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Six Reasons Why CVS Health Should Acquire Aetna … Soon

Posted by | , Fuld & Company

Should CVS consider acquiring a health plan? If yes, then which one? With a market-cap of about $80 billion and an impressive portfolio of assets across retail and pharmacy, why would it make sense for CVS to include a health plan in its portfolio?

Evolving industry competitive dynamics between health insurance companies and pharmacy benefit managers (PBMs), suggest that CVS may benefit significantly through this strategy. Theoretically, the job of PBMs is to negotiate drug prices with manufacturers and pass on the savings to health insurance companies and patients, keeping a return for themselves.

Whether this process works exactly as intended is a point of debate in the industry. Each of the three companies that dominate the PBM business with more than one billion annual prescriptions, Express Scripts, CVS Caremark and OptumRx, has a different business model. Express Scripts is the only independent pure play PBM; CVS Caremark is part of CVS Health; and OptumRx is part of UnitedHealth Group’s Optum business, which acquired PBM Catamaran in 2015 for $12.8 billion. Anthem sued Express Scripts last year for not passing on reasonable negotiation savings to the health plan, thereby bringing the only pure play PBM under a lot of scrutiny. On the other hand, UnitedHealth Group’s OptumRx seems to be gaining traction, making a case for a consolidated business model for PBMs in the industry.

Here are the six reasons why CVS should acquire a health plan, and in particular, Aetna:

  1. Large-scale MCO deals are off the table
    The nation’s five biggest health insurers have tried a variety of megamerger consolidation options in the last few years. Both Aetna-Humana ($37 billion) and Anthem-Cigna ($48 billion) deals were blocked by DOJ earlier this year. With such precedence, it’s clear that such large-scale MCO M&A deals are unlikely to materialize in the near future, unless the regulatory and political situation changes drastically. In absence of such consolidation opportunities, the interest in vertical alignment is expected to grow for both health-plans and PBMs.
  2. United-OptumRx combination is gaining traction
    UnitedHealth Group is the only large-scale healthcare player that owns both health-plan and PBM assets, and other healthcare players have been watching this MCO / PBM model closely. The integrated model allows alignment of spends across medical and pharmacy, which is becoming increasingly relevant and can result in membership gains. The Aetna-Humana deal would have enabled Aetna to grow an OptumRx kind of PBM asset, which clearly would have impacted Aetna’s PBM contract with CVS which is due to expire in 2020. With that deal now blocked by DOJ, Aetna will expand CVS relationship further. However, Aetna may explore other PBM asset acquisition opportunities before 2020, which will put CVS at huge risk again.
  3. Adding a health-plan to its assets portfolio will provide strategic advantage to CVS
    CVS has an impressive suite of assets already, but if it were to add a health plan to its portfolio, it would create a truly large-scale integrated platform across retail, PBM, MCO, and a distributor joint venture (with Cardinal Health), providing CVS with a strategic advantage over UnitedHealth Group-OptumRx. This will also put heavy pressure on other large health plans and PBMs to fill in the gaps in their portfolios. For example, CVS’s action would force, UnitedHealth Group-OptumRx to acquire a retail pharmacy asset or force Express Scripts to acquire a health plan. Whether or not these players will find the right assets to acquire remains to be seen, but irrespective of that fact, CVS would already be several steps ahead of the competition if it acquires Aetna
  4. Low integration risk for CVS
    With Aetna’s existing PBM relationship with CVS, the integration risk for the acquisition is low. Risk of a challenging integration would have been different if the Aetna-Humana deal had materialized or if it continued to drag for a much longer period of time. Aetna stakeholders will gain more substantially by being part of this first large-scale integrated platform than what it would have gained with an Aetna-Humana deal.
  5. Makes sense to do it before Express Scripts acquires a health-plan (or gets acquired)
    Anthem issued an RFP earlier this year to replace Express Scripts as their PBM. Anthem and Express Scripts have been working under a 10-year pricing contract since 2009, when Express Scripts agreed to buy Anthem’s struggling in-house PBM for $4.7 billion. Last year, Anthem sued Express Scripts for $15 billion in damages and the ability to end its contract, saying Express Scripts overcharged Anthem by $3 billion annually. Express Scripts later filed a lawsuit of its own denying Anthem’s allegations.Now consider the dramatic change Express Scripts is witnessing in its competitive situation:
    1) The company is losing its biggest client / health plan to competition.
    2) PBM landscape is evolving with emergence of UnitedHealth Group MCO / PBM model, changing the competitive landscape.
    3) High chances that its biggest competitor CVS may follow suit and acquire a health plan.
    4) Health plans’ criteria for engaging with PBMs may change drastically (inclination towards MCO/ PBM model) in future.
    5) Anti-trust issues may prevent the firm from consolidating further within the PBM space.Under these circumstances, Express Scripts should be aggressively thinking about acquiring a health plan. Despite the firm’s recent fall-out with Anthem, it’s not unimaginable for Express Scripts to consider Anthem as a potential target. If this is Express Scripts’ strategy, then CVS is better suited to move faster and consider a health plan acquisition ahead of them. Express Scripts may also be an attractive target for Walgreens, if it gets federal approval to buy drugstore RiteAid (which acquired PBM EnvisionRx in 2015).
  6. CVS will be better positioned to drive and benefit from value-based contracts
    Value-based contracting (or outcomes-based-contracting) has gotten a significant amount of press in the pharmacy world in the last two years. While everyone agrees that rebate contracting between PBMs and manufacturer doesn’t work, the industry is still in its infancy as far as value-based contracting is concerned. Both health insurers and PBMs have signed more than a dozen such deals with drug manufacturers since 2014 targeting high-cost drugs in categories including cancer and hepatitis C. Despite the increase in the number of value-based contracts, insurers and manufacturers find that the complexity of tracking patients’ health can be a huge barrier. This challenge limits the scope and goals of such contracts in terms of managing drug spending. If CVS were to acquire Aetna, the resulting integrated platform could bring alignment that would coordinate data flows, improve consumer behavior and help manage costs. This success would result in a business model transition for PBMs from a focus on drug pricing to a focus on savings across pharmacy and medical spend.

Federal anti-trust roadblocks for large-scale consolidation deals, changing competitive landscape for PBMs, the need for lowering drug prices and maximizing positive outcomes –all point to a future where vertical integration can benefit large scale healthcare firms as long as they integrate their assets to provide deep efficiencies across the value chain.

CVS is extremely well positioned to succeed in such a future if it can move fast enough to acquire a health plan, and Aetna presents the lowest risk and highest return target.

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