esm7i Candy, cosmetics…and medical care? CVS plans to acquire Aetna in a massive vertical merger worth $69 billion. It will be the biggest deal in 2017 and the largest healthcare deal ever.
This article, amid all the hype surrounding the merger, explains the reasons behind it. These include operational cost cutting, expanded services to gain a competitive edge, and threats both from Amazon and UnitedHealth. This article also examines possible market effects.
The news of the deal was expected. CVS CEO Larry Merlo described the deal as a “natural progression” since the two companies have been “close” partners for years, ever since CVS began serving Aetna members. It follows on the heels of proposed horizontal mergers between industry competitors–insurers Aetna and Humana, Cigna, and Anthem–which raised antitrust concerns and were blocked by a federal court. The CVS-Aetna merger is a vertical merger, which means that it would involve companies that do different things in the same industry. This makes the CVS/Aetna merger more likely to get approved. Many see this as evidence of the changing healthcare landscape, given the increased consolidation of the industry and the political uncertainty surrounding the future of national healthcare programs.
This article will tell you everything you need to know about the merger. We’ll explain the reasons behind it, the potential market effects, and the outstanding issues.
A Defensive Strategy – Motivations behind the Aetna CVS Merger
In the wake of the Affordable Care Act and the potential for reductions in government programs such as Medicare, many health companies are reexamining the business plans they have and their partners. Aetna, CVS, and other health companies are all looking to reduce operational costs and gain a competitive advantage in the current landscape.
COST SAVING
According to CVS CEO Larry Merlo, the merger will produce $750,000,000 of cost savings. The drug industry is a complex one, with many different intermediaries. Five major players are involved: pharmaceutical manufacturers, wholesalers and pharmacies, insurers, and pharmacy benefit managers. PBMs act as middlemen between manufacturers and insurance companies. They work on behalf of employers and health plans in order to negotiate discounts and select drugs that are covered. The deal involves a complicated network of rebates and payments, but in the end, it would bring together a pharmacy, an insurer, and a PBM. The obvious benefit of this is that the money would stay under the same parent. Below is a diagram showing the process from manufacture to consumer.
The deal would allow CVS to control every step, except for drug R&D and the wholesaler that ships the drugs to hospitals and pharmacies. Toptal Finance expert Sebastian Fainbraun chimes in: “CVS’s MinuteClinic offers a cheaper alternative to quick medication as well as a simplified prescription process. It’s all about saving money, so Amazon can’t relax for now. CVS could also enter the delivery business. “Having a company owner who owns an insurance agency is important.”
EXPANDED SERVICE VIA COMMUNITY CLINICS AS A COMPETITIVE TOOL
The agreement would leverage CVS’ 9,700 brick-and-mortar storefronts in order to improve Aetna members’ access to preventative health care, as well as minimize costly emergency room visits. CVS currently operates 1,100 MinuteClinics that offer basic services such as flu shots and physicals. In combination with Aetna medical records, these services would allow consumers to receive certain preventive services at no cost and certain medications in CVS pharmacies. MinuteClinics will be key locations for Aetna and rival customers to receive low-level health care. The aim is to enable individuals to realize savings when they visit a retail outlet to treat minor symptoms or monitor their health. This will transform the way care is delivered.
The total cost of healthcare can be reduced by focusing on prevention and minimizing the hospital services that account for at least 70%. This will also help differentiate them from the competition. CVS plans to deliver care in the homes of customers to save money for Aetna, employers, and those covered by Medicare and Medicaid.
In terms of footprint, CVS operates 10,000 pharmacies in the United States, all of which are located within five miles of 71% percent of the population. Comparatively, only 34% of US households live within 5 miles of an Amazon-owned Whole Foods.
Skeptics, however, insist that this strategy may not be successful. The biggest hurdles include a significant time and money investment in order to turn drugstores into credible medical settings. “will have a difficult integration process, as well as a large debt load and learning curve.” Some are concerned that the care provided will be of poor quality and disjointed. According to Greg Burke, United Hospital Fund, it would be “unsettling” for people to come into a store to buy socks and have someone in with a bleeding scalp.
According to Toptal Finance expert Sebastian Fainbraun, “The deal will be more transformational for Aetna because it will give them better pricing for medications, a direct route for quick care, and another touchpoint with the consumer.” It is a lifeline for CVS because Walgreens and Amazon are going to eat them. In 2016, 34 of CVS’s retail sales (totaling 81 billion dollars in revenue) came from prescription drugs. This includes stores, online pharmacies, and long-term care pharmacy operations. The pharmacy benefits business is growing faster than retail, with a 20% increase in 2016 as compared to a 13% rise in retail operations.
Despite Amazon’s threats, the real race is against United Health
Everyone talks about Amazon as a game-changer–and for good reason. Amazon has established dominance in publishing, consumer electronics, cloud services, and, most recently, the food industry with its Whole Foods purchase. Stock prices of pharmaceutical intermediaries fell when Amazon announced that it would be entering the pharma business earlier this year. Amazon holds licenses to sell pharmaceuticals, as well as other products, in twelve states. These licenses may have been obtained to allow for the sale of medical equipment. Analysts suspect that it could have bigger ambitions. This would cause CVS and Aetna to join forces to establish a foothold and counter a ruthless rival.
Ana Gupte, a Leerink Partners analyst, believes that Amazon is the biggest threat to retail pharmacy chains such as Walgreens, CVS, and Walmart. Amazon will acquire cash-pay customers and mail-order clients and then move into the retail pharmacy and pharmacy benefits manager business.
