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CVS-Aetna Merger Will Be Largest in History — But Will Feds Allow It?

by Precise Leads

December 4, 2017

CVS and Aetna look to form the largest company in American healthcare, but the deal must overcome antitrust concerns to gain federal approval.

CVS Health Corp.’s rumored takeover of Aetna became a reality when the two firms announced a $67.5-billion merger on December 3rd. Under the agreement, CVS will acquire all of Aetna’s shares for $207 a piece, with $145 of that amount coming in cash and the remainder in stock. CVS has also agreed to take on Aetna’s debt, raising the total value of the deal to $78 billion.

Scheduled for completion by the end of next year, the deal would combine two major players in the healthcare industry, resulting in the largest merger in the history of American healthcare. With annual revenues of $178 billion, CVS operates roughly 10,000 pharmacies across the United States, in addition to its pharmacy benefits management arm. The nation’s third largest health insurer, Aetna counts $63 billion in annual revenues from the insurance it provides to 22.2 million members participating in its employer, Medicare, Medicaid, and other plans.

If approved, the combined entity would generate $240 billion in annual sales from insurance, prescription drug plan administration, retail pharmacies, and clinics, giving it a powerful barrier against the expected entry of Amazon into retail drug delivery. The companies estimate that cost savings, or “synergies,” could reach $750 million, with profits rising to low or middle single digits in the second full year following the merger.

One-Stop Healthcare Shop

CVS CEO Larry J. Merlo implied in an interview with the New York Times that the merger would transform CVS pharmacies and walk-in clinics into one-stop-shops for healthcare in a community setting. In addition to treating minor illnesses, CVS clinics would be run by nurses and other healthcare professionals who could help individuals manage chronic conditions such as diabetes in addition to performing diagnostic tests.

CVS has no immediate plans to staff the clinics with physicians, although Merlo told the Wall Street Journal that it could do so in the future. If it did, CVS would follow a blueprint now employed by the country’s largest healthcare insurer, UnitedHealth Group, which operates doctor clinics, an outpatient surgery chain, and a pharmacy-benefits management division.

Combining CVS’s retail network and Aetna’s insurance expertise will enable the two companies to “meet an unmet need in terms of improving access and reducing cost and helping people achieve their best health,” Merlo said.

ThinkAdvisor noted that the merger’s impact on insurance agents has yet to be determined, since the initial announcement failed to mention agents or brokers, but the medical hubs created by a CVS/Aetna partnership could include “navigators” similar to those that work within the Affordable Care Act’s public exchanges.

A Wells Fargo analysis also suggested that the merger might pave the way for a new health insurance distribution model. The report stated that “CVS retail locations would allow it to market Aetna health insurance plans to individuals, small businesses, Part D, Medicare and Advantage [users], and Medicaid [users].”

Antitrust Questions

Before the deal can be finalized, it must pass muster with the Justice Department, which has already blocked a proposed merger between Aetna and Humana over concerns surrounding competition. The possible merger of CVS and Aetna has raised issues over whether Aetna plan members will be allowed to fill prescriptions or receive care only at CVS locations.

A deal between CVS and Aetna could be categorized as a “vertical” integration in that each company currently operates in separate segments, so that the merger would essentially complement and expand each company’s business lines. In the past, the Justice Department has viewed vertical mergers more favorably because such deals do not create a mega-company in one category. However, the Justice Department recently sought to thwart a proposed vertical merger between AT&T and Time Warner, Inc., perhaps signaling it would be less inclined to approve the CVS-Aetna deal.

Alternatively, the transaction could be allowed by the Federal Trade Commission (FTC), which typically reviews retail mergers. Earlier this year, it approved Walgreens Boots Alliance Inc.’s similar acquisition of more than 1,900 Rite Aid Corp. stores. Securing approval from the FTC may hinge on Aetna divesting from all or part of its Medicare business, since both CVS and the insurer are major players in Medicare prescription drug benefit plans.

Aetna CEO Mark Bertolini told Bloomberg both companies will work with regulators to get the merger across the finish line. “We are obviously going to get some scrutiny,” he said. “We are prepared to deal with whatever comes along to make this work.”

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