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)

Disconnected: Rite Aid and Albertsons Merger Update

The proposed merger between Rite Aid and Albertsons faces a key crossroads type moment on Thursday, August 9th, when a pivotal vote will be made by the Rite Aid shareholders. The proposal on the table would give the shareholders of Rite Aid a reported 30% stake in the new company.

The prior piece on this merger focused on the transition of the pharmacy / drug store channel and the healthcare landscape. This landscape has adjusted further with the entry of Amazon into healthcare with their acquisition of Pillpack and their partnership with Xealth.

A report in Forbes describes a scenario where the Albertsons merger could be done just strictly out of fear of the impact of Amazon’s entry into the marketplace. The merger proposal is for $24 billion to bring the two companies together to compete against CVS (who is in the process of combining with Aetna), Walgreens (a giant company with Alliance Boots growing their presence in Europe), and Amazon.

A report by Bloomberg states that Rite Aid is set to announce a 2019 net loss of $125 million to $170 million, which far exceeds the numbers in the original guidance that they had reported earlier in the year. The speculation is that the people behind the scenes at Albertsons leaked this information ahead of the crucial vote on Thursday. The thought process being that the fear of the loss of value in Rite Aid will force the hand of their shareholders to vote in favor of the merger.

The Amazon partnership with Xealth provides them access into healthcare networks. The pharmacy side of Albertsons and Rite Aid also have clinics that they operate, which if the merger was approved would create a network of 319 clinics nationwide.

The detractors to the Rite Aid merger feel that the company could compete well on its own in the new landscape. The sentiment from some of the shareholders remains that the proposal from Albertsons does not place the proper valuation on the Envision Rx piece of the Rite Aid business model.

Envision Rx is the pharmacy benefit manager (PBM) piece of Rite Aid which has always been a sticking point in this proposed merger. This is a unique attribute of Rite Aid, which many maintain is an undervalued asset of the current proposal. This all comes at a time where two major investment consultant type groups have issued reports that caution the Rite Aid shareholders to consider rejecting the merger proposal.

There is a disconnection between factions of the Rite Aid shareholders over the Albertsons deal. The one side of the scenario is that Rite Aid is a much smaller company now that they have transferred so many store locations to Walgreens. The management of Rite Aid is stating that they feel that they are better positioned now because they will no longer be tied up with the sales of the locations to Walgreens and can focus on improving operations. The central message is that they can survive and compete as a smaller, leaner company without merging.

The other side of the scenario is the faction that feels that Rite Aid must “grow or die” with the “bigger fish” of CVS Caremark (Aetna), Walgreens, and Amazon. The merger with Albertsons will provide a combined company with 4,345 pharmacy locations, which will allow for a much more competitive company in the new landscape of the industry in the future.

Furthermore, there is the reality that Rite Aid stock has lost 77% of its value in the last two years. The Albertsons people are circulating a message that essentially is that Rite Aid will have no other interested parties for a potential merger if this falls through.

In truth, that is probably an accurate assessment because the government shutdown the Rite Aid merger proposal with Walgreens, CVS has no interest in acquiring Rite Aid, and there are not really any other suitors out there in the industry.

Another argument is one that is against the merger which in brief, is that Rite Aid and Albertsons are both struggling in low-margin businesses (pharmacy/drug store and grocery channel) and merging them together will not remedy those core issues related to being niche focused in industry channels that have low profitability.

The grocery channel could potentially provide a regional partner for Rite Aid that could be interested in buying their Northeast and Mid-Atlantic based locations such as Royal Ahold (parent company of Giant, Eagle, and Stop & Shop grocery chains). This is pure speculation on a potential future course for Rite Aid because so many within the financial industry believe that the Thursday vote is going to sink the merger with Albertsons.

This potential merger between Albertsons and Rite Aid has been a mess from the beginning. The path forward for both companies if this merger does not materialize is unclear. Albertsons could shift their focus to an acquisition within the grocery channel, a regional sort of consolidation move to grow the company.

Rite Aid could move forward alone and try to “keep swimming” in the industry without a larger merger partner. They could maximize their revenue streams by executing a strategy around their clinics and with marketing Envision Rx.

The harsh reality is that the pharmacy channel is running scared from the entry of Amazon into their market. The potential for Rite Aid to make it on their own while being squeezed by larger competitors could spell the end for the iconic American drug store chain.

The merger vote on Thursday will impact both the grocery and the drug store channels and could drastically alter the course of the strategic growth for two companies in the future. The consumer will be impacted by a lack of choice and a lack of competition in the industry which will force many consumers into a situation where they are facing increased out of pocket costs for pharmaceutical products in the years to come.

(Some background information and statistics courtesy of Forbes, Bloomberg, and Supermarket News)

Amazon Targeting Expansion Into Healthcare

Amazon announced a partnership with Berkshire Hathaway and JP Morgan to provide better healthcare for the employees of the three respective American corporate giants. The details of the exact parameters of the newly formed joint venture are unclear. It appears that the partnership will not be to form a healthcare company to compete with major health insurers.

However, the announcement certainly shook up the industry: from Wall Street to Main Street, everyone was talking about this news on Tuesday. The prospect of these three companies getting involved in the evaluation of costs is a daunting set of circumstances for the healthcare industry.

In addition, Amazon is rumored to be targeting expansion into the pharmaceutical area. The online retail giant filed for pharmaceutical licenses in a handful of states back before the holidays, but it is unclear whether they were related to the medical devices which they already sell on their site.

The strategy and route for Amazon into this space is through this partnership with Berkshire Hathaway and JP Morgan. The stakes for certain retailers or interested parties in the pharmaceutical industry could be very significant. The other side of the situation is the protection of patient records should Amazon start peddling prescription drug delivery services.

The potential for misdirected prescription abuse is also at stake here should Amazon enter the prescription drug space. This is all transpiring amid the backdrop of a prescription painkiller abuse epidemic in America.

Those are just some of the ethical issues presented in this situation. The business implications are also significant with the “Big Pharma” companies falling somewhere in between the distributors and the retail drug chains. The sentiment within the pharmaceutical manufacturers is that the potential entry of Amazon into the industry would be a welcome turn of events because it would provide greater competition.

The translation there is that the pharma companies have been at odds with the PBMs (Pharmacy Benefit Managers) for years. The PBMs handle mail order prescriptions and they negotiate prices for the large insurance companies and for large corporations that have a bigger “say” in the benefits for their employees.

The insertion of Amazon into the equation is problematic for the PBMs such as Express Scripts, CVS Caremark, and United Health/Optum. They will have diminished leverage in negotiating pricing and other terms with the pharmaceutical companies because Amazon will essentially disrupt the way that game has been played. This is why the pharmaceutical companies have no problem with Amazon entering the space, the online retail behemoth is going to look to undercut the other players in the mix.

The potential entry of Amazon into prescription drugs will also hinder the prescription drug distributors, particularly the top three: McKesson, Amerisource Bergen, and Cardinal Health. Amazon is going to push back on them on price and that is going to squeeze their margins. The massive consumer base that Amazon will bring to the table and could command with greater potential for consumers to join Amazon Prime membership just for the prescription drug services will put these distributors in a tough position.

The entry of Amazon would shift the distribution paradigm as well. Their presence would shape the cost structures for that component of the industry. The benefits would definitely be reaped by the consumer because it will have a domino effect on the prescription drug pricing across the board.

The final area is the retail prescription drug channel, which if Amazon does indeed enter this part of the industry it could have a profound impact on the entire industry. The biggest players that would be at risk in that scenario are: CVS, Walgreens, and Rite Aid.

Those three companies have existed for decades by servicing customers through predominately brick and mortar operations where the customer or patient will pick up their prescription products. These companies have delivery services available in some markets as well.

However, Amazon would turn that part of the industry on its head, so to speak, and reinvent the way that patients would get their prescriptions. The concept of ordering a prescription online, or through a voice- controlled device such as the Amazon Echo, one would think would be a compelling option for consumers.

There is a definite argument for the convenience that Amazon would provide to someone who was feeling too ill to drive to the pharmacy to get a prescription. It is appealing to people with busy lives as well, who need maintenance meds for a given medical condition to eliminate having to run over to the pharmacy from their routine thereby saving that time.

The retail pharmacy chains mentioned earlier would certainly have to adapt in the advent of Amazon potentially entering that sector. The strategy to combat Amazon would be two-pronged, in my opinion, in order to create resistance to Amazon grabbing too much market share.

First, the retail pharmacy chains can tout that they can fill prescriptions in one hour or less. The order of a prescription through Amazon will take more time to fill, so if you are sick (and the fact remains that being sick is when most people see a doctor and need prescriptions filled) the traditional retail route is still the most effective method.

Next, is an adaptation of the retail pharmacy operation into a true omnichannel approach. This approach is key to the survival of essentially every traditional retailer with a brick and mortar presence moving forward. The CVS, Walgreens, and Rite Aid chains and others in a regional presence have to consider developing delivery in most every market they serve. They also have to develop some type of website portal that can handle prescription orders for delivery to the consumer. This would allow for a truly omnichannel approach.

The patient prescription history and personal data are already in their database so these chains can tout the security and trust they have established with the patient over a period of time. This could become their pathway to remaining relevant with Amazon actively competing in the channel.

The patient confidentiality issues which were raised earlier in this piece still have significance as Amazon weighs whether to enter the pharmaceutical space or not. The potential for prescriptions to fall into the wrong hands is an aspect of this situation that should be careful considered by the government with respect to Amazon.

Conversely, that argument can be made for the major retailers and PBMs that are currently active in the retail pharmacy channel currently. The way the systems function today certainly provides some openings for the potential for prescription drugs to be misused or used by someone other than the patient it was intended to help. The mail order supply could easily get into the possession of someone who has the propensity to abuse prescription pain medications, anti-depressants, or some other type of pharmaceutical product.

The “Big Pharma” companies seem at this point, from their public statements, to be largely unconcerned with Amazon entering the market. I can understand how some people might be confused by this position. However, when you consider how the industry functions, and through my professional experience in different roles within the pharmaceutical industry, I can attest that the “Big Pharma” guys only care about making money. Amazon will allow them to do that especially with the PBMs.

The PBMs must be concerned about retaining profitability should Amazon enter that area of the industry. The joint venture announced on Tuesday with Amazon, Berkshire Hathaway, and JP Morgan has the healthcare industry shaken up already.

In full disclosure, some reports have also speculated whether Amazon is announcing this partnership to “save face” because of reports that they make their employees who work there for a certain length of time and then leave the company pay back the amount that Amazon paid for the healthcare coverage for that particular employee.

This new partnership could integrate new technology into the sector with rumors that the three companies in the venture will have an employee web portal that will provide healthcare planning information to help reduce the cost of tests and other services for those on their payrolls. The other rumor is that they are going to launch a smartphone app that streamlines healthcare choices and explains the protocols for different procedures very simply.

It is clear though that Amazon wants to get into the healthcare and potentially the pharmaceutical space and that has put everyone from the major health insurers, to PBMs, to those involved in the pharmaceutical retail drugstore segments on notice that changes are coming whether they are ready for them or not.

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”.