A 5 minute read
October 31, 2017

CVS Caremark wants you to know it’s more than just a pharmacy—it’s a healthcare corporation. News of the potential acquisition of Aetna, a private insurance company, by CVS broke on October 26. Under this deal, CVS would purchase Aetna at $200 per share for a total of $66 billion, making it one of the largest acquisitions of 2017 and one of the largest healthcare acquisitions in history. According to Definitive Healthcare data, Aetna currently has nearly 40 subsidiaries, 60 ACO affiliations, and incurred more than $20 billion in claims last year.

Combined, the two companies would generate annual revenue of over $240 billion, drastically strengthening their leveraging power in price negotiations with drug manufacturers and in other business dealings. This merger has the potential to drive down overall healthcare costs—and it’s not the first effort CVS has made in this area. In October CVS became the pharmacy benefit manager (PBM) for Anthem, a private payor, forming IngenioRx. Anthem has nearly 30 subsidiaries and incurred more than $33 billion in claims last year according to Definitive Healthcare data.

CVS MinuteClinics Serving the Highest Percentage of Low-Income Residents

Clinic Name % of Pop in Poverty Median Income
CVS MinuteClinic - Tallahassee 76.1% $12,458
CVS MinuteClinic - Akron 65.3% $9,983
CVS MinuteClinic - Ann Arbor 54.0% $13,429
CVS MinuteClinic - Columbus 53.9% $24,380
CVS MinuteClinic - Baltimore 53.8% $11,278
CVS MinuteClinic - Brooklyn 49.7% $13,918
CVS MinuteClinic - Independence 49.6% $22,077
CVS MinuteClinic - Charleston 49.1% $14,583
CVS MinuteClinic - Washington 49.0% $15,119
CVS MinuteClinic - Clemson 48.5% $20,179

Fig 1 Data from Definitive Healthcare

Though an Aetna acquisition would allow CVS to be more aggressive in its pharmaceutical price negotiations, it could also damage their Anthem affiliation. Historic antitrust laws could also undermine the CVS/Aetna merger before it even begins. A recent partnership between Aetna and Humana, another private payor, was denied by the Department of Justice on the grounds that market competition would be suppressed.

In an uncertain healthcare industry, companies may feel as though large-scale mergers are one of few ways to maintain relevance and profitability. President Trump’s administration has committed to improving healthcare through policy, but neither the House nor Senate has been able to agree on a repeal or replacement measure of the Affordable Care Act. The ambiguity of healthcare reform has left private payors and providers in limbo, delivering quality care under current legislation while anticipating what may come next. Though the benefits of acquiring Aetna are clear for CVS, industry experts speculate that this isn’t about pricing power—it’s about Amazon.

Amazon has been a market disruptor since its inception. It may be difficult to remember, but when the retail giant first appeared, its focus was modernizing book sales. Amazon has since revolutionized online sales through its use of nationwide warehouses, online streaming, Prime membership, and its recent purchase of Whole Foods grocery stores. If the company does decide to enter the healthcare space, it could have greater purchasing and negotiating power in dealings with pharmaceutical companies.

Clearly there is a lot of speculation that this merger is all about Amazon--and I do believe the caution is well-founded. But while Amazon may be part of the CVS merger, I think this is more about the continuation of a trend toward aligning care providers and insurers. This alignment has been accelerated through the proliferation of ACOs as well as through the trend of IDNs creating their own payors. CVS has been aggressively moving in this direction already with its giant PBM business and assertive launch of MinuteClinics—both of which bring the insurer and provider markets closer together.

CVS has direct experience in care delivery through its MinuteClinics. These outpatient acute care clinics are stationed in various CVS Pharmacies and Target locations, offering quality treatment and preventative care with shorter wait times than physician’s offices and urgent care clinics. According to Definitive Healthcare data, there are more than 960 CVS MinuteClinic locations across the U.S. Through this venture, CVS Health has a practical understanding of population health, patient demands, and pharmaceutical manufacturers, giving them the upper hand in price negotiations and other business dealings.

However, healthcare legislation is becoming increasingly complicated. There is ambiguity and controversy surrounding what insurers are required or even able to offer their clients. If CVS and Aetna were to merge, the company could potentially offer exclusive retail clinic coverage of pharmaceuticals and treatments unavailable elsewhere.

CVS MinuteClinics Serving the Highest Percentage of Elderly Residents (65+)

Clinic Name % of Pop Elderly Median Income
CVS MinuteClinic - Rancho Bernardo 73.5% $45,750
CVS MinuteClinic - Gaithersburg 47.8% $50,517
CVS MinuteClinic - Naples 44.9% $78,750
CVS MinuteClinic - Edina 39.5% $48,994
CVS MinuteClinic - Tequesta 39.0% $63,260
CVS MinuteClinic - Hilton Head 38.7% $65,582
CVS MinuteClinic - Brevard 37.8% $53,698
CVS MinuteClinic - Boca Raton 37.5% $92,616
CVS MinuteClinic - Ocean City 36.0% $45,542
CVS MinuteClinic - Hendersonville 35.8% $51,090

Fig 2 Data from Definitive Healthcare

The erosion of historical healthcare boundaries has opened the doors for partnerships between pharmacies and insurers, retail giants and providers. Patients are seeking care at retail clinics, outpatient surgery centers, and freestanding imaging centers rather than at a hospital or physician’s office, driven by lower costs and shorter wait times. Telehealth enables remote care providers to offset the workload of affiliated hospitals and bring reliable care to rural populations. Those who are uninsured or have hefty medical bills turn to crowdfunding to offset costs. Wearable wellness trackers and “smart” objects tied to phone apps are increasing awareness of personal and population health, turning individuals into their own care providers and trainers.

The influx of technology and increase in care facilities has the potential to fragment care. This is where companies like CVS, Aetna, and Amazon see potential to offer seamless care delivery through partnerships—similarly to the increase in hospitals acquiring outpatient surgery centers and affiliating with urgent care and retail clinics.

When it comes to Amazon entering the healthcare industry I think the time for the pharmaceutical industry to get worried about Amazon is when they purchase a retail pharmacy presence similar to what they’ve done with Whole Foods. For now, by strategically positioning itself as a trusted healthcare provider, CVS can further influence healthcare delivery in partnering with equally influential healthcare leaders.

Visit the Definitive Blog to read more about health system mergers and acquisitions.

Definitive Healthcare has the most up-to-date, integrated, and comprehensive data on the healthcare industry. Our database tracks clinical and financial metrics on over 8,800 hospitals, 1.5 million physicians, 600 payors, 500 payor subsidiaries, and more.

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