Aetna acquisition could help CVS's Amazon defence

The $69bn acquisition of the US health insurer Aetna could help the pharmacy benefit manager (PBM) CVS Health defend itself against the expected market entry of Amazon, ahead of a push by the online retailer into prescription medicines.

It also raises questions about the fate of Express Scripts, which would become the only one of the big US PBMs not to have an in-house insurance company. Of course, first the CVS-Aetna deal has to meet antitrust requirements, which is not a given.

CVS has talked up the potential of the takeover to improve healthcare efficiency and lower costs. However, insurers can act as a check on PBMs, which have themselves drawn criticism over a lack of transparency. And decreasing competition in the sector might have the opposite effect on drug prices.

Amazon attack

For CVS, which runs a pharmacy chain as well as being a PBM, a deal of some kind had been looking increasingly necessary. One or both sides of the business could soon come under threat from Amazon, which has not said exactly what it is planning, but which could soon become anything from an online pharmacy to a full-scale PBM (Ask booksellers what Amazon might mean for medicines, November 8, 2017). 

However, investors were not convinced by the acquisition, sending CVS’s stock down 3% this morning. The credit ratings agency Moody’s pointed out that the deal would be financed largely by debt, and that it came with “high execution and integration risks”. CVS is also assuming Aetna’s debt of $8bn, pushing the total deal value up to $77bn.

There are questions about what the takeover will mean for CVS’s recent agreement with Anthem, under which the latter is creating its own PBM, Ingeniorx. But on a conference call today CVS executives insisted that that partnership would not be affected by the CVS-Aetna tie-up.

Either way, CVS’s PBM rival Express Scripts looks set to lose out. It is currently partnered with Anthem, but that contract will not be renewed when it expires in 2019. The two companies had a bust-up in 2016, with Anthem claiming that Express Scripts had overcharged it to the tune of $3bn.

Express Scripts now faces the prospect of losing a partner, gaining a new competitor in the shape of Ingeniorx, and falling behind its rivals as the only large PBM not linked to an insurer. Unitedhealth and Optumrx were the first to use the combined model, and the group expanded its PBM footprint in 2015 with the acquisition of Catamaran.

PBMs questioned

Express Scripts might need to follow CVS’s lead if it wants to keep up with the pack and defend itself against the threat of Amazon – particularly as the PBM model is coming under fire from all sides.

PBMs are supposed to lower costs by using their scale to negotiate with pharma companies, but the model has been criticised for keeping drug prices high. And there are also doubts about whether a middleman like a PBM, that also needs to make a profit, is necessary.

The PBM market is ripe for disruption and, judging by its track record in other industries, Amazon could be the company to do this.

CVS will no doubt hope that the acquisition of Aetna will help shield it from the worst of this. The company envisages a world where Aetna customers could access basic care in a CVS pharmacy instead of a doctor’s surgery or hospital, thereby reducing costs. The integrated PBM-insurer model could also improve care for patients with chronic conditions and reduce hospital readmissions, according to CVS.

The reasons behind the deal seem sound. Questions remain about whether CVS can pull it off, and whether it has overpaid.

To contact the writer of this story email Madeleine Armstrong in London at madeleinea@epvantage.com or follow @ByMadeleineA on Twitter

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