A lot of (virtual and physical) ink has already been spilled on commentary on the proposed CVS-Aetna merger, much of it on the part of business analysts who are looking at the deal from a 40,000-feet-up view. In that regard, it was quite interesting to read an analysis of the deal published in The New England Journal of Medicine on February 15 and authored by Leemore Dafny, Ph.D. Dr. Dafny, as described in her Harvard Business School faculty and research profile, is a professor of business administration at the Harvard Business School, and member of the faculty of the Kennedy School of Government. That profile also noted that “Professor Dafny’s research examines competitive interactions among payers and providers of healthcare services, and the intersection of industry and public policy.” Among her current projects: “studies of consolidation in the US hospital industry and the kidney dialysis industry, products and pricing on the public health insurance exchanges, co-payment coupons for prescription drugs, and the implications of for-profit ownership of insurance companies.”
So, not surprisingly, Dr. Dafny’s “Perspectives” article, under the headline, “Does CVS-Aetna Spell the End of Business as Usual?” offered a more nuanced look at the situation than some generalists have done. As Dr. Dafny notes, “[T]he proposed $70 billion merger of CVS and Aetna would be the largest deal ever in the health care sector outside pharmaceutical company mergers and among the 20 largest deals in history. So this seems an appropriate occasion to pause and consider what it might mean for the health care delivery system.”
She also notes that this is an inter-species deal, involving two companies and really, four different types of entities. There is the overall CVS Health, whose biggest book of business remains its retail pharmacy/drug store component. But the Woonsocket, R.I.-based CVS also operates over 1,100 MinuteClinic walk-in clinics nationwide; and it owns the pharmacy benefit management company, CVS Caremark (formerly Caremark, before it was acquired by CVS in 2014); and it is now combining with the Hartford, Conn.-based Aetna, one of the nation’s largest health insurers, covering more than 23 million Americans. So this is quite different from most large healthcare industry mergers and acquisitions to date.
As Dr. Dafny notes, “The new company (let’s call it NewCo) combines a health insurer (Aetna) with a pharmacy benefit manager (PBM; CVS Caremark) and a retail pharmacy and provider chain (CVS stores and Minute Clinics). Unlike other recent health care mega-deals, the proposed arrangement is not about one firm gobbling up another that provides essentially the same services, often in the same geographic markets. Those ‘horizontal’ mergers can pose clear competition and antitrust concerns. Indeed, Aetna’s last proposed deal (with rival Humana) was blocked by the U.S. Department of Justice.” In this case, as she points out, “The proposed CVS–Aetna merger is largely ‘vertical,’ involving consolidation ‘up and down’ the value chain. Vertical mergers enable myriad channels that can actually heighten competition,” she says, “although there is still a risk that competition will be lessened at some point in the value chain.
“How might NewCo heighten competition for patients, offering them greater value for their money?” Dafny asks. “It aims to be a ‘new front door to health care in America,’ aggressively expanding the scope of services supplied in its in-store Minute Clinics. This statement understandably set off alarms for provider organizations,” she adds. “Whenever an insurer merges with a provider, the logical expectation is that the new entity will try to change or expand the provider’s business, potentially at the expense of rivals.”
Dafny notes that, “Currently, Minute Clinics provide a limited array of mostly acute care services, at prices below those of outpatient clinics, urgent care facilities, and certainly emergency departments (EDs). Episodes of care originating at retail clinics might also be cheaper if they entail fewer referrals for additional care, and that additional care doesn’t generate benefits that exceed costs. Nonetheless,” she adds, “the jury is still out on whether retail clinics reduce even short-term health care spending: a recent study of 1.3 million Aetna enrollees found that retail clinics’ convenience leads to greater use, more than offsetting savings from lower prices.”