CVS-Aetna Deal Could Mean End of Era in How Drugs Are Paid For

If Aetna Inc. is eventually swallowed by CVS Health Corp., an important part of the health-care business will be changed — perhaps for good.

For years, pharmacy benefits were largely carved out from the rest of a medical coverage plan. But increasingly the two services are being combined, a move that in theory will make it easier to verify whether expensive drugs are worth the cost. A merger of the third-biggest health insurer with the largest U.S. drugstore chain, which also operates a pharmacy-benefit management company, could speed the process.

“You are hearing the warning for the end of the road for the classic standalone” pharmacy-benefit business, said Pratap Khedkar, managing principal at consulting firm ZS Associates.

Drugmakers are producing more pricey treatments for cancer and rare diseases. Combining drug and medical benefits in the same place is “the only way” payers will figure out whether such expensive new drugs are actually making people better and saving money by keeping them out of the hospital, he said.

A merger of CVS and Aetna would create a health-care behemoth and put huge pressure on standalone players such as Express Scripts Holding Co. and Walgreens Boots Alliance Inc. Express Scripts would become the last major standalone pharmacy-benefit manager not allied with a major insurer. 

All Channels

CVS and Aetna have held discussions about a potential deal, according to people familiar with the matter who asked not to be identified as the details aren’t public. A newly combined company would “own the entire chain, from prescribing and filling prescriptions to the health plans that pay for them,” said Michael Rea, of Rx Savings Solutions, which has an app that helps patients find lower cost drugs.

Under a combined roof, the insurance arm of CVS-Aetna could help keep costs down by routing patients needing basic urgent care to CVS-owned walk-in clinics and keeping them out of expensive hospital emergency rooms, analyst Ann Hynes of Mizuho Securities said in a note to clients. The company would also become a formidable competitor to UnitedHealth Group Inc., the biggest health insurer and owner of its own PBM unit, OptumRx.

But even with the new clout, a merger isn’t likely to be derailed by federal antitrust authorities, said John Briggs, an antitrust attorney at Axinn Veltrop & Harkrider in Washington.

CVS and Aetna declined to comment.

Walgreens, the No. 2 drugstore operator, could also feel the pressure. A CVS-Aetna marriage could cause the drugstore chain to look for its own acquisition targets, with Express Scripts being the most likely, Charles Rhyee, an analyst at Cowen & Co., wrote in a note to clients Friday.

And then there’s Amazon.com Inc., which recently gained drug-wholesaler licenses in 14 states. The looming threat of the e-commerce behemoth entering the mail-order pharmacy business and pushing down profit margins for drug distributors, benefit managers and retail pharmacies intensifies the pressure on standalone players.

For CVS, the move is “a natural defense against the potential threat of Amazon entering the retail pharmacy market,” Rhyee said.

Another possibility is that Amazon could buy Express Scripts. That would give the internet retailer an instant and large foothold in both the PBM industry and the mail-order pharmacy business.

‘Strong’ Model

Health insurer Anthem Inc., Express Scripts’ biggest current client, announced earlier this month that it would leave Express Scripts when its contract ends at the end of 2019 to form its own PBM unit. And Prime Therapeutics, another major player, manages drug benefits for nonprofit Blue Cross and Blue Shield plans in numerous states.

“Our model is strong and thriving,” said Jennifer Luddy, a spokeswoman for Express Scripts. “We believe in the value that we provide to our customers as an independent PBM.”

On an earnings call this week, Express Scripts Chief Executive Officer Tim Wentworth said he was open to a deal with Amazon to help serve cash-paying patients.

Walgreens declined to comment.

In terms of the CVS-Aetna deal, antitrust authorities will look closely at the competition between the companies in selling Medicare Part D plans for the elderly, said Briggs, the attorney.

There could be fight between the Justice Department and the Federal Trade Commission, which share antitrust enforcement, over which agency will investigate the merger, according to Briggs. The Justice Department handles insurer mergers and successfully stopped the combination of Aetna and Humana Inc. this year. The FTC investigates retail pharmacy deals. In September, it cleared Walgreens’ acquisition of 1,900 Rite Aid Corp. stores after Walgreens shrank the size of the deal.

Still, a CVS-Aetna deal would likely win approval because a number of other major players will remain in the Part D market, he said.

“That’s an easy fix,” Briggs said. “The whole deal is not going to crater on account of Part D.”

    Read more: http://www.bloomberg.com/news/articles/2017-10-27/cvs-aetna-deal-could-mean-end-of-era-in-how-drugs-are-paid-for

    Amazon Threat Causes Shakeout in the Health-Care Industry

    Amazon.com Inc. is casting a long shadow over the health-care industry.

    The prospect of the giant Internet retailer entering the business is beginning to cause far-reaching reverberations for a range of companies, roiling the shares of drugstore chains, drug distributors and pharmacy-benefit managers, and potentially precipitating one of the biggest corporate merger deals this year.

    On Thursday, the pressure was plain to see. A report that Amazon had received pharmacy-wholesaler licenses in a dozen states triggered a fast and steep selloff that wounded the likes of McKesson Corp., AmerisourceBergen Corp. and Cardinal Health Inc. And late in the day, shares of Aetna Inc. surged after a report that it was in talks to be taken over by CVS Health Corp.

    Executives in the drug industry say that Amazon could use its expansive online reach and its logistical muscle to threaten companies that ship and sell medicines to consumers and cut pricing deals with drug makers.

    “Size and scale-wise, they can disrupt anywhere they want to disrupt,” said Chip Davis, president of the Association for Accessible Medicines, a trade group for generic medication, in an interview Thursday.

    Competitive Squeeze

    A deal for Aetna could conceivably move CVS further away from the business of brick-and-mortar retail drugstores and deeper in health services such as pharmacy benefits, where it already has a sizable presence.

    Combining Aetna and CVS would create a health-services giant and a bigger competitor for UnitedHealth Group Inc., which is the largest U.S. health insurer and has its own own clinics and a pharmacy-benefits unit.

    The presence of Amazon is already being felt by retailers and companies that sell drugs over the counter. The head of of Bayer AG’s consumer-health business said on a conference call with analysts Thursday that the wider shift to online shopping by U.S. consumers was hurting its business. Erica Mann, the division’s chief, dubbed it the “Amazon effect,” saying buyers are looking for value.

    At the same time, the pecking order in the health-supply chain is beginning to shift.

    Earlier this month, insurance giant Anthem Inc. said it was cutting ties with Express Scripts Holding Co. after a long dispute over pricing and starting its own pharmacy-benefits manager in 2020. A bulked-up CVS and Anthem’s new venture could raise the pressure on Express Scripts, which has touted its independence.

    Any tie-up of Aetna and CVS would follow a pair of failed mergers among health insurers. The deals would have reduced the ranks of big U.S. health insurers from five to three, a prospect that led the Justice Department to oppose both prospective tie-ups.

    If the Aetna deal happened, “CVS would have a dominant position” in the drug-benefits business, said Michael Rea, founder of Rx Savings Solutions, which has an app that helps patients find low cost drugs.

    Pharmacy Threat

    Analysts have speculated that Amazon could soon enter the business of selling prescription drugs, threatening to disrupt retail drugstores, drug wholesalers, and the pharmacy-benefits management business. While Amazon has never publicly commented on what its plans may be, CNBC reported this month that the Internet giant could make a decision about selling drugs online by Thanksgiving. The network didn’t name its sources.

    McKesson slid 5.2 percent at 4 p.m. in New York, while AmerisourceBergen shares fell 4.2 percent and Express Scripts sank 3.7 percent following the report on Amazon’s state licenses by the St. Louis Post-Dispatch.

    Bloomberg News confirmed that Amazon had obtained wholesale-pharmacy licenses in at least 13 states, including Nevada, Idaho, Arizona, North Dakota, Oregon, Alabama, Louisiana, New Jersey, Michigan, Connecticut, New Hampshire, Utah and Iowa. An application is pending in Maine. Some of the licenses were obtained late last year and some this year.

    Amazon declined to comment.

    The licenses could be part of Amazon’s business-to-business sales effort, which would include sales to hospitals, doctor’s offices and dentists. Amazon on Tuesday announced “Business Prime Shipping,” which brings the quick delivery associated with Amazon household orders to workplaces. 

    The Seattle company launched Amazon Business in 2015, offering tractor parts, latex gloves, file folders and millions of other products needed in factories, hospitals, schools and offices. Businesses are shifting their supply shopping online from less-efficient methods such as browsing print catalogs, faxing orders and telephoning sales representatives.

    Online business-to-business sales – a broad category that includes pens and paper for the office as well as lab equipment and parts used in factories — will grow to $1.2 trillion in 2021 from $889 billion this year, according to Forrester Research Inc.

    On a conference call Thursday with analysts, McKesson CEO John H. Hammergren said the wholesaler doesn’t “take the entry of any competitor lightly,” but said the company already has a large online order operation and similar to what Amazon does logistically. “To some extent, we were Amazon before it was cool to be Amazon.”

      Read more: https://www.bloomberg.com/news/articles/2017-10-26/drug-wholesalers-slump-after-amazon-com-obtains-state-licenses