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Why a CVS-Aetna Merger Could Benefit Consumers

Why a CVS-Aetna Merger Could Benefit Consumers

The following originally appeared on The Upshot (copyright 2017, The New York Times Company)

There are reasons for consumers to be optimistic about CVS’s reported purchase of Aetna for $69 billion. It’s one of the largest health care mergers in history, and in general, consolidation in health care has not been good for Americans.

But by disrupting the pharmacy benefits management market, and by more closely aligning management of drug benefits and other types of benefits in one organization, CVS could be acting in ways that ultimately benefit consumers.

You probably know CVS as a retail pharmacy chain — it runs nearly 10,000drugstores. But over the years, it has diversified. It now runs walk-in clinics, including in Target stores. And it runs one of the largest specialty pharmacies, dispensing high-priced drugs that require special handling.

In a big move a decade ago that set the stage for more recent developments, CVS purchased a majority of shares of Caremark for nearly $27 billion to enter the pharmacy benefits management business.

Pharmacy benefits managers are companies that help insurers devise and run their drug benefits, including serving as middlemen in negotiating prices between insurers and drug manufacturers.

Many health industry experts believe that pharmacy benefits managers effectively increase prescription drug prices to raise their own profits. This is because they make money through opaque rebates that are tied to drug prices (so their profits rise as those prices do). Competition among pharmacy benefits management companies could push these profits down, but it is a highly concentrated market dominated by a few firms, CVS among the largest.

But CVS’s recent moves may shake up an already changing pharmacy benefits landscape. In October, the insurer Anthem announced its intentions to part ways with the pharmacy benefits management firm Express Scripts. Instead, it will partner with CVS to develop its own pharmacy management business.

Anthem would not be the first insurer to forgo external pharmacy benefits management and take on the role internally. The insurer UnitedHealth Group also runs a leading pharmacy benefit management business, OptumRx. And CVS’s purchase of Aetna would also remove it as a middleman acting between that insurer and drug companies.

“While it’s still early, the moves by Anthem and Aetna have the feeling of the beginning of the end of the stand-alone pharmacy benefits manager business,” said Craig Garthwaite, a health economist with Northwestern University’s Kellogg School of Management. These insurers, and UnitedHealth Group, have concluded that outsourcing pharmacy benefits management may not serve their interests.

This removal of profit-taking middlemen could be good for consumers in the short run if it leads to lower drug prices. “In the long run, it might be harder for new insurers to enter the market because they won’t be able to negotiate lower drug prices than the larger firms,” Mr. Garthwaite said. “This could result in further concentration in the health insurance market.” That could harm future consumers, though not in ways we can predict today.

The CVS-Aetna deal would be just another of the many recent mergers across business lines in health care. Insurers are buying or partnering with health care providers. Health systems are offering insurance. Hospitals are employing physicians. Even Amazon is jumping into the pharmacy business in some states. This may be part of the motivation for CVS to buy Aetna — defensive jockeying to maintain access to a large customer base that might otherwise begin to fill drug prescriptions online.

Typically, mergers in the sector have led to higher prices and no better outcomes. But a CVS-Aetna merger might be different because their business lines complement each other. The most significant overlap is in the management of Medicare drug benefits: Both companies offer stand-alone Medicare prescription drug plans.

But there is a lot of competition in the Medicare drug plan market, so this overlap may not be a leading area of concern.

The CVS-Aetna merger is primarily about a supplier and its customer joining forces, what economists call a vertical merger. This type of merger can enhance a firm’s ability to coordinate across interlocking lines of business.

In this case, CVS-Aetna might more effectively manage certain patients with chronic conditions (those insured by Aetna), reducing costs. Let’s imagine that Aetna could leverage CVS’s pharmacies and clinics to help patients — who require medications to avoid hospitalizations — stay on their drug regimen. That could save the merged organization money. It could also translate into both better care and lower premiums, though there’s no guarantee at this stage of either.

One source of optimism: Research shows that coordinating pharmacy and health benefits has value because it removes perverse incentives that arise when drug and nondrug benefits are split across organizations. When pharmacy benefits are managed by a company that’s not on the hook for the cost of other care, like hospitalization, it doesn’t have as strong an incentive for increasing access to drugs that reduce other types of health care use. That could end up costing more over all.

So there’s reason to believe that a combined CVS-Aetna might find ways to reduce costs — and represent an instance when consumers actually come out ahead after health care consolidation.

Conclusion

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2 Responses

  1. The Merger

    The CVS-Aetna deal will change how big employers buy health benefits.

    https://www.reuters.com/article/us-aetna-m-a-cvs-health-employers-analys/cvs-aetna-deal-to-change-how-big-employers-buy-health-benefits-idUSKBN1DX0UJ

    Ann Miller RN MHA

    Like

  2. Amazon, Berkshire, JPMorgan Form Employer Health Care Company

    Three corporate giants, Amazon, Berkshire Hathaway, and JPMorgan Chase & Co, have announced the formation of an independent health care company to service their employees’ health care needs.

    For a look at the company’s long-term plans, including using technology to deliver more affordable and simplified care; read more here.

    https://www.managedhealthcareconnect.com/content/amazon-berkshire-jpm-form-healthcare-company-cut-costs

    Dr. David Marcinko MBA

    Like

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