By Christina Veiders
Managing Editor

At a time when America’s health care is under renewed scrutiny, a new entity, CVS/Caremark, emerged last week that made all in the retail pharmacy community take notice. The combination of CVS, the nation’s leading drug chain, with Caremark, the No. 2 pharmacy benefit manager, is significant by its sheer size and scale.

The $27 billion merger combines the clout of CVS’s network of more than 6,000 stores operated in 43 states and the District of Columbia with Caremark’s network of over 60,000 participating pharmacies. Add to this CVS’s own PBM, PharmaCare, purchased in 1994, which has 55,000 pharmacies in its network and operates four mail-order facilities and more than 50 specialty retail pharmacies.

Mail order is a bane for retail pharmacies, and Caremark operates seven mail-order pharmacies and provides services for over 2,000 health plans. CVS also provides health care services through its MinuteClinic subsidiary, which operates 155 clinics in 19 states.

The merger makes the new entity No. 1 in retail pharmacy sales, as well as in the number of PBM lives managed, pharmacy claims processed, specialty pharmacy sales and retail-based clinics, according to the CVS prospectus. One source expects the combined companies to fill or manage more than 1 billion prescriptions per year. The financials of the combined CVS/Caremark companies come to $80 billion in revenue — and another $800 million to $1 billion in incremental revenue expected in 2008 — as well as annual cost savings in excess of $500 million.

The resulting powerhouse in health care takes CVS beyond retailing and deep into delivery and management of fully integrated health care services. It also gives CVS a strong voice in the public health care debate. It’s a bold response to Wal-Mart’s $4 generic drug program.

Bruce Kneeland, a retail pharmacy consultant, told me the merger is ominous for all others in retail pharmacy. While it’s too early to know how things will shake out on the competitive field, Kneeland said, it appears to change the retail landscape. “Whether you have to compete by getting into the PBM business or something else remains to be seen,” he said.

PBMs are supposed to provide high-quality drug care at the lowest possible cost. It’s how PBMs arrive at and negotiate the lowest prices with drug manufacturers through AWP (average wholesale price), manufacturer rebates, drug formularies and generic substitutions that’s being challenged in lawsuits and questioned by many who call for more transparency in this process.

By dint of its sheer size, CVS/Caremark has the opportunity to change the PBM model and drive more pharmacy sales into retail. This can be partly achieved by driving 90-day-supply mail orders to be picked up at stores. Tom Ryan, who heads CVS, said 20% to 30% of people who get prescriptions by mail would rather get them at retail. Ryan recently told investors the new company will be “patient-focused” rather than product-centric, giving consumers what they want.

CVS now holds a big advantage in health care. Supermarket pharmacies will have to work harder than ever to leverage their synergies with pharmacy, whole health and food to retain their share of the market.