CVS to Acquire Aetna
On Sunday night, CVS Health and Aetna released a joint press release announcing a $69 billion acquisition plan for the pharmacy company (CVS) to purchase the health insurance giant (Aetna). The CVS Health and Aetna merger would not only set a record as the largest health insurance deal in U.S. history, but could potentially change the way that consumers get health checkups or see a doctor for other ailments. CVS has over 9,700 pharmacy locations and more than 1,100 walk-in health clinics nationwide. These “minute clinics” offer vaccinations, lab tests, health screenings and treatment for basic injuries and ailments. CVS also owns the pharmacy benefits manager (PBM) and mail order pharmacy Caremark.
The CVS Healthcare and Aetna merger could result in a shift in health care costs, where consumers are treated for emergencies or even how often they visit the doctor. It could also mean the beginning of similar mergers in the near future. While the deal has the appearance of being beneficial to consumers, many question if this is so.
A Threat to U.S. Hospitals
The proposed acquisition is designed to keep patients out of the hospital as a part of a move towards more value-based care. The plan includes a CVS service expansion in its pharmacies and retail clinics. In addition, CVS will begin to deliver services and care directly to a customer’s home. This is intended to possibly save Aetna money by putting patient care in a lower cost home-setting as opposed to outpatient clinics.
While this is a potentially positive move for patients, it comes as bad news for hospitals nationwide. Hospitals regularly see millions of patients in emergency rooms and provide care for issues that CVS and Aetna executives believe could be directed to an outpatient clinic or avoided altogether. The acquisition is believed to be filling the void in regards to convenience and coordination that healthcare is currently missing.
CVS and Aetna want to shift healthcare from a fee-for-service system that encourages treatment by volume and increases costs to a value-based care system. CVS/Aetna plans to heavily use mid-level practitioners to provide care. For example, nurse practitioners will provide care in CVS Minute clinics, a pharmacist administering vaccines in the pharmacy or a nutritionist in the home. The CVS/Aetna merger is the first integration of large systems that excludes doctors. All of these things could prove to be detrimental to the nation’s largest hospital operators like HCA Holdings, Community Health Systems, Tenet Healthcare and the nonprofit hospital industry as well.
Hospitals have not been oblivious to the possibility of radical changes that are now coming into fruition. Hospital operators have been forming partnerships with retailers like CVS and Walgreens-Boots Alliance and even expanding services into community-based urgent care centers. United Health Group is the most integrated system and owns everything from hospitals to PBMs to physicians. Unfortunately, they may not be making changes to lower cost services fast enough to compete with CVS’ $69 billion purchase of Aetna that gives the chain and its 1,100 retail clinics more than 22 million paying health plan members.
The Good, the Bad & the Ugly Truth
History may be a good indicator that the recently announced $69 billion CVS and Aetna merger may not be a win for consumers. If the insurance company and the pharmacy and pharmacy benefit manager (PBM) are allowed to merge, it may result in less choice and higher costs for both consumer and payor alike. CVS’ acquisition of Caremark, one of the nation’s dominant PBMs is evidence of this point. After acquiring Caremark in 2007, CVS formed exclusive pharmacy networks that prevented its consumers from accessing pharmacists of their choice and in the end increased their prescription drug costs. CVS claimed that consumers were rewarded with increased choice – a claim that would only prove to be true if the consumer only wanted to get their prescriptions at a CVS store or a CVS mail order operation.
Yet another example that insurer/PBM combinations do not benefit consumers or payors is proven in the 2015 UnitedHealthCare acquisition of CatamranRX. The deal allowed UnitedHealthCare, the largest insurer nationwide to acquire the then fourth-largest PBM into its OptumRX PBM, making it the third largest PBM in the United States. This merger has no evidence of its claims that greater integration and greater patient focus equating to improved care and lower overall costs for consumers. Rather, it has proven to result in fewer choices, higher drug prices, poorer services and an increase in fraud and abuse. The instances of decreased consumer welfare can be substantiated in the recent lawsuits against Optum for charging consumers co-pays that far exceed the costs of the medication itself.
PBMs are special entities that lack transparency yet dominate the pharmaceutical industry. The PBM market is controlled by only three PBMs. The lack of transparency and regulation provides ample opportunity for these PBMs to escalate their profits by way of rebates schemes that inevitably inflate the price of drugs. Typically, a PBM will receive a “rebate” from the insurance company for drugs provided. This allows them to pocket a large portion of rebates that far exceed any potential value that they can provide to consumers. Mergers such as the CVS/Aetna acquisition cement the role of such PBMs. A PBM will use its size and power to force a wholesaler to sell a drug for $200 per month. The $500 margin is returned to the PBM.
CVS may claim that the merger is necessary to gain increased bargaining power, which would in turn lower prescription costs, but unfortunately, the past history of PBM mergers has proven differently for consumers. The market is neither competitive or transparent, thus allowing rebates to be increasingly pocketed by the PBMs and consumers to continuously receive the short end of the proverbial stick.
And, In Comes Amazon
In the background to all of this change within the healthcare sector is the threat of online retailer, Amazon.com, entering the ring of the middleman business. Some analysts and consumers project that the online retailer giant would further disrupt the drug supply chain with a new business model and potentially simplify and make the drug-pricing system far more efficient. The idea of an online empire that has disrupted the way consumers shop becoming competition is found to be appealing for many.
Amazon has proven that information technology can and will produce benefits to companies that may not have appeared to be compatible in the past. As the online giant’s plans to enter the healthcare arena became more apparent this fall, healthcare companies across the spectrum began to assess the threat and scrambled to prepare for this perceived disruption. The CVS and Aetna merger is rumored to be a result of this.
Only Time will Tell
The CVS Healthcare-Aetna deal is being touted as a vertical merger and it is assumed there will be few regulatory obstacles in the way. However, the unpredictability of the current administration combined with the valid concerns of what impact the deal will have on patients could pose significant road blocks for the merger. If the deal quickly passes through regulatory oversight, only time will tell how such a concentration of power in the healthcare system will impact U.S. consumers.
While there is little actual business overlap between CVS Healthcare and Aetna, it is nearly impossible to properly gauge how its combined leverage could be used. On one hand, it could result in a plethora of innovative product and service offerings for consumers. On the other hand, the merger could prove to adversely impact the products and services being offered to its patients. There is also mystery as to how this merger will affect doctors.
Regardless of whether or not the CVS-Aetna deal closes, consumers can be assured that Sunday’s announcement will only fuel similar discussions between competitors. This proposed merger provides a template for a one-stop shop for healthcare services. This could inevitably open the door for greater consolidation in the healthcare sector. There are pros and cons to these highly concentrated healthcare service companies, but players like Amazon and Walmart may force groundbreaking changes in the battle in the healthcare sector.