In Days, Aetna Pivots From Insurer To A Health Care Business

A whirlwind week for Aetna Inc. — shedding its disability and life insurance business and, three days later, reports of a buyout offer from CVS Health Corp. — point to a new future for the 160-year-old Hartford health insurer.

On Thursday, The Wall Street Journal, citing unnamed sources, reported that CVS was offering $200 a share, or about $66 billion, for Aetna that appeared to open up a new option for growth for the insurer. Earlier this year, Aetna’s acquisition of rival Humana, a deal the insurer pushed as “transformative,” was rebuffed by federal officials as stifling competition.

“Aetna management is dealing with its own growth challenges and needs to reinvent its business model with the likes of CVS,” Ana Gupte, an analyst at Leerink Research said, in a note to investors.

Both companies have declined to comment on the reports of the offer from Woonsocket, R.I-based CVS.

A potential merger with CVS, with roots in storefront pharmacies and now a pharmacy benefits manager, represents a new path in the changing health care industry. For Aetna, it could represent a giant step toward a rapidly transforming digital future where the insurer’s vast trove of data plays a critical role in personalized health.

“We know in health care the big problem is administrative costs and this is a way of getting at that,” said David Souder, associate dean for graduate programs at University of Connecticut School of Business.

Souder said bringing insurance and pharmacy under one corporate umbrella has the potential to cut costs between insurers and pharmacies. Uniting the two also could give the merged company more leverage to negotiate better prices with drug companies, he said.

Spencer Perlman of Veda Partners said that since being rebuffed by federal officials early this year in its attempt to buy Humana Inc. for $37 billion, Aetna has had fewer opportunities to grow.

“They had one strategy in mind when they bid for Humana,” he said. “When that was shut down, it limited their options,” he said.

Michael Rea, chief executive of Rx Savings Solutions, which provides prescription advice, said the combination of CVS and Aetna could provide patients with the entire range of services from a doctor’s prescriptions to filling the prescription and follow-up health care.

“It will make the landscape more competitive,” Rea said, noting it may force others in the industry to “up their game.”

Aetna’s shares closed at $173.12, up 8 percent since Wednesday, before the CVS story was reported, but still short of CVS’s $200 offer. One analyst said Aetna might not be a willing partner with CVS, even though the Journal reported the company chief executives have been meeting for six months.

“We have little doubt the potentially leaked deal terms are to push a reluctant [Aetna] toward a deal that might undervalue the company over the long-term,” Peter Costa, an analyst at Wells Fargo Securities, wrote in a note to investors.”

Nevertheless, Aetna CEO Mark T. Bertolini has been publicly talking about CVS for months. He told analysts in May the insurer is interested in realigning its pharmacy business, bringing it more in line with customers’ retail experiences.

Bertolini has often talked about strengthening Aetna’s relationship with CVS, including leveraging CVS store footage for health care services such a diagnostic testing, dialysis, vision care and other services, while the two could develop more home health care services.

Analysts at Cowen envision CVS pharmacies that could be split in half with the pharmacy desk in the middle. One side would contain the general merchandise and the other the health services, they wrote in a note to investors.

“In particular, we see the move into health care services as a natural defense against the potential threat of Amazon entering the retail pharmacy market,” the Cowen analysts wrote.

Amazon has obtained wholesale pharmacy licenses in at least a dozen states, including Connecticut, according to published reports.

Aetna announced Monday it would sell its U.S. group life and disability business to The Hartford. Observers said the move helps Aetna shed a business that was not part of its strategy to become a health care company.

Aetna announced in June it will move its headquarters to New York from Hartford, where it was founded in 1853.

Aetna said it is pursuing a digital transformation, shifting from its traditional role as a health insurer.

The transformation is aimed at “personalizing” health care and focusing on how to individually tailor a plan to keep a person healthy rather than just treating the illness or the disease. The plans, would be based, in part, on data that are gathered for people of a similar age, health background and other factors.

Aetna said it hopes to tap into “knowledge economy” workers in New York who will be crucial to its digital work.

The headquarters relocation is expected to have only a slight affect on jobs in Connecticut, where it now employs about 6,000, many in Hartford. However, it is unclear how a potential combination of Aetna and CVS might ripple through employment.

UConn’s Souder said he believes CVS would likely allow Aetna to operate as autonomous unit, given CVS has no expertise running an insurer.

“For it to work, CVS would have to leave Aetna alone,” Souder said.

David Cadden, professor emeritus at Quinnipiac University’s School of Business, said he doesn’t see a lot of overlap between the two companies. Even so, the expense of the merger could lead to some layoffs in a reorganization aimed at cutting costs.

“You can lay some people off and hopefully, management will come up with an organizational design that is more efficient than it was before,” Cadden said.

Joe Brennan, president and chief executive of the Connecticut Business & Industry Association, said the prospect of the merger and how it might affect the local economy raised familiar fears over jobs.

“Obviously, in this environment, there is always a concerns because we haven’t seen the growth in Connecticut that we’d like,” Brennan said.