The other day I read a headline that I never thought I would see: “CVS to buy Aetna.” Wait, what? That’s right boys and girls, a pharmacy and PBM is trying to buy the third largest insurance company for a reported $66 billion. After the shock wore off, I started to question why, and think about what this could mean to the ever-more-complicated health care industry. The first thing I did was read the explanations given to the stock analysts. There were three primary reasons given for CVS’s interest in acquiring Aetna: 1) to improve its negotiating position with drug manufacturers, 2) to expand on its 1,100 health care clinics, and 3) because of the concern generated that Amazon would be entering the retail pharmacy space. I think those reasons comprise part of the truth, but don’t tell the whole story.
While there may be some truth to the first point, that it will improve CVS’s position with the drug manufacturers, it’s not in the way most people think. Most people likely assume the combined size of the company will grant it more negotiating leverage. I’m not buying that argument. CVS currently has 9,700 pharmacy locations around the country. They have a pharmacy within 3 miles of 80% of the U.S. population. They serve 5 million customers a day and have 90 million members in their PBM plans. Does that sound like a company that needs more volume to drive drug price discounts? To me, the real play here is what the combination of an insurance company, specialty pharmacy, PBM and retail drug store network could do to the pharmaceutical marketplace. What if the combined company wanted to negotiate an exclusive contract for, let’s say, a high volume or high priced drug that has at least one competitor? What kind of price do you think a drug manufacturer would be willing to give to become the supplier of the only drug in a particular category covered by Aetna, with exclusivity enforced by CVS’ network of stores and PBM contracts? That is a whole new kind of leverage. If you don’t think an insurance company would ever grant a given drug exclusivity or exclude a drug from coverage, you might want to consider the following headline:
“Cigna to stop covering most OxyContin prescriptions”
By Nadia Kounang, CNN
Updated 7:49 PM ET, Thu October 5, 2017
The next reason given as to why CVS would be interested in Aetna is the expansion of the CVS clinic network and driving business into this care delivery model. This, to me, is a big reason why a merger between these two companies makes sense. Let’s say Aetna starts selling policies where visits to a CVS MinuteClinic have a zero dollar co-pay. Compare that to a $20 co-pay at your PCP, a $40 co-pay at a specialist or a $500 co-pay at an emergency room. How much volume do you think will be driven to these clinics? These less expensive visits reduce medical expense for Aetna insurance and drive up their profits while also driving profits to the CVS delivery system. This is the proverbial Wall Street “win/win”, or as some would put it, “double dipping into the profit jar.”
Finally, there’s the “defense” reason. CVS would buy Aetna to help counter the possible entry of Amazon into the retail pharmacy industry. I do think there is some validity to this rationale regarding the acquisition. The combined entity would certainly be in a better position to do something to defend their pharmacy business than CVS would alone.
In my mind, these reasons don’t tell the full story. To begin to understand it, and more importantly, what it could mean in the future, we need to explore an additional, and very basic, reason why any publically traded company would take on $64 billion in new debt to buy another company. The fundamental reason any company would do something like this is because they believe there will be a resulting earnings increase that more than offsets the cost of the acquisition. It’s as simple as that. Publicly traded companies do things to maximize the investments of their shareholders. So, by this logic, the reason why CVS is willing to spend $66 billion on Aetna is they think it’ll be worth more than $66 billion in additional earnings.
With that understanding, my main questions are how do they think the combination of the companies is going to increase earnings by more than $66 billion, and how will that change the health care landscape? I may be paranoid, but I think there are many reasons to be very concerned about the possible combination of a pharmacy, a corporate urgent care clinic network, a PBM and an insurance company. So, humor me for a bit and consider the following scenario.
As stated above, the only reason for a company to buy another is because it believes it will improve its earnings, and thus the value it provides its shareholders. In the case of CVS and Aetna, that’s a pretty high hurdle to clear. CVS is offering $66 billion for Aetna. Since they only have a little over $2 billion in cash right now, they are going to have to finance at least $64 billion. Let’s say CVS finances that $64 billion over 15 years at a typical interest rate. That would mean they’d have to produce an extra $2.4 billion in earnings annually just to make the payments on the money they borrowed. Where are CVS and Aetna going to find $2.4 billion more than what each company produced as earnings in 2016?
I think they plan on getting that money by pushing for lower rates from drug companies, negotiating exclusive deals on some drug categories and pushing Aetna members to use their MinuteClinics. I think they have designs on forcing specialty pharmacy utilization into their Corum infusion care sites as well. All of these things could help produce the extra earnings Wall Street and their creditors will demand.
If this happens, it could cause a significant shift in how care is provided in this country. What we could end up with is an erosion of the physician-patient relationship as care starts to get pushed to the MinuteClinic environment. We’d also see physicians with fewer choices when it comes to the drugs they prescribe. In this scenario, the drugs you receive could be dictated by which insurance company your employer picked and which drug store supplies them, rather than by what your doctor feels is best for you and your condition. Finally, where you receive care for things like chemotherapy infusions or MS treatments could be pushed to a CVS-owned infusion location and out of your specialist’s office.
All of this may be acceptable if it produced significant reductions in overall health care costs, but there’s still that pesky $2.4 billion in extra earnings to worry about…
I’ve been working in health care for over 30 years now. I will be the first to admit that we have lots of problems and we must figure out how to control costs before the system overheats. I’m not saying that doctors, hospitals or even drug companies are perfect or blameless in all of this. What I am saying is that the combination of CVS and Aetna will not solve our health care problems. It might produce extra earnings for CVS and Aetna. It might change the way care is delivered – though not in a good way. What it will not do is reduce costs. If the acquisition happens, what’s next? Walgreens buys Cigna? Amazon buys United? Where does it stop and what does our health care look like in this country after it’s all done? “Mr. Howrigon, please proceed to the drive up window where the doctor will talk to you through the glass and hand you your prescriptions. Then, if you want to drive around to our pharmacy we will be happy to provide you with the drug we have chosen for you based on your specific insurance coverage. What’s that you say? You had an allergic reaction to this drug in the past? I guess you should have selected a different pharmacy/insurance company.”
Remember, the question is not whether I’m paranoid; it’s whether I’m paranoid enough.