The CVS-Aetna Merger Will Be a Disaster for Small Drugstores and Patients ?

https://slate.com/business/2017/12/the-arguments-for-and-against-the-cvs-aetna-merger.html

Big corporate mergers in the health care industry tend to work out poorly for customers. When hospitals combine, they raise prices. When insurers get together, premiums can leap. But when pharmacy giant CVS announced last week that it planned to buy Aetna, the nation’s third largest insurer, in a deal worth $69 billion, some experts were cautiously optimistic. “[T]here’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,” Austin Frakt, a professor at Boston University’s School of Public Health, wrote at the New York Times.

The optimism isn’t absurd. In theory, merging might help the companies nudge patients into more low-cost and effective care. It could also weed out some of the bad incentives that appear to be driving up prescription drug costs.

But there are also reasons to be wary of the deal, which could help CVS and Aetna unfairly elbow away their competition.

To understand why CVS would be interested in acquiring an insurer, there are a few important things to know. First, many industry watchers seem to be afraid that Amazon is planning to enter the prescription drug business, which would put unbelievable pressure on retail pharmacies. CVS may be girding itself for that future by expanding into other lines of business. Second,

CVS isn’t just a chronically understaffed purveyor of energy drinks, toothpaste, and Lipitor. It’s also a health care provider.

Along with its 9,700 drugstores, CVS runs 1,100 MinuteClinic locations, where patients can walk in without an appointment to deal with their basic health needs, like having a rash examined or getting a flu shot. Buying Aetna and combining it with this network would create a convenient, symbiotic relationship. For instance, Aetna could push its enrollees to use CVS’s inexpensive clinics, staffed with nurse practitioners and physician assistants, rather than visit a primary care doctor every time they come down with a fever. Of course, patients would probably stop by the pharmacy counter to fill their prescriptions, too.

The companies also argue that bringing together an insurer with a web of retail clinics will make it cheaper to treat chronic diseases, which are a major driver of health costs. Diabetes sufferers, for instance, could stop by CVS for check-ins to monitor their health and pick up their supplies. The pharmacy could keep tabs on their blood sugar remotely and send a helpful text when levels are off. This sort of pre-emptive care could prevent major complications from the condition, which would be good for the patient, and Aetna’s bottom line.

This is the sort of value-based care model—where providers make money by keeping patients healthy and expenses down, instead of charging for as many services as possible—that most experts think the U.S. medical system needs to shift toward if we ever want to control our health spending. The U.S. government, for its part, has been trying to nudge hospitals and physicians in this direction for years. And while there are questions about whether CVS can actually pull off its vision, it’s not necessarily an absurd idea to try. “This is certainly going to be difficult to do,” Craig Garthwaite, a professor at Northwestern University Kellogg School of Management who studies the health care industry, told me. “But the first step along that road is to create the economic incentives so that you make more money if you make people healthier.”

There’s another reason wonks are guardedly optimistic about the merger, and it has to do with drug prices. Since 2007, CVS has owned CVS Caremark, the country’s second largest pharmacy benefits manager, which counts Aetna as one of its most important clients. Employers and health insurers hire PBMs, as they’re called, to handle their prescription drug plans, and much of their work involves negotiating discounts from pharmaceutical-makers. But many observers have begun to think that these middle men, who are theoretically supposed to keep drug costs down, may actually be contributing to their rise by encouraging companies like Pfizer and Novartis to hike their list prices, then offer big rebates in order to win business.

A big part of the problem is that PBMs typically take a cut of each rebate for themselves, so they benefit when list prices go up. (If that makes the industry sound like a kickback scheme, well, you be the judge.) This might be less of a problem if there were lots of companies competing by offering to accept a smaller slice of the action in return for their services, but the industry has become incredibly concentrated. According to Bloomberg, about 70 percent of all prescriptions in the U.S. are handled by just three PBMs, including CVS Caremark.

Because their dealings are bound by confidentiality agreements, it’s not clear exactly how much of the country’s spiraling drug cost problem can be traced back to the PBMs. Their role may even be a bit overhyped, since the companies make a convenient scapegoat for pharma manufacturers looking to deflect blame for high prices. When Mylan come under fire for hiking the cost EpiPens last year, for instance, it was quick to blame the “broken system” created by companies like CVS Caremark.

Whether or not these companies are the villains they’re often painted as, though, there seems to be a growing consensus that insurers are better off cutting-out the middle man and managing their own PBMs. The theory is that instead of trying to maximize their own share of each rebate while driving up drug prices in the process, an in-house benefits manager will only be incentivized to keep costs low for the insurer they’re attached to. United Healthcare owns OptumRX, the number-three PBM, which it combined with Catamaran, then the industry’s number-four player, in a $12.8 billion deal. And in October, Anthem announced it would end its contract with industry leader ExpressScripts and start its own internal PBM with CVS’s help. By purchasing Aetna, CVS is continuing a trend that could rationalize the country’s drug distribution system, at least a bit.

So, that’s the upbeat story you can tell about this merger. There are also reasons to doubt it.

For starters, it’s not obvious that sending patients to their local MinuteClinic instead of their family doctor will save all that much money for customers or Aetna itself. America’s astronomical health spending isn’t driven by an excessive number of visits to primary care visits. It’s driven by hospitals, largely, and there’s not much about this merger that suggests it would help Aetna and CVS squeeze those costs. “They don’t have doctors. They don’t have hospitals. They don’t have outpatient centers,” Martin Gaynor, a professor of economics and health policy at Carnegie Mellon, told me. “They have outpatient pharmacies and they have MinuteClinics. What do you do with that?”

As for fixing our broken drug distribution system: United Healthgroup has owned a PBM business for a while now, and there’s no indication that it’s saved customers much if any money. That may be because, despite what the incentives look like on paper, it’s more profitable for the merged companies to keep making profits off of high drug prices and risk losing a few insurance enrollees than it is to try to iron out those costs, David Balto, an antitrust lawyer and former policy director at the Federal Trade Commission’s Bureau of Competition, told me. “Where we have seen insurers and PBMs merge, we’ve seen no efficiencies,” he said.

Finally, it’s possible that letting CVS and Aetna merge will give them new tools to unfairly undercut their competitors. The most obvious concern is that CVS will push Aetna customers to use their pharmacies instead of, say, Walgreens, or their mom-and-pop drugstore around the corner. “When CVS acquires Aetna, will it restrict where Aetna consumers get their drugs? You better believe they will,” Balto said. The National Community Pharmacists Association, which represents the owners of 22,000 pharmacies, including independent shops and regional chains, has voiced the same concern.

The merged companies could have some subtle but unfair advantages over other insurers, as well. CVS might offer Aetna a better deal on prescriptions than, say, United or Cigna, giving its corporate sibling a leg up. Some antitrust advocates, like Open Markets policy director Phillip Longman, are also concerned that Aetna could leverage the vast trove of patient data from CVS’s PBM business in ways that might be unfair to other carriers.* “In the health care business, if one player gets this trove of information, it’s a big competitive advantage,” he said.

Just like the potential benefits of the merger, a lot of these concerns are hypothetical at this point, and there are reasons to think they could be overblown. CVS might not want to alienate other insurers and customers by openly playing favorites with Aetna. Regulators could require CVS to set up a firewall to ensure Aetna doesn’t abuse Caremark’s data. As for independent pharmacies, they may be in trouble anyway if Amazon decides to finally jump into the business.

But the issues deserve careful attention. Unfortunately, we can’t necessarily count on the government to give them that. For several decades, the Justice Department has focused on policing horizontal mergers—where two companies in the same line of business, such as two insurers, combine. But CVS and Aetna would be what’s known as a vertical merger, where companies in two different stages of a supply chain join up. The DOJ has generally given those deals a free pass. It made an enormous exception recently, by suing to stop AT&T from acquiring Time Warner, but many believe that may have been political payback by the Trump administration against Time Warner–owned CNN and not precedent.

So, could the marriage of one of the country’s biggest pharmacies and biggest insurers be a happy one for consumers? Or will it just lead to a more concentrated health care industry without benefiting patients? It’s doubtful that the government is going to stop us from finding out.

3 Responses

  1. No kidding. Wanna let patients DIE? Vote REPUBLICAN! Remember Health Care is NOT A RIGHT! See, GOP presidential primary debate Tampa Fla 2012.
    Wanna know why CVS has bought Aetna now?? And not BEFORE?? See, Trump administration, changes to FTC.
    Hope you morons that voted a Republiscum gubbmint are proud!
    Death to the sick working class and CHILD MOLESTERS FOR U.S. Senate!!

  2. I totally agree with Connie. The issue I have is I just received a letter from my insurance Blue Cross/Blue Shield of CA. If I want to continue getting a discount on my prescriptions I have to get my medications from CVS for regular prescriptions and mail order. For specialty drugs that have to be pre-approved by my insurance, I have to use Walgreens. I take Linzess because of my prior 22 years using opioids which starting in 2018, it will have to be approved by Blue Cross and then filled at Walgreens for a reduction of cost. I boycotted both of these chains due to refusing to fill my prescriptions of pain medication. Last was 2 years ago when CVS needed to know why I was taking pain meds. It was Saturday and they said they needed to talk to my Physician. Well, I said call them. She told they are not open on Saturday. Mine is open on Saturday for half days . When I told her call they are open she then tells me oh we don’t have time to call them. I was the ONLY person AT the counter. 4 people working (??????) behind the counter sitting around looking at family photos. So I started using Wal-Mart. Never a problem. About 6 months later I started using marijuana for pain. It works great for me so I got a medical card. I am afraid that to many individuals are going to be involved in my healthcare. I pay $700 a month just to keep my government plan. That doesn’t include what we pay for Medicare. I am worried about changing plans as I don’t know what is going to happen with Healthcare. Both of us have preexisting conditions.
    Using AT&T and Time Warner is bad example. They have nothing to do with my healthcare. Just saying.
    Thanks for allowing me to vent. It felt great.

    Terri

  3. Chronic illness requires a continuity of care! That’s not going to be given in a minute clinic! You can guarantee that the patient health care costs won’t go down and will most likely go up. I believe that insurance in and of itself has made health care costs go up and quality of care to drop so the nightmare of “health care” will only get worse. As they say “you can’t put the toothpaste back in the tube” and the nightmare will only get worse!

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