When CVS Caremark Corp. Chief Executive and President Larry Merlo announced that his drugstore chain would stop selling tobacco products , one of the first to respond was the president of the United States.
The speed of the presidents statement indicates that CVSs decision was likely coordinated with the White House. Every day, countless business decisions are made without any comment from the White House. Something unusual was going on.
This is troubling. It gives the appearance of preference for those who curry favor with the powerful, and it squeezes out smaller entrants who can supply innovative products and services to consumers. What do you think about CVSs decision? Take our poll.
The president said: “I applaud this mornings 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.”
The president congratulated Merlo by name, as well as “all who helped make a choice that will have a profoundly positive impact on the health of our country.”
As long as businesses are acting within the law, they should not be trying to please the federal government. Nor should they refrain from acting because they expect governments praise. There is no upside to such behavior, and much downside.
As everyone knows by now, CVS CVS +0.20%, the No. 2 drug store chain, will give up $2 billion in revenues by halting sales of tobacco products. CVSs stock declined in response to the announcement, but it is not clear that shareholders long-term interests will be undermined.
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The management of CVS might not be able to tell shareholders about the pressures the chain may face to win favor with the government, especially in the context of the newly implemented Affordable Care Act. Of course, health groups have been trying for years to limit tobacco sales and advertising.
With the federal government taking over a large share of the health-care business through the new exchanges, I imagine it helps providers such as CVS to be in regulators good books.
CVSs walk-in MinuteClinics, staffed by nurse practitioners, want to offer services that will be reimbursed by insurance companies listed in the exchanges. In its 10-K for 2012, the company stated that “visits paid for by employers, health insurers or other third parties accounted for approximately 85% of MinuteClinics total revenues in 2012.”
Over the past six years, CVSs clinic business has grown at a compound annual rate of 39%, according to the company.
With the Affordable Care Act, CVSs drug business could be at the mercy of regulators from the Food and Drug Administration, the Center for Medicare and Medicaid Services, and possibly numerous other agencies within the Department of Health and Human Services and elsewhere. Last year, CVS spent $13 million on lobbying, according to the Center for Responsive Politics.
In the past, CVS has tangled with the Federal Trade Commission, the Office of the Inspector General of the Department of Health and Human Services, and the Department of Justice. These regulatory battles are likely much easier if the president is on CVSs side.
There are reasons for drugstores not to cave to government pressure on tobacco sales. The purchase of cigarettes is legal and regulated. Cigarettes are generally kept behind counters, and stores ask for ID before purchase.
We do not want to turn the tobacco market into the drug trade, with sales occurring in the black market and in unsafe locations. We do not need a repeat of Prohibition. Tobacco use has declined as the price has risen and as young people have become increasingly aware of the dangers of smoking.
Federal and state governments collect about $36 billion in tobacco taxes every year. If the market were driven underground, tax revenue would decline. The government per-pack profit from cigarettes in 2012 was $3.78, or 66% of the cost of a pack.
Many products are unhealthy, especially in large quantities. The government should not be in the business of haphazardly regulating some products, as former New York Mayor Michael Bloomberg wanted to do with supersized sugary sodas.
Regarding legalization of marijuana, Obama said in an interview published Jan. 27 in the New Yorker, “it’s important for it to go forward because it’s important for society not to have a situation in which a large portion of people have at one time or another broken the law and only a select few get punished.” He described pot as less dangerous than alcohol.
What’s next? Will wine, beer, and alcohol companies face pressure to reduce their sales?
It is surely difficult to turn down the president of the United States. Business executives who work with the president are publicly congratulated and thanked, and invited to White House parties. Those who fall on the wrong side of the White House are shamed, like “fat cat bankers” in 2009.
This type of climate helps companies who do the government’s bidding and who are well-connected, rather than those who produce what consumers want to buy. This harms rather than helps America’s economy.
Original Source: http://www.marketwatch.com/story/cvss-decision-isnt-really-about-smoking-2014-02-05