The largest healthcare M&A transaction of the year — CVS Health's bid to buy Aetna for $69 billion — is the kind of deal that can upend an industry. At the very least, it will make plenty of waves.
What kind of waves, however, remains to be seen. The deal reflects a number of industry trends that could be amplified as a result. Or some more nascent themes could gain traction as this deal and potential others like it play out.
Regardless, the questions to consider are myriad. Here, we examine a few of the biggest ones.
Will the deal survive antitrust reviews?
One of the biggest and probably the most immediate hurdle for CVS and Aetna is convincing regulators their merger would not violate antitrust laws.
There’s no question the company this deal creates is a behemoth in the industry. It will have $245 billion in combined revenue and about $19 billion in combined EBITDA, according to Moody’s, which notes the new organization will have “unsurpassed scale and reach in the industry and the potential to reshape the entire health plan market.”
CVS has 9,700 retail pharmacy locations and 1,100 walk-in clinics. Aetna is the country’s third largest health insurer by covered lives with 22 million customers. The market power a combined CVS and Aetna would have is considerable, and potentially dangerous.
While it is very likely the federal government will scrutinize the deal on antitrust concerns, it is not clear whether the reviewing agency would be the U.S. Department of Justice, which blocked the Aetna-Humana and Anthem-Cigna mergers, or the Federal Trade Commission, which would normally handle retail mergers. FTC allowed Walgreens Boots Alliance Inc. to buy nearly 2,000 Rite Aid stores earlier this year but not until deal was ratcheted down considerably.
Vertical mergers like CVS and Aetna are generally viewed more favorably by regulators, but the new Assistant Attorney General for the Antitrust Division, Makan Delrahim, did recently decide to challenge AT&T’s acquisition of Time Warner, which is also a vertical integration. (Interestingly, Delrahim was previously a lobbyist for Anthem.)
If the deal is approved, it could include certain restrictions or organizational changes. For example, Aetna could be barred from explicitly steering patients toward CVS pharmacies.
The companies have announced leadership adjustments that could come into play as the deal is examined. When the transaction is closed, three of Aetna's directors, including CEO Mark Bertolini, will be added to the CVS board of directors. Aetna will operate as a stand-alone business with its current management team and members of that team "will play significant roles in the newly combined company," according to a press release.
The deal is risky in some ways for CVS, as it is credit negative for the chain and will “weaken the company’s metrics due to the large increase in debt to finance the acquisition,” according to Moody’s. The investor service also said the transaction, as the first of its kind, has “significant execution and integration risks.”
Would the combined company really be able to lower costs?
Related to the question of whether the combined CVS-Aetna company would have too much market power is the question of whether the merger leverage could result in lower healthcare costs as the companies claim.
Theoretically, the vertical integration would lead to efficiencies that drive down costs. It’s far more complicated in practice, however. Maulik Bhagat, managing director in the healthcare practice of global consultancy AArete, told Healthcare Dive savings could be realized if the merger is properly executed, but there are also risks.
“A merger of this size not done right operationally could have a negative impact,” he said. “For example, a key to deriving synergies from such a merger is effective data integration and possibilities from resultant advanced data analytics – but that is easier said than done.”
Moody’s Vice President Micky Chadha said the deal “will mark an industry shift towards a more seamless approach to managing healthcare costs as it brings together the overall management of a patient’s medical bills and prescription drugs under one umbrella.” He also noted the area most likely to see a cost benefit from the deal would be patients with chronic illnesses and a need for specialty drugs as well as highly-coordinated care.
Analysts from Fitch Ratings agreed. “Vertically integrated entities are better positioned to manage care and patient outcomes while controlling costs,” they noted.
Another player that could have a role in efforts from CVS-Aetna to lower costs is Epic. CVS and Epic recently announced an initiative they hope will allow providers to consider cheaper drug alternatives with real-time benefit information and point-of-prescribing electronic prior authorization. Surescripts has also joined a partnership with the aim.
How might this deal change care settings?
While federal regulators will no doubt comb through the deal, a care setting under a merged Aetna-CVS Health could give customers a streamlined experience, equating to a newfound consumerism principle that’s said to be sweeping the industry.
CVS pharmacies and retail clinics would gain information and access to Aetna’s customers. Insurers have been pushing patients into lower-cost settings and out of hospitals when appropriate to help contain costs. A combined Aetna-CVS Health, using the CVS MinuteClinics, could provide a built-in symbiotic relationship with the insurer pressing for preventative care in low-cost settings. This is a goal both companies highlighted in their joint statement: “This transaction fills an unmet need in the current healthcare system and presents a unique opportunity to redefine access to high-quality care in lower cost, local settings whether in the community, at home, or through digital tools.”
The two companies say pharmacy locations will include space for wellness, vision, hearing, nutrition and medical equipment. The benefits and changes will span years to take shape so how the deal would actualize is yet to be seen. Health IT will be a key strategy for care coordination and remote patient monitoring. But assuming the deal goes through and the strategy works, the outpatient landscape could turn on its head.
Companies like Forward, having recently expanded into Los Angeles, and One Medical — both focusing on primary care clinics in metropolitan areas — are attractive to consumers as they offer convenient care access enabled by technology. Insurer Oscar also opened a primary care clinic in Brooklyn and partnered with Cleveland Clinic, which matches enrollees to a Cleveland Clinic care team and Oscar concierge team. These efforts point to the decentralization of healthcare spurred by younger companies.
The combined company could lead the way toward a more holistic view of healthcare, but only if it is constantly pushing toward exploring the possibilities of advanced data analytics, Bhagat said.
“The ability to view a member’s wellness and care needs across medical and pharmacy areas, and also provide distributed and convenient access to the member to essential elements of care, particularly preventative, diagnostic and E&M, can be extremely empowering and effective if done right,” he said.
Competition in the outpatient setting could be threatened and how care settings will continue to evolve through dealmaking will be a trend to watch, federal approval or no.
What does this merger show about current payer trends?
The deal reflects a trend among payers of expanding their footprint in the industry by partnering with providers and social services to improve population health. Aetna CEO Mark Bertolini is a big believer in lowering healthcare costs by affecting social determinants of health. At the recent Healthcare of Tomorrow conference, Bertolini said payers should be expanding their benefits to potentially include paying for transportation or ensuring members have a roof over their head and enough to eat.
Part of the impetus for payers moving into other sectors in the healthcare space is the increased control a payer can get over where a patient gets services and what those services are.
Bhagat said payers aren't looking for deals as much as they are looking for horizontal or vertical integration.
“Depending on who the entity is, the reasons could be different, but largely range from a typical defensive strategy, to decrease the odds of being acquired themselves, to increasing competitive entry barriers for potentially disruptive payers such as Amazon, to establishing more control over delivery of care and outcomes for captive membership, etc.,” he said.
This deal has particular repercussions for the PBM market. Moody’s analysts said the merger would create a PBM that would disadvantage others by its sheer scale and strength. CVS is already a strong player in the market and by combining with the major insurer it would gain more ability to integrate services and drive efficiencies. The future for PBMs is likely to be more of a carve-out model that is separate from medical benefits, according to Moody’s.
Jeff Byers contributed to this post.