Potential CVS-Aetna merger: Top 6 industry implications

If a CVS-Aetna merger does happen, here are the top 6 industry implications:

1.     The way could be paved for other new healthcare models.

Hinde

“Payers should pay close attention to the integration of pharmacy, retail, care management, and patient care that could be possible under a combined company,” says Will Hinde, managing director of West Monroe Partners' Healthcare & Life Sciences consulting firm. “There will be significant lessons learned from the patient experience and data analytics perspectives. While being early to a merger like this could bode well for CVS-Aetna, it could also give other payers the roadmap they need to explore similar mergers, or scope similar partnerships without the full-scale merging of two companies. With companies like Amazon and Walmart investing in healthcare, it certainly gets everyone thinking about what is possible.”

Jay Wolfson, DrPH, JD, distinguished service professor, Public Health, Medicine and Pharmacy, and senior associate dean, Morsani College of Medicine, University of South Florida Health,  agrees. “Walgreens and Rite Aid may become merger/acquisition targets for other financial services entities, and Walmart is a natural vehicle for growing a direct consumer health service model,” he says. “Chain grocery stores with pharmacies may have to decide where their healthcare futures reside, or may become targets for a niched acquisition of their pharmacy business.”

Wolfson

“It is likely that other marriages will be sought-and they may be initiated by either side,” Wolfson adds. “Walmart has a dynamic financial and consumer access advantage if it wants to play more in healthcare than it does. It could become an even more expansive community services resource-food, pharmacy, tires, and primary and ancillary services-all on-site, with the capacity to negotiate hospital and specialty clinical service contracts in their communities. Whether they would be keen on owning/managing inpatient, post-acute care or skilled care facilities is a different but related question for the evolution of the healthcare system.”

2.     Intermediaries, which were intended to be the impartial arbiters, now have the ability to control markets on the demand (i.e., formulary) and the supply (i.e., provider networks, their own providers).

John

“While this has been a concern with the PBM industry for years, it is significantly exacerbated when the overall medical carrier is also the PBM,” says Pramod John, CEO, VIVIO Health, a specialty drug management company. “Economically, why this is more significant is that unlike medical provider systems which have geographic diversity, making it difficult if not impossible to consolidate them, pharmacy chains have little diversity and are already organized into national chains, such as CVS Health, making it possible to buy and require the usage of their own chain, thereby controlling both what product is purchased, the price, and the supplier.”

John believes that now this can be pushed a step further from self-administered drugs (pharmacy) to professionally administered drugs (medical), considering that Aetna is the plan and Coram (an infusion service provided by CVS Health), “can now be positioned as the exclusive provider, and specialty drugs are the fastest growing and highest margin piece of the drug supply chain,” he says.

3.     These complex mergers are new categories-neither payer nor provider-for which existing laws are insufficient to regulate.

“It is almost impossible for a buyer to understand what they are buying, and in contracting, who is selling what,” John says. “Every deal now is a complex web of contracts, intermediaries, and providers. It is becoming harder and harder to understand the economics of what services are being purchased and how that compares to other alternatives, especially on the ‘vertically integrated bundles’ that are becoming the norm. One could make a strong argument that antikickback statutes, such as the Stark Law, should apply even more to these new entities that are being created and that without that, purchasers are completely in the dark and vulnerable to exploitation and abuse.” 

Delaney

If the merger is approved, the likelihood of PBM and pharmacy chains merging with other national insurers will increase in order to match the scale of a combined CVS Health and Aetna, says Dan Delaney, managing director at HealthScape Advisors, a healthcare management consulting and analytics firm based in Chicago. “If this merger were approved, we would likely see another wave of consolidation activity, particularly with the looming threat of Amazon to the pharmacy business,” he says.

4.     Big data analytics technology will be front and center.

“Big data will become even more important for private and government plans to more effectively coordinate and manage internally owned means of production,” Wolfson says.

5.     There will be increased negotiating power on large market drugs and fewer mouths to feed in the value chain. 

“Specialty higher priced drugs will likely not be too affected by the merger, but certainly larger market drugs (e.g., diabetes, cardiovascular) are going to have potentially big players pushing hard on price and value to patients to drive share, especially given the history here for these companies,” says Herman Sanchez, managing partner at Trinity Partners, a global life sciences consulting firm. “I wouldn’t be surprised to see Walmart step in and continue this trend. This downward pressure and the fact that a player has been extracted from the value chain will likely mean lower prices.”

6.     Patients might win-or lose.

Sanchez

“The merger likely would lower prices and improve access, which is beneficial for both the pharmaceutical industry and patients,” Sanchez says.  

John shares a similar viewpoint. CVS Health has contracts with large Blue Cross and Blue Shield plans that tend to have the largest market share in many states, allowing them to get a piece of the pie by acquiring the minority carriers, he says. “When considering the Blues and their dominant market position, it could be argued that CVS Health and Aetna, in fact, is a good thing and could potentially help reduce that dominance,” John says.  

It may allow employers and consumers to better align their healthcare benefits and pharmacy benefits, according to Bruce Carver, associate vice president of payer services, MedeAnalytics, a healthcare analytics provider. For example, allowing pharmacy benefits to incentivize people with chronic conditions such as diabetes and high blood pressure to fill and adhere to their medication, would help avoid future hospital admissions.

Carver

“An integrated insurer would be able to establish such incentives,” Carver says.

Also on the positive side, the combined CVS Health and Aetna entity would create “a strengthened national organization offering a full spectrum of services across insurance, pharmacy, urgent care, and other holistic services,” says Delaney. “However, it’s unclear whether the unit cost economies generated from the increase in scale and service offerings will translate to price breaks for the consumer or additional profit for the enterprise.”

PBMs historically have been viewed as the drug purchasing middlemen, established to negotiate lower prices that health payers did not have the resources or time to negotiate. “However, it has been questioned if the savings gained are being passed on to employers or consumers,” says Carver. “As a result, the market is demanding more pricing transparency. When people see PBMs report a lot of profit, they believe this to be a root cause of increased drug prices. These new integrated models will have greater capability in providing that transparency. Managed care executives should watch this M&A activity very closely. Where things get complicated is in Anthem’s initiative of forming a new PBM, IngenioRx. For CVS to operate a PBM with Anthem, while owning Aetna, will be a topic of much debate in the coming months."