CVS, Aetna, Retail Integrated Delivery Systems and the Strange World of Frenemies

by Clive Riddle, October 27, 2017

As widely reported, including in the Wall Street Journal, CVS is making a very serious bid to acquire Aetna for more than $200 a share, equating to $66 billion. The most often cited drivers behind this deal include:

• CVS’s strategic response to Amazon’s potential entry into the pharmacy business
• CVS strategic response seeking growth outside core business, after antitrust regulators rejected Walgreens/Rite Aid merger
• Aetna strategic response seeking growth outside core business after antitrust regulators rejected Aetna/Human and Anthem/Cigna mergers
• Aetna would serve as significant source of members for CVS PBM division, customers for CVS pharmacies and patients for Minute Clinics
• CVS and Aetna’s strategic response to competitors aligning health plans and PBMs such as UnitedHealth acquisition of Catamaran

Much attention has been given to initiatives for integrated delivery systems between hospitals and medical groups that take on purchaser functions. Does this signal a different focus – on retail integrated instead of clinically integrated systems - bringing together pharmacies, retail clinics, health care coverage, wellness services, patient engagement and care coordination?

But Wall Street experts remind us that doesn’t mean this deal is a sure thing.  Things could fall apart simply due to details in the financial terms, or because of new changes in direction by competitors or in the overall market. The Street quotes Jeremy Bryan, a portfolio manager at Gradient Investments, a minor CVS shareholder: "There's just no case study for this. There could be regulatory hurdles. But we have cautious optimism." The Wall Street Journal states “The deal almost surely would attract close scrutiny from U.S. antitrust enforcers who have expressed concern about health-care consolidation.”

Assuming however there is a clear path forward for CVS and Aetna, the question remains for them what lies in wait for them down the road? A few potential concerns include:

• Would the deal jeopardize the recently announced Anthem/CVS relationship whereby CVS will service Anthem’s new PBM?
• Would the deal drive other competing health plans away from the CVS PBM and pharmacies?
• What if CVS is counting on Aetna becoming a more significant force in Medicare Advantage to drive CVS PDP business, and Aetna fails to deliver?
• What if the Trump Administration and Republican Congress succeed in further scaling back Medicaid, causing Aetna’s significant investment in Medicaid business to erode and become a drag on CVS overall performance?
• What if Aetna focuses its pharmacy and retail clinic network offerings on CVS locations, and loses market share to competitor plans with broader offerings?

On the other hand, maybe the deal wouldn’t cause competitors to blow up relationships with CVS or Aetna. The Washington Post quotes Adam Fein, president of Pembroke Consulting: “This is part of the strange world of the health insurance and PBM industry. Many companies are frenemies.”