CVS said it pursued the deal because with the country’s population aging, a
growing percentage of Americans will get their prescription drug coverage from
Medicare.

Shares of Universal American jumped by more than a third in morning trading.
The company said shareholders would get $12.80 to $13 per share in cash and
would own a new company operating Universal American’s other businesses.

CVS said the deal will more than double the size of its Medicare drug
business. Universal American serves about 1.9 million people in the Medicare
Part D federally subsidized prescription benefit program for Medicare
recipients, while CVS serves 1.2 million.

Woonsocket-based CVS, which operates a chain of drugstores and manages
pharmacy benefits, said the deal is expected to close in the second quarter of
2011 and will add to its earnings per share within a year. The agreement is
contingent on approval by Universal American shareholders.

Under the agreement, CVS will acquire all stock in Universal American and
give Universal American’s shareholders 100 percent of a new public company that
will own Universal American’s Medicare Advantage and traditional insurance
businesses. The new company will have about $640 million in cash and no debt,
Universal American said.

CVS’s third-quarter profit fell more than 20 percent, to $809 million, as its
Caremark unit continued to lose business. CVS pharmacy services revenue fell 8.5
percent as private employers canceled contracts and patients defected from its
Medicare drug coverage plans. The company said pharmacy shoppers were spending
conservatively in the weak economy.

Analysts have questioned the wisdom of CVS’s $26 billion 2007 acquisition of
Caremark, which provides pharmacy-benefit services to employers.

Shares of Universal American, a provider of health benefit plans based in Rye
Brook, N.Y., rose $5.63, or 38.5 percent, to $20.24, while CVS shares fell 2
cents to $34.98 in morning trading.