While this is supposedly a merger of equals, it will be Caremark (CMX) making the moves to shore up the CVS (CVS) business model based on a very profitable pharmacy operation subsidizing a break-even (at best) front store operation.
Currently, the Big 3 PBMs create expansive retail networks including over 60,000 pharmacies with no sub-group receiving preferential status.
Expect the following from Caremark if the merger with CVS goes through:
(1) two-tiered retail networks with no co-pays if patients choose CVS and $8/$16 if they choose any other "non-preferred" pharmacy
(2) 90-day retail fill option ONLY if filled at CVS
(3) over-the-counter drugs like Allegra and Claritin now covered as pharmacy benefit ONLY if bought at CVS
(4) reduced differentials in reimbursement rates between retail and mail order
The differential is not due so much to cost differences, but the ability of the Big 3 PBMs to get away with "holding up" retail prices so as to facilitate lower mail order pricing without suffering margin erosion.
When you have the power to set the price of competitors, as the Big 3 PBMs do, setting high prices for competitors is in your own best interest (but not your client's).
Wal-Mart (WMT) has detected this practice and intends on being a trust buster, a role it knows quite well (just ask the grocery unions and numerous manufacturers of brands.
Caremark will have to respond by lowering generic reimbursement rates for CVS, but try to hold off any reduction for mail order.
Eventually, CVS will have to make up for reduced pharmacy net profits with higher net profits on the front store through higher prices or lower operating cost margins (through slowed store expansion to increase front store sales per store).
But this plays right into Wal-Mart's strategy which is at its core an attempt to raise the cost of convenience. Wal-Mart is really after the front store as much as the pharmacy.