The CVS-Aetna Combination: What’s it Really Mean?

New York Times’ healthcare journalist Reed Abelson contacted me Thursday about the proposed acquisition of Aetna by CVS. She asked if I was surprised: I replied no. Big deals in healthcare aren’t surprising anymore, especially when they involve mega-companies in complementary sectors of our industry.

Since that conversation, I found myself pondering if this is just another big deal or something different. After all, both companies compete in sectors accustomed to consolidation. This one is unique: it combines market leading companies in three sectors—health insurance (Aetna), retail health (CVS) and pharmacy benefits management (Caremark). It will result in a company with a combined market capitalization of $128 billion--—substantially below UnitedHealth’s $205 billion capitalization but substantially bigger than prominent investor-owned sector leaders like Hospital Corporation of America ($27 billion) and others. But could this deal be more than just another horizontal integration play?

Here’s what we know about their proposed deal: Per Thursday’s news release, CVS offered more than $200/share for Aetna which was trading around $175/share prior to the announcement. That put the price-tag for the acquisition at $66 billion. Aetna shares closed the week up 11% and CVS shares were down 3%--fairly predictable for deals of this size.

CVS CEO Larry Merlo and Aetna CEO Mark Bertolini had been in discussions for months after Aetna’s acquisition of Humana was suspended last February. Their organizations knew each other: since 2010, CVS had provided pharmacy benefits management (PBM) services to Aetna under a 12-year contract with Caremark. On October 18, Aetna competitor Anthem announced it planned to offer its own PBM service, IngenioRx, starting in 2020 with help from CVS via a five-year agreement. And the competitive climate for both companies was fluid: Walgreen’s planned acquisition of Rite Aid appeared uncertain, Amazon’s entry in healthcare was anticipated and uncertainty about the fate of the repeal and replace was a consideration. So, against this backdrop, the two leaders convinced their boards that a combination now makes sense.

Each company brings unique experience and assets:

  • CVS calls itself an “integrated pharmacy healthcare company.” It operates 9709 retail sites; Caremark, the third largest pharmacy benefits management serving 75 million members, 1100 Minute Clinics in 33 states that supported 28 million visits last year, 35 specialty pharmacies, and a variety of consulting programs. The Woonsocket RI based company employs 158,000, serves 5 million consumers daily, fills 1.9 billion prescriptions annually and had revenues of $177 billion last year. CVS stores now feature enhanced fresh food offerings, chemical-free cosmetics and other “better for you” wellness options. And since 2014, tobacco products have not been sold in its stores.
  • Aetna is the third largest insurer in the U.S. with 46.7 million enrollees. It is widely known in the industry for its advanced analytics and joint venture health plans with prominent health systems like Texas Health, Inova Health System and others. Headquartered in Hartford CT, it employs 49,500, achieved $63.2 billion in revenues in 2016 and has contracts with 664,301 physicians and 5,667 in its networks.

It’s impossible to know if this deal will go through. Their boards, advisors and investors will be buried in their due diligence in coming weeks while regulators weigh in on the antitrust and regulatory approvals needed. Skeptics think the deal might not happen due to its complexity. (“Why CVS won’t Buy Aetna” Forbes October 27, 2017). Others think it might, since United Healthgroup’s Optum Rx PBM has figured prominently in the drug supply chain without facing regulatory constraints. It’s anyone’s guess what will happen.

Is this just another big deal in healthcare or does it signal a shift in our industry landscape? I think the latter. Here’s why:

The health and wellness market is attractive to consumers and insurers. The healthy-living industry is fragmented and maturing. It’s been funded primarily through employer sponsored wellness programs and discretionary spending by consumers; both are increasing. Millennials, Gen Y and Gen X are showing interest in healthiness and spending their money in its pursuit. And among seniors, wellness and fitness is a growth market that programs like Tivity Health’s Silver Sneakers are successfully providing. Wellness and healthy living is a core competence for both CVS and Aetna. In CVS, it’s about healthy food, primary care, chemical-free cosmetics, self-care remedies and medication management. In Aetna, it’s been about management of chronic conditions among their enrollees and customized insurance programs that incent healthy behaviors. Combined, the synergies of two will be leveraged to maximize their impact as the market for healthiness expands.

CVS and Aetna have invested capital where the puck is going. The competencies and assets of the combined organizations coupled with their scale mean they are in a favorable position to deliver cost-effective healthiness and population health services to employers, government health plans, and government payers like Veterans, Medicaid enrollees and others. Potentially, they can be the category killer for healthiness, combining their retail, digital and insurance skillsets to deliver products and services that reduce demand for more costly traditional health services accessed through providers. Their capital deployment strategy is not encumbered by obligations to fund hospital programs nor inhibited by the interests of specialists requiring support for their programs in hospitals. They are financially poised to channel their enrollees and retail customers to high value, narrow networks of providers with whom they contract. And their 1100 Minute Clinics will play a key role as the front door.

Consumers are ready for change. Let’s face it: our value proposition is in distress. Our system is focused on caring for the sick and injured; we’ve defaulted to others to manage healthiness. Our incentives are volume driven; our profits depend on specialty services and we’ve left consumers to fend for themselves in pursuit of healthiness. Most consumers, especially Millennials, Gen X and Y, think that’s a fundamental flaw. They believe our system is unnecessarily complicated, expensive and profitable. Our prices are not readily accessible. Our costs are hidden from scrutiny. Our outcomes are highly variable. Our service is poor. Our insurance premiums are unpredictable, costing more and covering less. They want simple answers to their complex problems. They want to be treated as individuals, not patronized as patients. And they want convenience and predictable costs. That’s why they’ve embraced retail clinics, micro-hospitals, alternative therapies and digital health. That’s why they are not threatened by the notion that Amazon’s Alexa might capably answer their questions about their treatment options and their costs. And that’s why they’re likely to accept CVS into the mainstream of their family’s health.

It will be months before this deal is consummated or alternately talks are suspended. Meanwhile, their boards will mull the due diligence from their investment bankers and their management teams will try to maintain normalcy in their core operations while answering customer and employee inquiries about what’s next.

In a narrow context, the CVS-Aetna combination might result in greater pressure on drug costs for those insured by Aetna but it could mean much more. The two companies share a commitment to health: they might usher in an alternative framework for health systems of the future wherein bricks are less important than clicks and healthiness is as important as sick care.

As hospitals and health systems transition from acute-centricity to integrated systems of health, it’s likely CVS, Amazon and others will be major competitors or strategic partners. The CVS-Aetna combination might mean it’s a new day for how we define competition in our industry and how we appropriate resources to healthiness.

Paul

P.S. Wednesday marks the start of the fifth enrollment period for the Healthcare marketplaces. Estimates are that more than 8 million will enroll, and half of these will be new to the exchanges. But the suspense about the CSR subsidies is no longer a factor: insurers have raised their silver plan premiums by 34% to fund the subsidies, so soon after December 15, we’ll know who enrolled, who dropped out and the long-term picture for Healthcare.gov