Tuesday, February 20, 2018
Business

Three reasons why CVS wants to buy Aetna for $69 billion

A CVS-Aetna combination could create a health colossus that would reach deeper into the average customer’s life to manage care and cut costs, according to analysts who follow the companies.

Drugstore chain and pharmacy benefits manager CVS Health Corp. has agreed to buy the nation’s third-largest insurer, Aetna Inc. The deal announced Sunday would be worth about $69 billion.

Such a deal would combine a health insurer that covers around 22 million people with a company that runs 9,700 drugstores and more than 1,100 walk-in medical clinics. CVS also processes more than a billion prescriptions annually through CVS Caremark, its pharmacy benefits management business.

The marriage makes sense for several reasons, Wall Street analysts have said since the negotiations were first reported. Here are three key factors:

1. BETTER CARE MANAGEMENT

Pharmacy benefit managers — which run prescription drug plans for employers, government agencies and insurers — use their large purchasing power to negotiate prices. But they and insurers have long wanted to do more than just process claims and pay bills.

They believe the key to controlling health care costs is making sure people stay on their medicines, get care at the right locations and do whatever they can to avoid expensive hospital stays. The idea is to work with patients while they are healthy instead of waiting until they’re sick.

For example, Aetna could use the CVS network of clinics to help patients with diabetes keep tabs on their blood sugar and cholesterol levels. That could stave off more serious complications like a heart attack.

The combined company also could push the clinics and telemedicine as an alternative to expensive emergency rooms. Insurers have long fought to curb the use of ERs for anything that isn’t life threatening. Retail clinics can cost a third of the price for an ER visit, Leerink analyst David Larsen said in a research note late Thursday to investors.

CVS could expand its clinics or create small urgent care centers — which can handle a wider array of ailments — in its stores, Mizuho Securities USA analyst Ann Hynes said in another note. Then it could steer people to them by waiving co-payments for those options and charge $500 if they went to an ER instead.

2. BULKING UP FOR AMAZON

Combining with Aetna would help CVS protect its stake in the pharmacy benefits management market in case online retail giant Amazon jumps into prescription drugs. It also would bring in more customers to its stores as Aetna patients fill prescriptions and possibly buy other items, too.

Pharmacy benefits managers and their investors have been sweating a possible Amazon entry into this market for weeks. Amazon has yet to announce any plans for such an expansion, but the St. Louis Post-Dispatch reported recently that Amazon has been approved for wholesale pharmacy licenses in at least 12 states.

Amazon would represent a "massive threat" to CVS, Leerink analyst Ana Gupte said. She noted Amazon could take prescriptions away from CVS and is already competing with the drugstore chain over store merchandise it sells outside the pharmacies.

3. DECENT REGULATORY ODDS

Antitrust regulators have shown a disdain for big business combinations in the same sector.

They sued to stop Aetna’s purchase of rival Humana Inc. and the Blue Cross-Blue Shield insurer Anthem Inc.’s deal with Cigna Corp. Those multibillion-dollar acquisitions would have boiled the country’s five biggest insurers down to three.

CVS also saw a plan by rival drugstore chain Walgreens Boots Alliance Inc. to buy all of Rite Aid Corp. languish for a couple years before the companies agreed to a much smaller combination.

The businesses of CVS and Aetna have fewer overlapping parts than those other combinations that worried regulators. The companies both manage Medicare prescription drug coverage, and some of that business may have to be sold.

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