Walmart’s Potential Acquisition of Humana: Competitive Strategy Implications for the U.S. Healthcare Industry

Posted by | Ken Sawka

I loathe the pervasive, trite metaphor that compares competitive strategy to the game of chess.  However, recent reports that Walmart is in discussions to acquire health insurer Humana can only be explained as a game of three-dimensional chess.  Should this deal go through – and, to be sure, it is a long way from happening – it satisfies three competitive strategy objectives for Walmart: responding to CVS Health’s strategy, blocking Amazon and improving access to new customer segments.

Responding to Competitive Activity—Retailization of Healthcare

First, it is a direct response to CVS’s proposed acquisition of health insurer Aetna and would further solidify the realignment of healthcare payers and providers within the broader retailization of the delivery of healthcare products and services.  CVS, like Walmart, is more than just a retailer.  CVS in 2006 acquired MinuteClinic and as a result now has more than 1,000 walk-in clinics in its stores.  CVS also has a pharmacy benefits management company stemming from its 2009 acquisition of Caremark.  By adding a health insurance company in the form of Aetna, the resulting vertical integration in healthcare combo – retailer, clinic operator, pharmacy benefits manager, and insurer – can realize significant efficiencies, negotiate for lower drug prices with pharmaceutical manufacturers, and capture the growing share of healthcare spend among consumers and employers.

Walmart currently lacks two of the ingredients that a combined CVS-Aetna possesses: a pharmacy benefits manager and a health insurer.  As a result, Walmart currently is in a sub-optimal position to be a player in one of the fastest growing segments of the U.S economy: healthcare.  By acquiring Humana and combining it with the healthcare provider services Walmart already possesses – in-store clinics and laboratory testing services (via a recent partnership with Quest Diagnostics) – it fills critical gaps in its healthcare portfolio.

Walmart Humana Deal Anticipates and Complicates Amazon’s Healthcare Strategy

Second, it would be a pre-emptive measure to raise the challenges and the costs of a potential – and highly likely – deeper penetration of Amazon into the healthcare arena.  Amazon last year was granted licenses by 12 states to operate as a wholesale pharmaceuticals distributor, and its recently announced partnership with Berkshire Hathaway and JPMorgan Chase positions the e-commerce giant as a key ingredient in bringing technology solutions to alleviate the burgeoning healthcare costs being incurred by employers like Warren Buffett and Jamie Dimon.  Like Walmart, Amazon is missing several critical pieces of the puzzle to deepen its participation in the healthcare industry – a risk manager like Caremark or Aetna, and healthcare delivery services such as walk-in clinics.  By acquiring Humana, Walmart takes a prime asset off the board, likely raising the costs for Amazon to become a more integrated healthcare player and delaying the timeframe by which it can do so.

However, Amazon has significant strengths that can allow it to parry against Walmart’s potential move.  In a recent strategic planning engagement for a national health insurance company, Fuld & Company envisioned a scenario in which Amazon leveraged the 54 million U.S. households that are Amazon Prime members as a collective healthcare population, essentially turning Amazon Prime into a health insurance risk pool.  In this scenario, Amazon doesn’t necessarily need access to a health plan for members; it only needs access to a risk management provider that already has regulatory authority to cover Amazon’s customers.

Increased Access to Baby Boomers will Drive Growth

Third, Walmart’s interest in acquiring Humana can be seen as a pure growth play.  Humana is the second largest provider of Medicare Advantage plans, with 17.3 percent of that market and more than 3.5 million participants, according to the Wall Street Journal.  Medicare is a growth engine within the U.S. healthcare industry as more than 10,000 baby boomers reportedly become Medicare eligible every day.  By acquiring Humana, Walmart gains preferential access to seniors through Humana Medicare advantage, and leverage over pharmaceutical manufacturers to negotiate for lower drug prices.  Walmart would be able to thus provide an integrated set of healthcare services to seniors including lower-cost medications, diagnostic, and treatment services, while also cross-selling and bundling retail products.

To be sure, Walmart’s potential acquisition of Humana will not be the last salvo in the realignment of the U.S. healthcare industry.  Target, for example, could certainly attempt to make a play for a health plan, if Amazon doesn’t acquire it first.  And, the consolidation of traditional healthcare provider networks continues apace.  If this isn’t a game of competitive strategy chess worth watching, and our health + life science consulting practice will be keeping watch.

Tags: Amazon, Competitive Strategy, Health & Life Science, Healthcare, Mergers & Acquisition