Pharmacy giant CVS Health and Aetna, the nation's third-largest health insurer, are making progress toward a merger and could strike a deal by Monday, according to a person familiar with the discussions.
The possible deal, which is still not certain to happen, could be one of the biggest health-care mergers of all time and would mark a major shift in the competitive landscape of the industry.
Siloed, stand-alone health-care companies that perform functions such as processing health claims, filling prescriptions or negotiating drug costs are moving to become integrated companies aimed at managing many aspects of patient care.
The deal — and the shift in CVS business — may have been expedited by the tremors of anticipation rumbling through the health-care industry that Amazon could soon start selling prescription drugs.
Combining with Aetna could make CVS less vulnerable to potential Amazon competition, as it expands beyond filling prescriptions and negotiating drug prices and toward broader management of patient health. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)
For years, CVS has been evolving away from its familiar identity as an ubiquitous corner drugstore. It has extended into the big business of negotiating drug prices for employers and insurers, built out retail MinuteClinics and sent nurses to people's homes to help administer infusion drugs. Joining with Aetna continues this expansion into delivering care and could push Aetna's 22 million members into its network of pharmacies and clinics.
For Aetna, the merger would bring the business of drug price negotiation in-house, just as competitors have done. Health insurers are seeking more data and touch points with consumers, which CVS could provide through its retail locations, pharmacists, infusion services and clinics.
Analysts from the investment firm Jefferies wrote in August that Aetna's chief executive, Mark Bertolini, had described working with CVS and possibly other retailers to transform storefronts suffering eroding sales into a health pavilion offering blood draws, medical imaging, drug infusions and dialysis.
This trend toward “vertical integration” — bringing independent businesses that perform different services under one umbrella — is playing out across health care, pushed by financial incentives that are gradually shifting to reward patient outcomes.
For example, as a major pharmacy benefit manager, CVS today negotiates discounts with drug companies — one piece of health spending. With Aetna, CVS would have the data and financial motivation to incentivize better and more efficient health care for a patient overall, by seeing how drug spending fits in the broader context. Its pharmacists could help ensure patients are adhering to that drug regimen. Its MinuteClinics could be offered to patients at very low cost, to discourage the use of higher-priced health-care services.
“I want my pharmacy benefit manager to care about the total medical bill, as opposed to just the drug bill. I want my PBM to care about what kind of care is actually being delivered to the patient, and not just the cost and quality associated with that one silo,” said Dan Mendelson, president of Avalere Health, a consulting firm.
On CVS's most recent earnings calls, executives discussed the evolution of its business.
“We have begun to triage patients, where we are actively managing patients who have been diagnosed with some type of chronic care condition, in an effort to ensure that they're following their regimens of care, in an effort to keep them healthy,” said Larry J. Merlo, chief executive of CVS Health. “I think we have been able to demonstrate that our local presence, the fact that that can lead to direct engagement with customers and patients, and as a result, produce better outcomes at a reduced cost.”
In addition to CVS's potential challenge from Amazon, Aetna is facing a competitive threat from other insurers. UnitedHealth Group, the nation's largest insurer has a fast-growing segment of business called Optum that includes a pharmacy benefit manager as well as data services and a care delivery business involving 20,000 doctors and hundreds of facilities. Close to half of its revenue now comes from Optum. Another major insurer, Anthem, recently announced it would bring its drug negotiation management in-house.
“It has become increasingly clear that each of these individual organizations, with their one piece of the overall health-care pie, whether it is managing prescriptions or claims or the inpatient piece, isn't doing a whole lot. You have to have the whole picture,” said Kim Monk, a managing director at Capital Alpha Partners.
The deal could raise some antitrust concerns, particularly because both companies compete in offering Medicare prescription drug plans.
Aetna's proposed merger with Humana crumbled last year under Justice Department opposition. But the recent Justice Department challenge to the proposed merger between AT&T and Time Warner shows that even vertical mergers — combinations of companies that don't directly compete — may attract antitrust scrutiny.
“For Aetna subscribers, they'd effectively be forced into not being able to use their pharmacy of choice,” said David Balto, a former policy director of the Federal Trade Commission who led the consumer opposition to Aetna's proposed merger with Humana.