If completed, the deal would be the largest merger in U.S. healthcare industry history.In what could be the largest merger ever completed in the U.S. healthcare industry, CVS Health Corp. has reportedly offered to acquire Aetna Health Inc. for $66 billion. Since reports of the proposed merger emerged in late October, neither company has commented on it. The Wall Street Journal reported CVS’s market value at $75 billion, while Aetna’s is close to $60 billion.
If finalized, the deal would combine the nation’s third-largest health insurer with CVS’s extensive network of drugstores and clinics in addition to its sizable pharmacy benefit management (PBM) business, which includes a Medicare Part D plan for older individuals.
Both companies have actively sought to purchase competitors in recent years. CVS expanded its PBM operations with its $27.2-billion acquisition of drug benefit manager Caremark Rx in 2007. More recently, it bought nursing home pharmacy operator Omnicare Inc. for $12.9 billion in 2015. Just before news of the negotiations with CVS broke, Aetna announced its agreement to sell its group life and disability units to The Hartford for $1.45 billion in cash. The health insurer previously failed to acquire Humana after the Justice Department scuttled a tentative deal over concerns that it violated antitrust law.
PBM Business at Crux of Deal
A CVS-Aetna merger would mirror similar deals involving a health insurer with an established PBM. Aetna rivals UnitedHealth Group Inc. and Humana both operate pharmacy benefits in-house, and Anthem Inc. recently decided to switch from Express Scripts, a large independent PBM, to CVS as it seeks to install its own PBM. As Leerink analyst Ana Gupta told Reuters, that move could be in jeopardy if the CVS-Aetna deal is completed.
Medical and pharmacy benefits have traditionally been separate, but linking those two services could significantly lower drug prices by giving the combined insurer and PBM data on expensive medications, Pratap Khedkar, Managing Principal at consulting firm ZS Associates, told Bloomberg. As a result, insurers could quickly determine whether they’re worth the cost.
Insurers could also gain more leverage with drug companies in negotiating drug prices and out-of-pocket costs by uniting medical and pharmacy benefits. In the previous model, insurers let PBMs haggle over drug prices with pharmaceutical manufacturers, with both the insurer and the PBM sharing in any discount. In contrast, a combined insurer-PBM would control “the entire chain, from prescribing and filling prescriptions to the health plans that pay for them,” Rx Savings Solutions CEO Michael Rea explained to Bloomberg.
Despite these benefits, BMO Capital Markets analyst Matt Borsch held off on declaring the merged PBM-insurer model a winner, though he did concede that it might result in lower drug prices. “More consolidation could lead to pressure on some of the brand-name drug prices and a better counterweight to the big pharma companies,” he told Reuters.
Agents, Brokers Have a Role
CVS may have sought a merger with Aetna as a way to thwart Amazon as it expands into the retail pharmacy business, Charles Rhyee, an analyst at Cowen & Co., speculated. As ThinkAdvisor argues, however, these macro changes in the health insurance marketplace affect agents and brokers, as well.
As major insurers shift away from the traditional commercial health insurance market, agents and brokers have an opportunity to provide the small-group sector with niche products such as critical care coverage, hospital indemnity insurance, and telemedicine services packages. They can also steer business clients to smaller, lesser-known health insurers.
Although health insurer PBMs tout their ability to negotiate lower drug prices, agents and brokers have a responsibility to ensure that discounts are credited to employer health plans rather than the insurer. Agents and brokers can use their expertise to monitor the PBMs for clients.