CVS-Aetna Deal Driven By Competitive Threats In Health Care

With a blockbuster deal between the corporate giants looming, the pairing of health insurer Aetna Inc. and pharmacy giant CVS may, at first, seem unlikely, but it is dramatic evidence that both companies see competitive threats on multiple fronts in the health care industry.

Online behemoth Amazon is pushing to get into the pharmacy business. A formidable competitor, UnitedHealth Group, the nation’s largest health insurer, already has a well-established pharmacy benefits business. And health insurer Anthem is starting a pharmacy benefits unit of its own.

“It sounds like a defensive merger however you look at it,” said Ben Gomes-Casseres, a professor of strategy at the Brandeis University International Business School in Waltham, Mass. “Either defensive against the threat of Amazon, which we really don’t know that much about and whether that’s even going to be real. And then there’s not so much the threat but the power of combinations in the health care industry.”

CVS Health Corp. could announce a $66 billion acquisition of Hartford-based Aetna as soon as Monday in what could be one of the biggest health care mergers ever.

Industry experts say an Aetna merged into CVS would give the partners an ace that UnitedHealth and others don’t have: a massive, coast-to-coast chain of stores, including 9,700 retail locations plus another 1,600 in Target stores. In Connecticut, CVS has 135 retail locations and 20 in Targets, according to CVS Health’s website.

For CVS, the deal pushes the Woonsocket, R.I.-based company beyond its pharmacy store roots and into managing care. For Aetna, the merger helps the 164-year-old company move beyond managing data and administrating into the sale of products and services.

CVS clearly is seeing the competitive pressure from UnitedHealth, experts said.

UnitedHealth’s Optum unit fills more than 100 million prescriptions per month as a pharmacy benefits manager, poaching big customers from CVS and another manager, Express Scripts, according to Kaiser Health News.

“What they are trying to do — CVS and Aetna — is merge these two pieces … which is something UnitedHealth has in pocket already, and on the other hand, others like Anthem and Express Scripts don’t have,” said Gomes-Casseres, author of “Remix Strategy: The Three Laws of Business Combinations.”

David Souder, associate dean for graduate programs at University of Connecticut School of Business, said it is clear Aetna sees an evolving health care landscape and wants to remain a player in it.

Aetna was thwarted in its efforts to acquire rival insurer Humana because it would have given Aetna a too-large share of the market. The CVS deal is different because the combination would bring two different parts of the health care industry — insurance and pharmacy — under one corporate umbrella.

“The idea that the health care system in the United States is going to stay the same for the next 20 years is easy to reject,” said Souder, who has published papers on mergers and acquisitions. “But it makes sense for a company to try and create positive change rather than sitting back and waiting for change to happen to them.”

A pharmacy benefits manager processes prescriptions for those who pay for drugs, typically insurance companies or companies, and leverages their size in negotiations with drug companies and pharmacies.

They also act as a “middleman” between insurers like Aetna and those who use prescription drugs: consumers, hospitals and doctor offices.

IAetna would bring to a merger 38 million medical and dental members.

“You’d have the CVS pharmacy fill it, Aetna acts as the payor and now CVS owns that as well,” Michael Rea, chief executive of Rx Savings Solutions, a company that helps consumers find the best deals on medications. “They own all the steps of the prescription chain.”

Suzanne McGarey, managing principal at employee benefits consultant Ascende in Houston, said Aetna has the membership seeking health care services and CVS has the products and supplies.

“Aetna understands its members are more and more in charge of their health care dollars and where they spend them,” McGarey said. “Owning the stores, this creates an avenue that CVS-Aetna can drive members to purchase health care supplies, where they spend those dollars.”

Aetna members probably would get better discounts when going to a CVS, McGarey said.

CVS also operates 1,100 walk-in, “minute clinics” — including 26 in Connecticut — that treat minor illnesses and injuries, administer vaccinations and injections and perform screenings. There is a fee for each service.

Ana Gupte, senior health care services analyst at Leerink Partners in Boston, said, in a note to investors last week, the vision is to reconfigure the stores to provide even more medical services.

“The longer-term promise is to repurpose the real estate of CVS pharmacies and stores into primary and urgent care clinics,” Gupte said.

A merger also would bring together vast warehouses of data to better identify trends to help consumers live healthier lives and keep costs to the combined company down.

“The more they can see what a consumer is doing — and not doing — the more they can provide assistance to managing their health,” McGarey said.

How regulators will view such a massive deal, arguably the largest of its kind — uniting different parts of the same industry in a so-called “vertical merger” — is still uncertain.

Last month, the U.S. Justice Department sued to block the merger of AT&T and Time Warner, a deal that would give the combined company unprecedented capability to reach consumers through news and entertainment programs.

The Justice Department is arguing that it would harm consumers and weaken competition.

The department approved the merger of Comcast and NBCUniversal, but with numerous conditions.

“Now, whether they just wave it through or whether it will be a pitched court battle, we just don’t know,” Gomes-Casseres said. “Or whether there will be certain negotiations that they might be able to modify the deal and pass it.”

The other open question is how much the consumer would benefit from a larger company that would have the heft to negotiate with drug makers for lower prices

“When they do a merger like this, it’s clear that in a way their shareholders benefit,” Gomes-Casseres said. “There is a business benefit in terms of profits. Whether these profits then get passed on to consumers — we don’t know that — or whether there will be new services created based on the new cash flow that are benefiting consumers. We don’t know that either.”

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