CVS/Aetna Merger & Future Healthcare Business Models

CVS and Aetna combined logo

As we prepare for Pharma CI in September, we are reflecting on the changing state of healthcare. Last year, we witnessed the merger of CVS and Aetna, one piece of a growing trend towards mergers within the healthcare industry. We are now beginning to understand the trade-offs of these mergers, and their impacts on healthcare as we know it.

Aetna/CVS merger progress update:

CVS’ $70 billion acquisition of Aetna, which merged CVS’ pharmacy and pharmacy-benefit manager (PBM) business and Aetna’s health insurance, closed in November 2018. Since then, there have been some growing pains and a lot of external scrutiny. As of April, CVS’ shares have fallen 34% due to investor skepticism about whether this merger would actually increase profits, store visits, and income from prescription medications. This proved prescient; the June 2019 CVS investor day revealed disappointing earnings, blamed on and slowing prescription drug revenues .

Aetna and CVS had an “unusual” three-day Congressional hearing in June with live testimonials to determine if the merger did enough to protect competition for prescription drugs. Initially, CVS agreed to sell Aetna’s Medicare Part D drug business to WellCare as part of the merger, but the American Medical Association (AMA) believed this was insufficient. The President of the American Antitrust Institute testified against the merger and stated that a more concentrated PBM market would increase premiums. The hearing is now complete, but uncertainty around next steps will likely last through the summer.

In the meantime, CVS and Aetna plan to continue business as usual. If the settlement from the hearing is rejected, we expect to see both companies scramble to recover. A key factor to watch is how the companies will react as the sale of Aetna’s Medicare Part D business to WellCare cannot be reversed.

While the ultimate outcome is uncertain, we have identified some benefits and drawbacks of healthcare power concentration on consumers and society.

Potential benefits & “winners”:

In the best-case scenario, mergers lower costs and increase quality. With the CVS/Aetna merger, consumers may have more options for lower-cost care clinics versus emergency rooms for treatment. CVS defended its acquisition of Aetna by claiming that it will be the “driving force for change in our health-care system”. To be optimally effective, CVS and Aetna will need to change consumer mindset about taking CVS seriously as a location that can address their healthcare needs.

  • Increased healthcare access: The merger will drive CVS to create innovative programs that give consumers access to more healthcare options, particularly through lower-cost settings such as CVS retail stores and walk-in clinics staffed with in-house nurse practitioners. CVS has begun experimentation with lab, eye, hearing, and sleep apnea screening “concept” stores to improve access. CVS plans to open 1,500 health hubs in pharmacies by 2021 to support patients with chronic diseases (e.g. diabetes, heart disease, hypertension), which may transform those pharmacies into go-to treatment centers at lower premiums.
  • Reduced costs: Patients today are more likely than ever to seek care from hospitals versus physician offices, which has increased healthcare spending. A recent RAND Corp. reported that “hospital price increases are key drivers of recent growth in spending per capita among the privately insured.” Physicians that work out of hospitals have access to convenient in-house lab and diagnostic tests, which are billed at a higher rate to insurers. Less than half of physicians today run their own practices, so the hospital or group based medical care model has become more common. Improved access to lower-cost clinics could offset climbing hospital costs.
  • Improved position for small or mid-sized health insurers: We have seen mergers among the largest health insurance carriers fall apart due to antitrust concerns, including Anthem’s proposal to buy Cigna and Aetna’s proposal to buy Humana. As a result, companies such as Centene, Molina Healthcare, and WellCare, which serve Medicare and Medicaid consumers, are more attractive acquisition targets for larger players seeking to quickly increase membership.  As the health insurance industry becomes more concentrated, smaller insurers may be increasingly valued.

Potential drawbacks & “losers”:

So far, the potential benefits of the merger have not been realized. A very realistic alternative is that reduced competition will increase overall consumer vulnerability due to:  

  • Less transparency: As already complex organizations become increasingly complex, they can further obscure consumer understanding of how healthcare markets work and make it harder for consumers to compare prices.
  • Increased costs: Fewer choices and competition often leads to higher prices as there is less incentive to manage costs. CVS’ focus on increasing corporate profits could reduce its willingness to pass along savings to consumers.
  • Disproportionately poor outcomes for low-income populations: Reduced competition for Medicare Part D consumers is most likely to hurt the low-income, chronically-ill consumers who are most inclined to use these benefits.

What’s next:

As we continue to monitor the outcome of the merger, we also expect to see new entrants in the healthcare industry. Amazon, which has not yet fully entered into the healthcare or prescription drug space, is a looming threat that has motivated proactive, strategic partnerships. CVS’ Aetna acquisition helped to position the company against Amazon as a future rival. Another potential market disruption would be a deal between Walgreens and AmerisourceBergen. We expect to see more drug-supply chain consolidations to protect against competitive threats.

Click here to read Evolving Patient Support Programs to Gain Competitive Advantage

-Naomi Warren, Senior Analyst, Finance and Insurance Practice, Fletcher/CSI