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CVS Bid for Aetna Followed a Long Hunt

CVS’s bid for Aetna highlights a push among health-care companies to find new avenues of growth. Here, a CVS store in downtown Los Angeles on Friday.

CVS is now focused on sealing a deal with Aetna, though the hurdles to an agreement are formidable and, if there is one, it may not come until closer to year-end, the people said.

Big companies are rushing to integrate different lines of health-care businesses, aiming to squeeze out costs and use their bulk to bolster leverage with suppliers.

For CVS, a deal would be a bulwark against the threat of competition from Amazon.com Inc., which is exploring a move into the pharmacy business.

CVS already manages pharmacy benefits for employers and insurers, while also selling medicines through its own drugstores. Adding Aetna will expand its reach on the health-care payer side, giving it oversight over all aspects of health-care spending as a medical insurer itself. It will likely accelerate CVS’s existing efforts to remake its stores into health centers more akin to clinics, pushing it deeper into the health-care provider space. It will also lock in Aetna’s 22 million members as customers.

“You have the basis for a less expensive delivery system, at places where employees actually go,” said Robert Galvin, chief executive of Equity Healthcare, which negotiates contracts with health insurers on behalf of companies owned by big private-equity firms, including Blackstone Group , where he is an operating partner. “The diligence is going to be, what does this mean to an employer? Will it lower costs and improve care?”

UnitedHealth is already far down the road of integration. It is the parent of the largest U.S. health insurer and a major pharmacy-benefit manager, as well as a rapidly growing stable of doctor practices and outpatient surgery centers. Humana Inc., which owns its own pharmacy-benefit manager, has talked about going deeper into providing health care to members in their homes. Anthem, which sold off its PBM in 2009, now plans to start a new one in 2020.

For insurers, the tack is partly a reaction to the death of a previous round of deals; Anthem’s acquisition of rival Cigna Corp. and Aetna’s effort to buy Humana both ran aground earlier this year after losing antitrust cases. Cross-industry combinations like a CVS-Aetna deal would likely avoid much of that pushback because they are far more vertical than the insurer-insurer mergers would have been. Analysts said the two companies’ overlap is limited, largely coming in Medicare drug plans.

The insurance companies are facing off against pharmaceutical makers and hospital systems, which themselves have been merging and acquiring doctors, strengthening their hand in pricing negotiations and improving their ability to capture lucrative services. Insurers want to try to move care such as the infusion of specialty drugs away from hospitals and into other settings where costs can be far lower—in CVS’s case, perhaps eventually a MinuteClinic or home-based offering.

“Employers are looking for more comprehensive solutions to solve the big health-care management challenges,” said Nadina J. Rosier, a practice leader at Willis Towers Watson. They also want “a more seamless experience for the member.”

During an earnings call in May, Aetna CEO Mark T. Bertolini said that Aetna and CVS, which already have a contract for pharmacy-benefit services, were “trying to fundamentally rethink how we could work closer together, both on just the pharmacy side but also on the local care delivery that could go on in the community, given that CVS has 9,000 stores within 3 miles of 80% of the American public.”

He said Aetna believed “we need to get closer to home and closer to the community to help people…versus waiting for them to show up maybe once a year at the doctor to get information about how they’re doing.”

But the bottom-line question will be whether the bulked-up CVS can offer better economics than existing insurers and PBMs. “It’ll all depend on the math,” said Jim Winkler, a senior vice president at Aon PLC. “It will depend on the terms of the deal you can put in front of an employer and how transparent as an entity you are willing to be.”

Integration also carries significant risks, analysts say.

A deal with Aetna would be large—the insurer has a market value of nearly $60 billion—and CVS would need to pay for it largely with stock, and a recent decline in the drugstore owner’s shares makes that more expensive. The valuation gap between the two companies has narrowed significantly since they began talking and at about $70 billion, CVS market capitalization is currently less than $15 billion above Aetna’s.

Should the two companies agree to a deal, the new entity is expected to be run by CVS Chief Executive Larry Merlo, the people said.

Pulling together such large entities involves huge operational challenges, with big employers and other clients reluctant to subject patients to disruption.

Also, there is friction as companies seek to expand their role in the health-care food chain. In the case of CVS, it is seeking to own a company that competes against health insurers that it wants as clients. Its clinics may seek to draw patients away from hospital systems that prescribe the drugs its stores sell, and that Aetna needs in its contracted networks to serve members.

For insurers considering using CVS as a pharmacy-benefit manager, ownership of Aetna would be “problematic, there’s no question of that,” said Vicky Gregg, a former health-insurance CEO who is now a partner in a health-focused private-equity firm. “You definitely do get a competitive disadvantage, because they are always going to price more favorably to themselves.” Also, insurers are nervous about sharing detailed data with a competitor, she said.

The most immediate question for CVS on that front will be its deal to service Anthem’s new PBM. In a statement, the insurer said that during its evaluation process, “we considered various strategic possibilities and prioritized flexibility in developing our contract to maintain the ability to adapt to a changing and dynamic marketplace if appropriate.”

Write to Anna Wilde Mathews at anna.mathews@wsj.com and Dana Mattioli at dana.mattioli@wsj.com


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