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CVS to acquire Aetna

The complexity of a Pharmacy Benefit Manager (PBM)’s business and that of a health insurer’s business cannot be captured in a handful of paragraphs of a blog. Nevertheless, based on their origins, the PBM business model facilitates the delivery of all possible formularies to millions of members of the health insurance plans, and the health insurance plan, while taking some financial risk, connects all its millions of members with the right healthcare provider in the right setting at the right time. They both play the role of fiscal intermediaries amongst transacting parties. They do not make or build any tangible component of healthcare, they provided a service for a fee.

Over time with the speed and scale enabled by information technology, the PBMs and the health insurers have become some of the largest aggregators of demand for prescription drugs and healthcare. This has given them increasing market power to negotiate with the supply side i.e. the producers (pharmaceutical and med tech companies) and the healthcare providers (health systems, physician practices, laboratories, ambulatory surgical centers etc.) At the same time they (PBMs and health insurers) have increasingly demonstrated the successful transformation of data from every day “claims” transactions into information and knowledge that is an extremely powerful asset to enable all kinds of research, development and innovation. The PBMs and health insurers have also acquired and continue to acquire adjacent capabilities such as walk-in clinics, urgent care centers even physician practices.

The scope of this blog is not to discuss whether the proposed acquisition of Aetna by CVS should be approved or not. Given that there is precedence of a health insurer acquiring a PBM (United Healthcare’s acquisition of Catamaran in March 2015) and a number of health insurers already owning PBM capabilities in house (CIGNA, Kaiser), and that health insurers have acquired physician practices (United Healthcare) or operate medical groups, the move should come as no surprise. The cynics of consolidations may continue to see this as yet another move by large corporations to gain market power and control over the consumer. This may not be the best thing for consumers nor will it address the real cost problem, but it will not be as doom and gloom either. 

Individually both the firms bring a very broad spectrum of assets and capabilities.

  • Aetna brings with it a powerful infrastructure, 44.6million member lives, footprint in the employer, Medicaid, voluntary benefits, worker’s comp segments, strong member service culture
  • CVS brings a large community footprint with 9,700 pharmacy locations and 1,100 Minute clinics, senior pharmacy solutions and businesses, 4,000 nursing professionals, and 90 million plan members

The promise of the merger includes

  • Combining local presence, comprehensive benefits with robust back end infrastructure and modern day technologies (such as IoT, Digital, AI, 3D, Mobile and others) to provision a transformative healthcare delivery model for the end consumers.
  • Integration of care, empowering individuals and healthcare professional with information
  • Create value for the shareholders

Assuming the merger is not blocked, there could be one of three scenarios:

Best case scenario- everything goes as planned

  • Operating models integrate smoothly – local presence (Minute clinics and retail pharmacies) provide the access to communities, coordinated medical and medication management delivers the promise of integrated pathways, modern day technologies are applied to empower an informed decision maker that may be an individual, their family or the professional care giver. A better healthcare delivery model emerges.
  • Savings from cost synergies are achieved, earnings per share goals are achieved, and shareholder value is created. Hopefully some of these savings are also passed on to the consumers in form of lower prices and some are reinvested to create additional value.
  • Market power of the combined entity increases and it is able to negotiate better rates with the producers and care providers. Hopefully some of these savings are also passed on to the consumers in form of lower prices and some are reinvested to create additional value.

This would be a huge success, the promise of the merger would be delivered - it would be beneficial to the consumer and we may witness a new era of healthcare transformation.  

Worst case scenario – nothing goes as planned

  • Organization cultures are so disparate that nothing is integrated, they continue to operate as separate companies. The merged entity could end up adding cost of incremental administrative and coordination layers. Services are impacted and cost quality and experience deteriorates.
  • Savings from cost synergies are not realized, shareholder value is destroyed.
  • Market power is elusive and does not translate into better pricing, competition moves aggressively, supply side holds on to market power.

This would be an absolute disaster and the value created by the legacy companies would have been destroyed, consumers will ultimately be hurt and society may pay a bigger price than what we imagine. Neither the Aetna nor the CVS leadership want this and will do everything in their power to prevent this from happening.

Most likely scenario – some things go as planned and others don’t

  • A different model of care delivery emerges, the jury is still out on whether it would be better or worse for the consumer in terms of cost, quality and experience. We may see some aspects of each area improve, some remain unchanged and others may even worsen.
  • Savings from cost synergies not fully realized. These are typically over estimated in financial projections (anyways), the reality depends on underlying technology, operating policies and procedures, market campaigns, strength of the customer-supply-chain relationships. Neither consumers nor shareholders may realize the value.
  • The combined entity makes some gains in market power and is able to negotiate better pricing but consumers do not see the benefit of lower rates as the savings may be redirected towards other goals.

This scenario could be a catalyst to accelerate other competitive moves from Express Scripts, Anthem, CIGNA, United Healthcare and others.

It is anybody’s guess how this could go. In general consolidation and creation of larger entities has its benefits and challenges for the key stakeholders -end consumers, the employees and supply-chain partners. Ultimately, the success or failure will all depend on the leadership, the organization cultures, and the willingness to plough through integration challenges. Post-merger integrations are beastly projects by themselves and require humongous amounts of perseverance, grit and resolve to deliver the promise of creating new value. The potential and the opportunity exists with this transaction.

As I have always maintained, there is no “one size that fits all” solution to our healthcare problems. I remain hopeful and optimistic that the entrepreneurial spirit of our nation has yet to see a FAANG of healthcare emerge! This is definitely not it.

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Posted By Anita Ballaney

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