A CVS-Aetna Deal is Logical But Also a Stretch

(Bloomberg Gadfly) -- Health-care consolidation may get a whole new look. 

CVS Health Corp. is reportedly considering a blockbuster buyout of health insurer Aetna Inc. There is a sort of reverse precedent for such a tie-up, with an insurer buying a pharmacy benefit manager (PBM). But there's never been a deal like this, where a company with no experience operating a major insurer would suddenly run one of the country's largest. 

A CVS-Aetna Deal is Logical But Also a Stretch

In some ways, such a deal makes sense. CVS has expanded dramatically beyond its retail pharmacy roots since it got into the PBM business with its $21 billion purchase of Caremark in 2007. Aetna is already a client. CVS is the country's largest specialty pharmacy and operates more than a thousand medical clinics. The company's PBM business is substantially larger, and has been growing sales more rapidly, than its retail operation. 

A CVS-Aetna Deal is Logical But Also a Stretch

And there aren't too many other routes for major expansion. Walgreens Boots Alliance Inc.'s partially foiled multi-year attempt to buy Rite-Aid Corp. is a warning against pharmacy consolidation. CVS, its rival Express Scripts Holding Co., and UnitedHealth Group Inc.'s OptumRx unit already control the vast majority of the PBM market. Retail pharmacies are threatened by the rise of online options and a potential Amazon.com Inc. incursion.

So buying Aetna would enable CVS to direct enrollees and clients to a variety of CVS-controlled services, bolster its PBM's leverage with drugmakers, and give the combined business a cost and data advantage. The deal could also protect CVS if Amazon decides to enter the PBM business by adding diversification and a captive client base. 

A CVS-Aetna combo would have an excellent role model in UnitedHealth, which has outgrown other large health insurers largely due to investment in Optum. That unit encompasses pharmacy benefit management, health-care analytics, and even ambulatory surgery centers. It has both directly driven growth and helped UnitedHealth's insurance unit lower medical costs. 

A CVS-Aetna Deal is Logical But Also a Stretch

But there are a number of obstacles to such a deal. Worth $53 billion before a share-price surge Thursday and any premium, Aetna would be the largest purchase CVS has ever attempted, by a significant margin. CVS only has about $2.2 billion in cash, and already has $26.8 billion in total debt. This deal would add a whole lot of leverage. 

And running a health insurer would be a very different business for CVS. While the company does work with clients to bring down health-care costs, it currently mostly deals with drugs and doesn't directly take on health risks as an insurer does. Insurers have a huge regulatory burden from both the federal government and states, as well as a great deal of political uncertainty from Republican efforts to reform insurance markets.

And while the deal is unlikely to attract the antitrust objections that sank the attempted merger of Aetna and Humana Inc., the fact remains that this would be the largest one-shot vertical integration in U.S. health-care services history. It could still draw regulatory scrutiny and will be difficult to pull off. 

The merger will be fascinating if it happens, but don't anoint it as a done deal. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

©2017 Bloomberg L.P.