations as Chrysler and General Motors Corp.

Caremark grew explosively as alternative site care became the medical industrys fastest-growing segment, with overall annual revenues estimated at $10 billion. Caremarks 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 health care 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 health care 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 Caremarks 1987 earnings. Caremark then became a subsidiary of Baxter, and the strengths of each proved complementary to the other.

Baxters small network of American home health care centers, which had generated about 15 percent of its revenues, were bolstered by Caremarks 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 Caremarks established business, Baxter gained ownership of the second largest mail-order pharmacy in the country. Baxter was reportedly even more interested in Caremarks Health Data Institute, recognizing the strategic advantages of offering managed cost containment to some of its largest health care customers. Both Baxter and its new subsidiary prospered after the acquisition. By 1991, Baxters sales were nearly $9 billion, while Caremarks had more than doubled in the four years since the merger, to $600 million.

During this time, around $130 million of Caremarks revenues came from the federal governments 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 companys 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.

The spin-off 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 Houstons 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 clozaphine, a new drug for treating schizophrenia. Because the drug had a potentially deadly side effect involving a blood disorder, clozaphine users required weekly blood monitoring to ensure safe use. Sandoz and Caremark thus established an agreement under which clozapine patients were required to purchase Caremarks blood monitoring service. The combined cost of the drug and Caremarks blood testing made clozapine 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 clozapine.

Home infusion represented about 25 percent of Caremarks business in 1992, and overall patient care provided about 60 percent of the companys 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, Caremarks 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 ten percent in the coming year, but that the managed care division (which included the mail-order prescription business) would increase revenues by 40 percent.

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 health care reforms suggested by President Bill Clinton. Caremarks leading home care network would likely continue to gain patients, as its managed care services often proved less expensive than hospital care and its cost management services seemed integral to plans for reforming the American health care industry.

Further Reading:

Burton, Thomas M., Baxter Considers Issuing New Stock in Home Care Unit, Wall Street Journal, April 28, 1992, p. A14.

Burton, Thomas M., Caremark Probe Focuses on Transactions in Minnesota, Wall Street Journal, October 18, 1993, p. B4.

Deveny, Kathleen, A Booster Shot for Baxter Labs, Business Week, May 25, 1987, p. 63.

Feder, Barnaby J., Caremark Share Offer Set at $13.50, New York Times, December 1, 1992, p. D5.

Freudenheim, Milt, A Squeeze Hurts a Health Niche, New York Times, September 2, 1991, p. D6.

Freudenheim, Milt, Caremark a Spinoff by Baxter, New York Times, January 13, 1992, p. 37.

Freudenheim, Milt, Sandoz and Caremark in Suit Settlement, New York Times, September 4, 1992, p. D3.

Kimelman, Johh, Caremark International: Profits Begin at Home,Financial World, September 28, 1993, p. 22.

Marcial, Gene G.. A Slew of Suitors Wants to Shower Caremark withTLC, Business Week, October 18, 1993, p. 90.

Oloroso, Arsenio Jr., Caremark Holds the Line Crians Chicago Business, August 2, 1993, p. 46.

Oloroso, Arsenio Jr., Caremarks Mail-Order Drug Unit Delivers,Crains Chicago Business, March 22, 1993, p. 1.

Palmeri, Christopher, Buying Doctors, Forbes, June 7, 1993, p. 45.

Palmeri, Christopher, Keeper, Forbes, November 23, 1992, p. 50.

Rosenberg, Hilary, Prognosis for Home Health Care, Financial World, May 15, 1983, pp. 28-29.

Tomsho, Robert, Medical Care America Planning to Sell Its Home-Infusion Business to Caremark, Wall Street Journal, January 17, 1994, p. A3.

U.S. Inquiry Focuses on Baxter Subsidiary, New York Times, September 10, 1991, p. D4.

Wall, Wendy, Baxter Agrees to Acquisition of Caremark, Wall Street Journal, May 22, 1987, p. 4.

A. Woodward