Follow Up: CVS – Aetna Merger Could Be Challenged

In a follow up to earlier pieces on this topic, the mega-deal that merged CVS and Aetna in the healthcare sector totaling about $70 billion could be challenged in federal court. The federal judge, Richard Leon, on Monday indicated that he could stop the activity of both companies to join forces and keep them as separate entities while he weighs the consumer impact of the merger.

This is out of the ordinary as the merger has met approval through the Justice Department and the federal court proceeding is often a mere formality. It should also be noted that Judge Leon is the same court officer which presided over the controversial AT&T / Time Warner merger proceedings; that was a recent topic here on Frank’s Forum, because of the content sharing issues taking place in that industry.

It is not a coincidence that Judge Leon, who has received plenty of criticism for his handling of the AT&T/ Time Warner merger, is now considering putting the brakes on this CVS/Aetna planned consolidation. The conflict of interest issue can be raised very easily in the case of CVS/Aetna because of what each entity specializes in separately.

The merger of a major healthcare/retail pharmacy company with a major health insurance carrier presents plenty of ethical concerns that could mollify the public interest. The concern is that Aetna-insured patients, whether it is individual policies or employer-provided policy coverage will be forced to fill prescriptions for medication at CVS locations exclusively.

A related concern for the consumer is when their employer-provided coverage changes to Aetna from another carrier, which then could force them into an prescription arrangement with CVS after the individual has a long-term routine and trust with another pharmacy. A similar concern was raised during the discussions of the merger in some forums online regarding rural areas that will require the consumer to drive farther to a CVS location if they are insured through Aetna, and in areas of the U.S. where CVS does not have a large presence.

In fair balance, some proponents of the merger state that it will provide better care for less cost. The addition of Aetna to their ranks will help CVS gain leverage with PBMs for the negotiation of pricing on prescription medications, which I covered in an earlier related piece.

The federal court could make this situation both very interesting and very difficult for those involved at CVS and Aetna. Judge Leon used words like “less convinced” that the merger was not an anti-trust violation. That is a very bold statement on the record and certainly could be motivated by the flack that the judge received in the AT&T decision.

Americans have long been concerned by anti-trust or monopolies because they represent, at the core, a break from our national ideals of competition in the marketplace as well as limiting consumer choice. The American consumer favors both choice and competition to create favorable conditions for price and service. The limitation of either of these market forces is looked upon rather negatively in the court of public opinion.

Both CVS and Aetna have to be alarmed that they are potentially being painted with the monopoly brush, and that this deal could unravel in the eleventh hour, unhinged by a judge who is essentially trying to rectify a previous miscalculation with the AT&T decision, which looks more like a monopoly with each passing day.

The central question is whether or not the combination of CVS and Aetna is within the best interest of the consumer. It is starting to look like that answer may alter one of the largest healthcare mergers in American history.

(some background courtesy of Reuters, CBS Market Watch, and CNBC)

Healthcare Mergers: The Impact On Patients

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)

Gray Area: The CVS – Aetna Merger

The area of mergers and acquisitions is a key area of focus here on Frank’s Forum and that is what makes the CVS pursuit of purchasing and consolidating Aetna such significant news. The merger would be the largest transaction of 2017 (and we have had some tremendous M&A activity this year) and the largest health insurance merger in American history.

The price tag is astounding: under the terms of the current proposal CVS would obtain Aetna for $66 billion. The implications are of tremendous concern for several entities: health insurers, PBMs (Pharmacy Benefit Managers), other pharmacy retailers, drug companies, and most importantly: the consumer.

The potential combination of the second-largest retail drug chain and one of the largest health insurance providers in the nation is an alarming proposition. It has a feeling of a conflict of interest written all over it. The mainstream media and some other internet based news outlets have done an amazing job covering this emerging story and I encourage you to check out some of those related articles.

The thought process within some of the coverage in those outlets also corresponded with my first thoughts on this merger due to my understanding of the pharmaceutical network coverages through major insurance providers: higher costs for the consumer. This merger, should it clear all of the hurdles, would have tremendous implications on cost.

The consumer should have reservations because essentially this merger will translate to being given the following options: use a CVS location to fill your prescriptions for medications or use CVS mail order service for your prescriptions or end up paying a significant amount of additional money using a different option.

The retail brick and mortar locations of CVS are ubiquitous in certain areas of the country, but there will be some cases geographically where finding a CVS will be cumbersome for some consumers. That is a concern right off the top for the consumer.

The proposal clearly benefits CVS in providing them with a captive audience of consumers also has the ancillary benefit of fixing an issue most retailers are experiencing: reduced foot traffic in their stores.

Many retailers are dealing with reduced foot traffic due to a variety of factors, most notably the convenience of online shopping. This is a good segue to another driving force behind the CVS – Aetna proposed merger which is Amazon.

The online retail giant has been exploring for several weeks now whether to enter the prescription drug marketplace. Amazon has already been granted some preliminary licenses within this area, but I am not an expert on licensing requirements for prescription drug carriage across multiple states, for more information in that area I would suggest researching some of the great articles out there on the topic.

The industry experts insist that the hurdles for entry into the market are high for Amazon to attain. The ethical and procedural questions from a compliance standpoint will most certainly follow this new strategic direction for Amazon.

In addition, the recent legal changes to the policies regarding the dispensing of painkillers and opioid class narcotic drugs would be of particular scrutiny. The ramifications of Amazon carrying those types of products could potentially increase the rate of prescription drug addiction which the government is trying to curtail. Amazon has the two components needed to make this ultimately work: smart people and tons of money.

The convenience of filling your blood pressure medication from your Amazon Echo, your tablet, or your computer is enticing to some, and frightening to others. The “Amazon effect” has already impacted traditional retail channels, especially with their recent entry into the grocery channel with the purchase of Whole Foods, but where does it stop? Should Amazon be able to access prescription drug channels?

However, the case for a conflict of interest could also be made for CVS and Aetna. The merger of health insurance carriers and retail pharmacy chains also has been met with apprehension by some consumers as well. This type of arrangement essentially forces the consumer to use a particular pharmacy if they have insurance coverage from their job which is, in this case, through Aetna.

In fair balance, the other side of the argument would be made by those who have no problem with this merger by pointing out that many current arrangements are made between health insurance carriers, PBMs, and retail pharmacy chains. Some insurance carriers or their PBMs have relationships with Rite Aid, some with Walgreens, and some with CVS which create a “preferred provider” type of situation.

The implications for CVS to actually be the same company as Aetna run far deeper than just a strategic partnership. The potential for an approved bid for CVS to merge with Aetna, would have a domino effect on the retail drug business segment.

The nature of these situations and their impact on an industry segment would invariably begin the speculation of other similar potential mergers. Some examples could be Walgreens with United Health Group, Rite Aid with United or another smaller insurance carrier, and Jewel/Osco with Blue Cross Blue Shield.

The ramifications of a CVS merger with Aetna could change the way health insurance and prescription drug coverage is currently set up, it would have a dramatic impact on prescription formulary coverage, and result in potentially higher costs for the consumer.

The potential for Amazon to enter the prescription drug space is a whole other topic for debate on the potential for a wide range of potential ways that those products could be misallocated or abused.

The merger potential for the second largest retail pharmacy chains with one of the largest health insurance carriers compared to the largest online retailer getting involved in dispensing medications: in the words of the rock legend, Tom Petty, “I don’t know which one is worse”.

Follow Up: Aetna Merger With Humana Is Scuttled

The proposed $34 billion merger between two healthcare giants: Aetna and Humana, has been scrapped by the order of the court system over concerns related to higher prices and less competition in the marketplace. Both companies considered an appeal of the court decision, but announced on Wednesday that they were going to accept the decision and dismantle the merger proposal.

The deal seemed doomed to fail from the start because of the enormous impact that it would have over the healthcare of millions of Americans. It would have condensed the number of companies which provide healthcare on a nationwide basis from five to just three. The combined entity would have held a sizeable portion of the Medicare Advantage market, which is a type of medical insurance product which replaces traditional Medicare with a plan that has lower monthly premiums but higher deductibles for most services.

The combined company would have held enormous influence at the negotiating table with other healthcare entities and would have been able to essentially set prices; which could have had drastic consequences to the consumer.

It ended up being these anti-trust concerns which ultimately spelled the demise of this proposed merger. This goes against the trend in recent years of these proposed mega-mergers eventually moving ahead and beyond the anti-trust issues. The uncertainty involving the national healthcare policy with the change in the U.S. Presidency to Donald Trump most definitely played a role in the eventual scuttling of this merger proposal by the senior level executives at both companies.

I have covered mergers and acquisitions for a few years now for many different news outlets. This proposed deal had a clause called a “breakup clause” which I have seen associated with other mergers in the past, where one party agrees to pay the other an agreed upon sum of money if the deal were to not come to fruition. In this situation the Aetna side agreed to pay a breakup fee to Humana.

The breakup fee is reportedly $1 billion that Aetna will pay to Humana, which after taxes is around $630 million. The two sides spent over a year and a half preparing this merger proposal, and all of that work, effort, and resources are now out the window. The shareholders of both entities will most assuredly have some strong feelings about the lost time and energy on this merger. The Aetna shareholders have the added grievance of the breakup fee or termination fee that is being paid out which will eat into profitably totals as well.

The recent negative news speculation regarding some of the Medicare Advantage products also likely played a role in the eventual breakup of this merger. The uncertainty in Washington right now over the future of the federal government decision making regarding a potentially new national health plan also certainly had to have been factored into this situation as well.

This merger was originally proposed during the previous administration in Washington and it was designed to offset some of the conditions in the marketplace that were created by the Affordable Care Act. Those conditions pushed both Aetna and Humana to pursue a merger to synergize their operational capabilities and to streamline their costs in order to maximize profitability.

The court system and regulatory bodies had scrutinized this deal pretty harshly from the onset. The emphasis of any proposed merger in an area as crucial to the public domain as healthcare is going to be treated differently than if two companies wanted to merge to bake bread and cookies in a more efficient manner.

The backdrop to this situation is an American public that has a general distrust of health insurance carriers and is paying more out of their budget for healthcare related services than ever before. The American public also has seen wage stagnation and increased costs for other goods and services and senior citizens feel the budget squeeze; which all of these factors contributed to the opinion of the court that the merger would have had a significant impact on the price and competition in the marketplace.

Furthermore, another factor that makes this merger different than other proposed M&A activity that I have covered in the past is that the path forward is unclear. I can usually speculate in other proposals that may have gone sideways about the next move for the companies involved. The fact that the landscape in the healthcare industry is already so limited on the national level, it leaves both Aetna and Humana with very limited options.

The path for Aetna may be to look at some regional acquisition targets to improve their presence further in certain regions of the country, but that is an incremental move for sure, as they already have a pretty significant overall national profile.

The path for Humana may be to diversify some of their operational capabilities by reviewing some options to expand into other insurance products beyond Medicare Advantage. I am not sure how successful that path will be based upon the potential scrutiny some of those potential activities may be met with from the court system.

The potential changes to the national healthcare policy will eventually guide the decision making of both companies as they navigate the new terrain of the industry at that point.

In the end analysis, the scuttling of this merger, at least at first glance, seems to be the appropriate decision by both the court system and the corporations involved. It would have limited competition in the marketplace and had a negative impact on price increases for a consumer base that has grown very weary of that narrative.

The potential consequences of this ultimately unsuccessful deal could present overarching implications for future M&A activity in the healthcare industry and other industries in the months and years ahead.