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Will CVS buy Aetna for $66 billion?

Written By: Jason Shafrin - Oct• 27•17

CVS is in talks to buy Aetna for $66 billion.  This would be a merger between one of the largest pharmacy benefits managers (PBM) in the country and the third largest insurer.

A successful deal could push millions of Aetna’s members toward CVS’s retail pharmacies, walk-in Minute Clinics, and services such as home visits for infusion drugs at a time when retail pharmacy companies are facing stiff competition.

It would also give Aetna the ability to move deeper into the lives of the 44.7 million people it serves and manage their health more efficiently. For example, the insurer might be able to get better insight into whether patients are taking their drugs by gaining access to data from CVS clinics and retail counters.

However, there may be another reason for the deal.  Amazon may be entering the medical device and even eventually the PBM business.

Amazon has received approval for wholesale pharmacy licenses in at least 12 states, including Nevada, Arizona, North Dakota, Louisiana, Alabama, New Jersey, Michigan, Connecticut, Idaho, New Hampshire, Oregon and Tennessee.

However, the CVS-Aetna deal may never happen. According to Bruce Japsen of Forbes:

Anthem just last week said it was forming its own pharmacy benefit management company, IngenioRx, with CVS, which operates a PBM. That was seen as a way to compete with the nation’s largest health insurer, UnitedHealth Group, which owns the PBM OptumRx.

But  for  CVS to operate a PBM with Anthem, the No. 2 health insurer, while owning Aetna, the No. 3 insurer, would be highly unusual coming off a period of intense antitrust scrutiny of the health insurance industry. Aetna and Humana, the nation’s fourth-largest insurer, pulled the plug on their merger last year after intense antitrust scrutiny over the potential creation of a monopoly purchaser of health services.

The health care market is rapidly evolving.  In the words of Heraclitus, “you cannot step twice into the same stream” or put more simply, “The only thing that is constant is change“.

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2 Comments

  1. Amanda says:

    This is such an interesting article. There are some potential challenges with acquisitions. Is CVS Health ready to take on an entire insurance company? This will be the biggest purchase for CVS Health to date, so they need to carefully consider if they have the capacity to run Aetna and if they are willing to take on the risk of owning a health insurance company. CVS Health has had plenty of experience in the health care field with their MinuteClinics and pharmacies, but they have never ventured into the field of health insurance until now. Taking on a health insurance company entails a lot of risk and regulations from state and federal government. With today’s political uncertainty regarding health care reform, would it be a smart move for CVS Health to dive into the health insurance company field? Moreover, with integrations, the companies need to work together in sync. They need to know the organizational behavior of Aetna and see if it matches with CVS Health. Senior management from both companies need to be on the same page about structure and priorities.
    Another potential barrier is that CVS Health is in partnership with Anthem to created IngenioRx. Anthem’s contract with Express Scripts will be ending in 2019, so Anthem hopes to have IngenioRx active by 2020. Although IngenioRx is separate from Caremark, CVS’s PBM, it is interesting to see how CVS Health will operate with Anthem while owning Aetna.
    There are a lot of pros and cons to this potential acquisition. I do not believe that CVS Health is ready to make such a major purchase. I would advise CVS Health to not buy Aetna. Instead, if Amazon is a threat, it would be more beneficial for CVS Health to privately negotiate with Amazon. Caremark could be the PBM for Amazon. As for Aetna, this speculation already increased their stock by 11.5% just last month. Even if this deal does not go through, Aetna already benefited from the speculation alone.
    However, if this deal does go through, CVS Health will need a strong team of insurance experts to overlook the transition and manage Aetna. It would be interesting to see what will happen between CVS Health and Aetna, as this an unprecedented moment.

  2. Jackie C says:

    In 1963, the Goldstein brothers opened their first storefront in Lowell, Massachusetts. The main mode of products were health and beauty. Determined to provide the best quality and service they could, they aptly named their business ‘Consumer Value Stores’, or as it would become known, CVS. Today, the franchise is nearly unrecognizable from the modest storefront from which it originated, with over 9,700 retail pharmacies and counting.1 As their retail sales have fallen, they have continued to expand their health initiatives, with the retail pharmacy division of CVS Health ranking as the 7th largest U.S. corporation in 2016 according to Fortune 500.2 Last year, CVS Health generated over $177 billion, owing largely in part to their control of nearly a quarter of prescription drug sales in the U.S., and their place as the largest pharmacy-benefit manager (PBM) in America.2
    PMB’s act as an intermediary between large pharmaceutical firms and employers or insurers to negotiate bulk pharmaceutical discounts. PBM’s negotiate on behalf of commercial health plans, self-insured employer plans, Medicare, and state/federal employee health benefit programs.3 In 2016, PBM’s managed pharmacy benefits of over 266 million individuals in the U.S.4 PBM’s are responsible for the total value of drug rebates and discounts rising from $39 billion in 2008 to over $125 billion in 2015 due to their ability to accumulate collective demand and conduct hardline negotiations for drug discounts.4 They operate within several arenas, from integrated healthcare systems, to retail pharmacies, to insurance companies. The major PBM’s of today are Express Scripts, UnitedHealth Group, and CVS Health.5
    PBM’s may sometimes operate dubiously, having been exposed for using secret rebates and allotting these savings to stakeholders, instead of passing them on to the insurers and employers for whom they are negotiating.3 Therefore, this potential source of savings is not passed on to the consumer. In March of 2016, the health insurance company, Anthem, sued the PBM Express Scripts for $15 billion after alleging that they have withheld savings, a claim which Express Scripts denies.6
    Aetna, a managed health care company generating over $63 billion last year alone, manages care for clients, the majority of which are corporations that have employee sponsored health insurance and benefit programs.7 Aetna also has some of the highest rated Medicare plans, and has almost entirely exited Obamacare plans, leaving it as one of the strongest insurance providers on the market.7
    Currently, CVS acts as Aetna’s PBM.8 Having an in-house PBM can control for the pocketing of savings that can occur within PBM’s, as has been shown to be successful for companies such as United Health Group which bought and combined PBM companies Optum Rx and Catamaran.9 This allowed United Health to negotiate prices from pharmaceutical companies, and to be competitive with giants like Express Scripts, while monitoring and ensuring that savings were passed on to insurers and consumers.
    Healthcare costs continue to soar, with total healthcare cost inflation rising 6-7% since 2014, largely due to rising costs in nearly every aspect of healthcare, from doctors, to drugs, to medical devices.10 A partnership between Aetna and CVS may be the most efficient and conceivable way to lower prices, and lead the market towards more integration between insurers and providers.11
    In the past, such as the example of AT&T and Comcast, vertical integration within a market division has been successful in its ability to bolster profit margins. Unfortunately, more often than not these deals have been shown to neither lower prices or improve quality of services for consumers.12 More commonly, the newfound profits are redirected to officers or stakeholders of the companies. With more of the consequences of these mergers coming to light, regulators of antitrust laws have been increasingly hesitant of approving the joining of firms within the same market segment. For example, the recent attempt to merge Aetna and Humana was denied.12
    However, although Aetna and CVS Health both operate within the healthcare-world, this form of vertical integration has the potential to resulting in value-based purchasing to align incentives between providers and payers.13 In theory, this type of merger will result in positive results for consumers such as more choice, better health outcomes, and lower prices. CVS will be able to leverage negotiations with drug-makers, especially with the accumulation of health data from Aetna, giving them the ability to set deals that tie drug prices to patient health outcomes.14 This will improve the competitiveness of CVS and Aetna, which together would be offering a fully integrated health and drug service with ease of convenience and access to healthcare providers for Aetna members. Over 80% of the U.S. population lives within five miles of a CVS store, and 50% live within ten miles of a MinuteClinic.13 There is evidence that companies that integrate vertically create efficient, cost-saving measures, as seen in conglomerates like Kaiser Permanente, and also reflected in organizations such as Intermountain and the Mayo Clinic.15
    Ideally, Aetna consumers would be afforded lower premiums and out-of-pocket spending when accessing healthcare through CVS Health outlets. As mentioned, an added benefit would also be the accumulation of patient data, which could will help extricate successful and unsuccessful interventions, contributing to the personalization of medicine and healthcare practices, while driving costs down.
    Another potential rationale for the deal is to offset the threat of market entry by Amazon. Though not publically confirmed that they will, Amazon has acquired the licenses to distribute wholesale pharmaceutical in 12 states.16 Upon the news of this, CVS stock, alongside stock of several other companies in the pharmaceutical supply industry, fell almost instantaneously. Amazon has the logistics and mechanisms of efficient delivery in place, and nearly 50% of their sales on the ecommerce site are from third party distributors.15 They are certainly in a position to be a competitive player in the pharmaceutical distribution market. This has put pressure on other companies to protect themselves, and serves as another motivation for the Aetna-CVS deal. Once the news of the possible deal was announced, CVS stock rose right back up, and Aetna stocks rose as well.15
    Amazon could also serve as a touchstone for pricing and consumer benefits. Amazon has a reputation that is known for its focus on customers, having forgone profits for several years, solidifying its notoriety as a threat to pharmaceutical providers like CVS.17 Amazon’s entry into the market would help ensure that any newfound surplus that results from a merger of CVS and Aetna would be redirected as savings to the consumer.
    The Aetna-CVS deal may also pave the way for other companies with similar portfolios to follow suit. Potential equivalencies could include mergers between companies such as Anthem and Walgreens, again with the potential for more aggressive negotiating powers to bring down prices, which in turn could be passed on to the consumer.12,14,15
    Only time will tell as to whether or not a CVS-Aetna partnership would result in savings and quality improvements for customers, but there is evidence that consolidation will have positive outcomes as companies continue to find ways to provide low-cost, high quality care to their consumers. Although there is no guarantee that savings will be passed on to customers, with market pressure from giants like Amazon, they will likely be guided to do so.18,19 If other insurers and providers decide to team up to compete with a CVS-Aetna entity, more consumers will theoretically benefit in the same ways.20 Although the concern that any newfound profits from a consolidation such as this will be used to line the pockets of officers and shareholders is a legitimate one, the current climate of the market and the threat of Amazon entry is enough to off put this apprehension and restore faith in the notion that consumers will be allotted these savings. With the potential payoff for the consumer through healthcare integration, I believe that the CVS-Aetna merger will benefit consumers and pave the way for others like it, further driving down costs for a wider population of individuals.

    References
    1 Lisa C. Gill. CVS health. J.P. Morgan Equities Research Reports. 2017.
    2 Adam J. Fein. Profits in the 2016 fortune 500: Manufacturers vs. wholesalers, PBMs, and pharmacies (rerun). Drug Channels Web site. http://scholar.aci.info/view/1427c4ba468114a0104/156e0ebfa48000122141806. Updated 2016.
    3 Thomas Gryta. What is a ‘pharmacy benefit manager?’. Wall Street Journal (Online). Jul 21, 2011. Available from: https://search.proquest.com/docview/878545557.
    4 New AARP report shows PBMs pocketing huge “windfall” profits. PharmacoEconomics & Outcomes News. 2010(611):3. https://search.proquest.com/docview/869909335. doi: 10.2165/00151234-201006110-00006.
    5 Lisa C. Gill. Pharmacy benefit management. J.P. Morgan Equities Research Reports. 2017.
    6 Anthem sues express scripts over prescription drug pricing. American Pharmacists Association Blog Web site. http://scholar.aci.info/view/14b703761f30013000a/1539f1698a600014c11. Updated 2016.
    7 Chelsey Dulaney. Aetna raises membership projection. Wall Street Journal (Online). Jan 13, 2015. Available from: https://search.proquest.com/docview/1644694195.
    8 Aetna and CVS caremark enter into contract to provide PBM services. Health & Beauty Close-Up. 2010.
    9 United health to buy catamaran for $12.8 billion; intel reportedly in talks to purchase altera; FTC to meet with reynolds american and. Imus in the Morning. 2015.
    10 Why healthcare costs rise faster than general inflation. The Health Care Blog Web site. http://scholar.aci.info/view/1427c4bd336114a0104/1531fa33a9f00014c3d. Updated 2016.
    11 Jason Shafrin. Will CVS buy aetna for $66 billion? Healthcare Economist Web site. http://scholar.aci.info/view/1465fccf1c85c0c0128/15f61a854260001e959e9d9. Updated 2017.
    12 Gelles D. Comcast and time warner cable merge in $45.2 billion deal. International New York Times. Feb 14, 2014.
    11 Analysts concerned by CVS-aetna merger talks. Global Banking News (GBN). 2017.
    12 Fragmented health system paves way for CVS-aetna merger. New Economic Perspectives Web site. http://scholar.aci.info/view/14a1c0b35fe79eb01a6/15f928581dd00014d0daa99. Updated 2017.
    13 Carolyn Y Johnson. Why CVS health would want to buy aetna. Washington Post – Blogs Web site. https://search.proquest.com/docview/1955897339. Updated 2017.
    14 CVS health reports dramatic drop in prescription drug trend to 5 percent, despite rising drug prices. PR Newswire. Feb 23, 2016. Available from: https://search.proquest.com/docview/1767300486.
    15 The right dose? health care in america. The Economist. 2017;425(9065):62.
    16 Mariella Moon. Amazon has drug distribution licenses for at least 12 states. Engadget Web site. https://search.proquest.com/docview/1956226450. Updated 2017
    17 Seth Fiegerman. Amazon may be factor behind rumored CVS, aetna merger. CNN Wire Service. Oct 27, 2017. Available from: https://search.proquest.com/docview/1956070171.
    18 Jed Graham. CVS health looks to buy aetna as amazon threat gets real. Investor’s Business Daily. Oct 26, 2017. Available from: https://search.proquest.com/docview/1955757845.
    19 CVS and aetna talks take place under amazon’s shadow: DealBook briefing. New York Times (Online). Oct 27, 2017. Available from: https://search.proquest.com/docview/1955956137.
    20 Is this the future of health care? The Washington Post (Online) Web site. https://search.proquest.com/docview/1958457001. Updated 2017.

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