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.”
But that’s now. Who knows how this will play out in the next ten years? We already know a few things: first, consumers of healthcare services, like consumers of all consumer services, are becoming more demanding of convenience and of service quality. Now, in contrast to their ongoing experience in the retail, travel/transportation, and consumer services worlds, healthcare consumers—known by providers as “patients”—have until recently accepted levels of service quality that would destroy any merchandise retailer, commercial airline, or bank. I myself am old enough that I remember (granted, as a very young adult) joining the hordes of office workers rushing out during our lunch hours to stand in line in order to write checks to cash. (Yes, Virginia, there was a time before ATMs existed.) Who now would open a checking account with a bank that required them to stand in line to get their cash? Or, as I often say, who would fly with an airline that required them to fill out paper-based forms in triplicate when they arrived at the gate?
But healthcare still remains to some extent consumer-unfriendly, when it comes to customer service—most particularly with regard to waiting for a doctor appointment. Already, urgent care clinics have sprung up to meet the need for care that doesn’t require emergency department-level care, but does require prompt attention. And, of course, CVS’s MinuteClinic clinics are already luring consumers with colds, coughs, and sore throats, to access primary care in settings that are convenient (the CVS down the block), and with very brief waits, if any waits at all.
So primary care physicians in practice really need to think about the implications of this business deal, should it be approved by federal authorities (which honestly, is at least somewhat likely). And hospital leaders need to think strategically about this, too, particularly the leaders of hospital-based organizations that are rushing in to employ the physicians who are fleeing the complexities and administrative burdens of medical practice in a healthcare system that is shifting from volume to value (and therefore, is demanding that practicing physicians expend a great deal more effort documenting their clinical and financial outcomes).
Broader healthcare system changes
But apart from any perceived market-share threat to practicing physicians, there is another whole set of implications here, and I think that Dr. Dafny gets it right, when she says that, “With a focus on total costs of care in Aetna’s corporate DNA, NewCo will aspire to reduce total spending for care (while increasing its own revenues) by redirecting patients to lower-cost sites for certain services, such as infusions or imaging (in which NewCo may have ownership stakes); using its physical convenience and nonvisit care technologies to maintain contact with patients requiring closer monitoring, thereby potentially averting ED visits and admissions; and considering combined medical and pharmacy spending.”
As she notes, once the merger is approved, “Aetna can directly support these objectives by encouraging members to use Minute Clinics, other NewCo-affiliated providers, CVS pharmacies, and Caremark services — perhaps through favorable cost sharing or more seamless scheduling, billing, and care or product delivery. To the extent that CVS’s physical and digital efforts can lower total costs of care, NewCo can benefit directly from anyone insured by Aetna, and indirectly by sharing in savings with members of self-insured plans. Notably, Aetna is building market share in Medicare Advantage plans, and arguably Medicare Advantage enrollees are the members most likely to appreciate and benefit from frequent, high-touch interactions with CVS pharmacists and nurse practitioners.”
So this business combination really could be a game-changer—the kind of disruptive development that is so often talked about in healthcare—but which, in this case, really could have profound impacts on healthcare delivery in the U.S. The fact that this business combination is bringing four different elements in healthcare payment and delivery—health insurer, pharmacy benefits management company, retail pharmacy, and quick-care clinic firm—all under one corporate umbrella. And yes, that could really change things. For one thing, it could put demonstrably more pressure on the leaders of hospitals, medical groups, and health systems, to enhance their cost-effectiveness and improve their service levels.
And, in that, healthcare IT leaders—CIOs, CMIOs, and everyone else—will necessarily be significant figures in helping their organizations improve service quality levels, enhance their cost profiles, and better connect with their patients. Optimizing EHRs, creating greater engagement of patients in communicating with their care teams, and improving clinical decision support, will all be critical to “skating where the puck is headed,” as they say in the ice hockey world.
So I agree with Dr. Dafny—there’s a whole lot to ponder in this proposed merger. And if federal authorities approve it, it will already be high noon for provider leaders, in terms of responding to it.