CVS-Aetna Deal: Success Depends On Ambition
(Bloomberg Gadfly) -- The idea of the place that sells you toothpaste also managing your health insurance may feel odd. But that's set to be a new reality after CVS Health Corp.'s announcement on Sunday that it will acquire Aetna Inc. for about $67.5 billion in cash and stock.
In order to justify the hefty cost of this deal, CVS and Aetna need to embrace that oddness and become a far more prominent player in the health-care market.
Part of the motivation for the deal is prosaic. Aetna's key Medicare Advantage market is growing more competitive, but the company has limited options to make a big deal in that space; the government has not been friendly to insurer mega-mergers.
CVS, similarly, has few options to bulk up further in the already concentrated retail pharmacy and pharmacy benefit management (PBM) sectors. Meanwhile, Amazon.com Inc. is contributing to a tough environment for retail sales, amid rumors it might also get into the pharmacy business. Even without Amazon, CVS's PBM arm faces lower-cost competitors and government scrutiny.
The deal will cut drug costs for Aetna and provide a captive market of insurance customers for CVS's retail and pharmacy businesses. But given the $45 billion in new debt CVS is raising, the deal will have to do more than that.
The new company has an obvious role model in UnitedHealth Group Inc., which has used in-house PBM OptumRX and other non-insurance businesses to become the most valuable health insurer in the U.S. But matching UnitedHealth isn't easy.
CVS's PBM is larger than OptumRX. And it will get even bigger after Anthem Inc.'s planned switch to CVS from rival Express Scripts Holding Co. But its current lead isn't huge, and the fact that Anthem is starting its own PBM means CVS will have a limited and low-margin role in that relationship.
And UnitedHealth absolutely dwarfs Aetna as an insurer.
UnitedHealth has had years to figure out how to turn its Optum unit -- which includes everything from health-care analytics services to ambulatory surgery centers -- into a cost advantage for its insurance plans. CVS-Aetna will be learning on the job and constrained by a big debt load in its ability to invest in the business.
Success won't come from aping UnitedHealth, but by leveraging what's unique about this new company. UnitedHealth has a lot going for it. But it definitely doesn't have 9750 physical locations in the U.S., many of them with clinics. No insurer has anything like that.
Bringing more care out of hospitals and into retail settings such as CVS clinics has long been a focus of various efforts to reduce health-care costs. CVS and Aetna have a unique opportunity to do that at scale. The company's leaders mentioned vision care, audiology and nutrition advice as possible areas of expansion -- and that should be just the start.
The combined company has a difficult needle to thread. It needs to deliver inexpensive care and save clients money. But it also needs to find a way to make any newly expanded retail health-care services feel compelling and convenient, rather than like a mandatory budget experience for captive Aetna enrollees.
But shifting a significant portion of patient care to CVS stores has the most potential to justify the price paid in this deal and serve as more than a theoretical firewall against an aggressive Amazon foray into health care.
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.
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