CVS Health has agreed to buy Aetna for about $69 billion. The merger, if completed, would be the largest health insurance deal on record and would combine the biggest US drugstore chain with the third-largest health insurer. It represents a new type of experiment in health care industry consolidation.
The agreement between CVS and Aetna, first reported by the Wall Street Journal, has reportedly been in the works for some time. The combined business would push some of Aetna’s 22 million customers into CVS drugstores to fill prescriptions through CVS’s drug plans, which could help the company’s brick-and-mortar stores as retail is struggling. Aetna’s insurance plans, meanwhile, would get greater access to the place their customers go for care.
And this could be the first of a coming wave of health care mergers that could affect what you pay for prescription drugs, how businesses buy health insurance, and how health care companies are structured.
“Your retail pharmacy wants to be a bigger piece of your health care and is buying greater access to you by purchasing an insurer,” Leemore Dafny, an economist at Harvard Business School, told me. “And they’re betting that they’ll be able to drive more revenue through that storefront, and the insurer would presumably be betting that they could lower total spend or raise quality through that integration in a way that they can’t just through an arm’s-length relationship.”
Managing pharmacy benefits is a big business
Pharmacy benefits managers — which include companies like CVS and Express Scripts— are the sort of middlemen between insurers and drug companies. They are contracted by health plans, employers, unions, and government entities to manage prescription drug programs and, over time, have taken advantage of their position to play a bigger role in negotiating the drug prices patients and their insurers ultimately end up paying.Many industry experts say these benefits managers increase prescription drug prices to raise their own profits.
CVS and Aetna say the merger would drive down drug pricesby giving the combined company more leverage in negotiations with drug manufacturers and cutting out the middlemen between insurers and drug companies. In the long term, though, experts say patients could end up paying more.
Eliminating profit-taking middlemen could bring down prices in the short term but could ultimately drive them up over time, Craig Garthwaite, a health economist with Northwestern University’s Kellogg School of Management, told the New York Times.
That’s because eventually these mergers will make it harder for new insurers to enter the market since they won’t be able to negotiate lower drug prices than larger firms. That reduces competition, and having fewer competitors often leads to prices going up.
“Given how concentrated the pharmacy business is in terms of these really two extraordinarily dominating companies of Walgreens and CVS, I think it ought to be a concern,” said Linda Blumberg, senior fellow at the Health Policy Center at the Urban Institute, about the prospect of higher prices.
“This deal is not being done for the average consumer,” David Friend, managing director at BDO's Center for Healthcare Excellence & Innovation, said. “It’s likely being done because both organizations have weaknesses.”
CVS has been managing Aetna’s pharmacy benefits since 2010 and recently announced a deal to help Anthem start its own pharmacy benefits management business. The insurer UnitedHealth already has its own internal pharmacy benefit manager, OptumRx.
“While it’s still early, the moves by Anthem and Aetna have the feeling of the beginning of the end of the standalone pharmacy benefits manager business,” Garthwaite said.
The merger could also change how companies buy benefits and drive customers to CVS’s stores
There are also questions over how the CVS-Aetna deal could impact the way major employers buy health benefits. Most national companies employing more than 20,000 people keep their prescription drug benefits separate from medical coverage, Reuters pointed out, under the belief that they pay less by shopping contracts around.
Aetna CEO Mark Bertolini told Reuters the tie-up would “lower overall” the cost of health benefits, but not everyone is so convinced. So far, they are taking a “wait-and-see attitude as to whether there is a direct favorable impact on their pricing” of a CVS-Aetna combination, Jim Winkler, senior vice president for health at Aon, told the publication.
The CVS-Aetna merger could also save money for the company in other ways by giving Aetna a closer relationship with consumers and access to CVS’s consumer data. It will help the combined company better identify which drugs work better than others (and which drugs don’t work at all) because they’ll have greater access to health data and potentially give them an opportunity to offer more efficient health plans.
It would also be an opportunity for CVS to get consumers in the door in an environment where brick-and-mortar retailers are seriously struggling. Whereas in the past it may have previously been cost-efficient for insurers to drive patients to mail-order prescriptions, the combined company will likely want to drive more customers to retail pickup so they buy items CVS carries — beauty products, greeting cards, snacks — and stop by the walk-in clinic.
Beyond its storefront pharmacies and pharmacy benefit management arm, CVS also operates one of the country’s biggest specialty pharmacies and runs walk-in MinuteClinics in its pharmacies and Target stores.
According to WSJ, CVS will use its nearly 10,000 US pharmacy locations to provide consumers with “more local care options” and convert it some of its pharmacies to community health centers where consumers can get answers about their health and coverage.
Lurking in the background, meanwhile, is the looming threat of Amazon’s potential entry into the pharmacy business.
CNBC reported in May that Amazon was hiring a new manager to help figure out how to help the e-commerce giant break into the pharmacy market. Amazon in October was reported to have acquired wholesale pharmacy licenses in 12 states. Amazon most recently dove head first into the grocery space with the acquisition of Whole Foods.
The threat of Amazon entering the pharmacy market likely spurred CVS’s move on Aetna. The deal “feels more defense than offense,” Ana Gupte, an analyst Leerink Partners, recently said.
“What I really think this merger means for consumers, on some level, is that Amazon is coming,” Friend said. “If CVS buys an insurance company, why couldn’t Amazon buy an insurance company tomorrow?”
This could be just the beginning for health care mergers
CVS’s bid to buy Aetna marks a new era in health care industry consolidation where insurers, drug distributors, and retailers buy each other up, leading to a health market with fewer, more vertically integrated players. If CVS-Aetna works, it could have some systemic cost-saving effects other companies might seek to emulate.
“This is a watershed event. The entire health care system is about to converge,” Friend said.
The CEO of Express Scripts, the largest pharmacy benefits management company in the United States, said recently that he would be “open to” a deal with an insurer at the right price. It recently ended its relationship with Anthem over a dispute about drug prices and rebates.
“I would expect some kind of frenzy to ensue, just as we saw with the health insurance mergers,” Dafny said. “It seems like the big health care companies, cash is burning a hole in their pocket and they’re looking for where to spend it.”
“It’s building on what we’ve already seen when you see insurers integrating with hospital systems, they’re doing that in order to make sure that their insurance company is getting the best rates from those providers,” Blumberg said. “I think this is taking that one step further and saying, okay, we’ve seen it work successfully in some areas between the insurers and medical systems, now let’s take a look and see how it works with drugs.”
Aetna in February called off its proposed $34 billion bid to buy fellow insurer Humana after a federal judge blocked the deal on antitrust grounds. Insurers Cigna and Anthem called off their $54 billion merger the same month after being blocked by the courts as well. Under scrutiny from regulators, Walgreens in June scrapped its $9.4 billion bid for Rite Aid and announced that it would buy half of the company’s stores instead.
Those were horizontal mergers, meaning they were proposed between companies operating in the same space and competing directly (think McDonald’s-Burger King). And the CVS-Aetna deal would be a vertical one, meaning they operate in separate stages along the business value chain (like if General Motors were to buy Goodyear Tire).
The sheer size of the CVS-Aetna deal would likely subject it to antitrust scrutiny, but it’s unclear how regulators might approach it. One possible issue could bethe companies’ business activities in Medicare Part D, a government program to subsidize prescription drug costs. CVS has 5.5 million members, or a 23 percent market share, and Aetna has 2.1 million, or a 9.9 percent market share.
Bloomberg Intelligence analyst Jennifer Rie said it may depend on which federal regulatory agency is tasked with reviewing the deal — the Federal Trade Commission has been less critical of vertical consolidation, whereas the Justice Department just sued to block a major vertical deal, AT&T’s proposed merger with Time Warner.
More broadly, the CVS-Aetna tie-up will be a test case for other potential vertical mergers in the health care space. “The question is, is [CVS] paying the right price to Aetna?” Dafny said. “It depends on your projections. How much new business does this drive to CVS and Aetna?”
LITTLE ROCK, Ark. (ARKANSAS NONPROFIT NEWS NETWORK )- On Thursday, U.S. Rep. Rick Crawford (AR-1) sent letters to federal regulators stating his “grave concern” over the proposed acquisition of Aetna, Inc., one of the nation’s largest insurance companies, by CVS Health, a Rhode Island-based healthcare conglomerate that has been at the center of a political showdown in Arkansas.
The congressman wrote that CVS Caremark — a subsidiary of CVS Health — has “run amok in my state by severely undercutting reimbursements to pharmacists.” CVS Caremark is a pharmacy benefits manager, a middleman company that negotiates drug prices with manufacturers on behalf of insurance carriers. PBMs also handle retail pharmacy claims.
Independent pharmacies in Arkansas say CVS Caremark, which is the PBM for insurer Arkansas Blue Cross and Blue Shield, recently slashed its payments for Blue Cross patients so deeply that drugstores now lose money when they fill many prescriptions. That has resulted in layoffs and may lead to store closures, according to the Arkansas Pharmacists Association.
The state legislature is now considering legislation that would subject PBMs to regulation by the Arkansas Insurance Department. Governor Hutchinson was expected to call a special session to address the issue as early as next week after the 2018 fiscal session concludes. But Crawford’s letters to U.S. Attorney General Jeff Sessions and U.S. Federal Trade Commission Acting Chair Maureen Ohlhausen may add a new dimension to the fight.
In December, CVS Health announced plans to acquire Aetna for $69 billion. CVS, which also owns the country’s largest retail pharmacy chain, is already ranked as the seventh-largest corporation in the U.S. by Fortune magazine, and critics of the deal say it would give one company too much leverage over the health care system. The Department of Justice and the FTC are empowered under federal antitrust law to stop such an acquisition if it is shown to hurt consumers.
“Left unchecked, the vertical integration of PBMs could destroy competition in community pharmacies, leaving patients with broken provider-patient relationships, higher costs, and less access to patient-centered care,” Crawford wrote Sessions and Ohlhausen. “Merging two entities with such a large footprint within the drug supply chain will only exacerbate problems with respect to pharmacy access, especially in underserved areas, like the First District of Arkansas.”
In an interview Wednesday morning, Crawford said he was speaking out against the CVS/Aetna deal because of the actions of CVS Caremark and other PBMs in Arkansas. Crawford, whose brother-in-law is a pharmacist in Missouri, said pharmacies are “a critical part of our healthcare model in rural America.
“Historically, I stay in my lane — I work on federal issues … but the lanes merged here with health care, and so I need to provide a level of support to my counterparts at the state level,” Crawford said. What’s happening in Arkansas is “a case study for … why they shouldn’t allow that type of merger to take place,” he added.
Crawford cited an example of so-called “spread pricing,” in which a PBM charges an insurance company a much higher rate for a particular drug than the rate at which it reimburses a pharmacy for the same product. According to data provided by the Arkansas Pharmacists Association, it recently cost an independent pharmacy in Arkansas about $91 to buy the generic equivalent of Tamiflu, a popular antiviral, from a drug wholesaler. When a Blue Cross patient filled a prescription at the pharmacy, CVS Caremark only reimbursed that pharmacy about $36 for the drug. That meant the pharmacy lost $55 by filling the prescription.
Meanwhile, Blue Cross has paid CVS Caremark about $133 for the reimbursement — meaning $96 of the cost of the reimbursement ostensibly went to the PBM. Blue Cross is by far the largest insurer in Arkansas, and the company covers a majority of beneficiaries on Arkansas Works, the state’s public-private approach to Medicaid expansion.
“The question is, where is this money going?” Crawford asked. “To say it’s unfair is really a huge understatement. I think it’s possibly illegal — it just looks illegal — and it certainly looks unethical.”
When asked last month about allegations of unethical or illegal pricing in Arkansas, a spokesperson for CVS Health responded by email: “The Arkansas Pharmacists Association is painting an overall skewed picture of how CVS Caremark reimburses pharmacies. We believe that independent pharmacies in our network are reimbursed fairly and that we are in compliance with state law. It is important to note that APA has repeatedly refused to share specific claims data with us to validate their allegations.”
Crawford acknowledged that opposing the Aetna merger won’t directly address the Arkansas pharmacy reimbursement issue.
“I’m not sure if there’s anything we can do at the federal level to address this Arkansas-specific problem … I think it’s going to require an Arkansas solution,” he said. “But what I can do at the federal level is raise this question in general terms that, ‘Is it good to see this kind of consolidation and vertical integration in the healthcare industry?’ ”
He also said the problem of PBMs squeezing pharmacies extended well beyond Arkansas. “This is happening all over the country. Pharmacists have been visiting members of Congress for the last two years with this complaint,” Crawford said. “We’ve kind of reached a boiling point … and while all this is going on, then you see these two companies [CVS and Aetna] seeking to merge and further consolidate control of a large portion of the healthcare industry.”
Crawford has held the First District seat since 2011 and is running for reelection this year against Democratic challenger Chintan Desai.
This reporting is courtesy of the Arkansas Nonprofit News Network, an independent, nonpartisan news project dedicated to producing journalism that matters to Arkansans. Find out more at arknews.org.