CVS and Aetna are just the latest in a list of healthcare M&A activity that is on the deck for the industry. The changing tide of the industry is alarming to some groups of people who see a future of less competition and patient choice. That can be a significant “red flag” for regulators, though so far it does not seem to have derailed any of these acquisitions from moving steadily forward.
The mega-merger that was long rumored between Cigna and Express Scripts was approved on Monday by the Department of Justice. This deal is set to pave the way for the CVS – Aetna proposed merger valued at $69 billion. The reports out of the financial media outlets are that CVS and Aetna would have to divest some holdings to satisfy anti-trust regulations.
Cigna – Express Scripts consolidating creates a combination of a major health insurer with a Pharmacy Benefit Manager (PBM) which they contend will make an environment to decrease costs for the patient. However, some feel that it will have the reverse effect.
Some feel that this deal and the corresponding proposed combination of CVS-Aetna will limit patient choice and force consumers into formularies where they will be faced with having to pay more for prescription drugs in the future.
This activity all comes amid the backdrop of Amazon making a concerted and deliberate push into the healthcare space with their partnership with Berkshire Hathaway and JP Morgan Chase to attempt to reinvent employer provided healthcare provisions. In a subsequent transaction, Amazon purchased the burgeoning mail order prescription provider, PillPack, for $1 billion over the summer.
Furthermore, Amazon announced a joint venture with Xealth which provides the internet shopping giant with a foothold into the healthcare services delivery system. The rest of the industry took notice, and in response Aetna entered into negotiations with CVS, Cigna began talking about synergies with Express Scripts, and Walgreens made certain deals of their own with national insurance carriers on a regional basis such as United Healthcare and Blue Cross & Blue Shield.
In my prior work in the M&A space, I have covered the premise of horizontal and vertical mergers. The vertical merger is one where the two companies may be in the same general industry space, but not in direct competition with one another. A good example of this type of merger was the AT&T – Time Warner deal. They both have business holdings in telecommunications and in television specifically (AT&T owns DirecTV and Time Warner owns multiple cable TV outlets) but they were viewed by the government as vertical in nature.
The example of a horizontal merger would be when Walgreens attempted to consolidate and merge with Rite Aid. I covered that with a series of articles and eventually, the federal regulators struck down that merger because it was between two businesses directly competing in the same industry space: retail drug store. The merger was seen, if approved, to have the effect of limiting consumer choice and potentially increasing costs to the consumer. It would have limited consumer choice in drug stores and the consolidation could have closed locations that were once part of Rite Aid, forcing people in rural areas to travel further to get to a pharmacy.
The CVS – Aetna deal hinges on the sale of Medicare Part D related plans that would most certainly need to be sold off to pass the regulatory standards in place. Some consumers feel that the deal would unfairly limit the choice of pharmacies because if they hold Aetna employer-based benefit plans, they would be funneled to CVS to fill their prescriptions. This could also be seen as giving CVS “a captive” group of consumers.
The Cigna – Express Scripts deal should help them compete against the Amazon healthcare joint venture that will continue to shape the landscape of the industry in the future. The potential impact of all of this M&A activity on the consumer has yet to be determined. Please check with your healthcare provider to make sure that you are aware of any changes this may have on your individual prescription plan coverage.
(Some background information courtesy of Bloomberg News, The Wall Street Journal, CNBC, and Reuters)