Continuing to Consolidate: Health Care Mergers & Acquisitions
With prescription drug prices rising, the spotlight is shining brightly on the health care industry. Consumers and politicians alike have questioned how best to curtail rising prices. Consolidation is a central strategy of managed care organizations, pharmacy benefits managers, pharmacies, wholesalers and insurers. These entities believe that through consolidation they could gain more purchasing power and can further reduce costs by increasing use of their own assets. As the pharmacy supply chain is predicated on scale, gains in purchasing power will purportedly allow managed care organizations to leverage their size and gain pricing improvements while, ultimately, reducing costs for all their consumers.
Announced Merger/Acquisition Agreements
CVS Health Corporation–Aetna Inc.
- The merger between CVS Health and Aetna was announced December 3, 2017.
- CVS Health agreed to pay $4.1 billion in cash, issue $21 billion in equity to Aetna stockholders and issue $44.8 billion in new debt to finance the acquisition. CVS Health will also assume Aetna’s debt, which brings the total transaction value to $77 billion.
- CVS Health and Aetna already have a large share of their respective markets. CVS Health is the second largest pharmacy chain in the U.S., controlling approximately 25 percent of the retail pharmacy market. CVS Caremark, the prescription benefits manager (PBM) subsidiary of CVS Health, is the largest PBM, capturing approximately 30 percent of the PBM market. Aetna is the third largest health plan, capturing approximately 5 percent of all covered lives.
- CVS Health believes that this merger can help to quell some of the rising primary care medical costs by allowing it to direct individuals using Aetna’s network to CVS Minute Clinics, reducing costly and avoidable emergency room or urgent care visits, while also allowing better management of patients with chronic conditions.
- Many who oppose the acquisition, which would have been the number two revenue generating company in 2016, behind only Walmart, argue that the same efficiencies could be realized through contractual arrangements between the two companies.
- As CVS Caremark currently generates over 40 percent of its revenue from specialty medications, the merger with Aetna also provide more access to current and future specialty utilizers. This will allow CVS to more effectively manages specialty prescriptions dispensed and reimbursed through providers in Aetna’s network.
Cigna Corporation–Express Scripts Holding Co.
- The merger between Cigna and Express Scripts was announced March 8, 2018.
- Cigna is financing the merger with $52 billion in cash and new equity and assuming $15 billion in new debt.
- Currently, Cigna is the fifth largest Health Plan, capturing approximately 5 percent of all covered lives.
- Express Scripts is the second largest PBM, capturing approximately 25 percent of the PBM market.
- Cigna believes that this merger will allow it to provide end-to-end clinical, medical, and utilization management, which would create significant efficiencies and cost savings.
- As with the CVS Health-Aetna merger, those opposed to this merger believe the same efficiencies can be achieved through contracting.
- It is important to note that this deal represents an insurance carrier buying a PBM. The CVS-Aetna deal is a retail pharmacy chain, which also owns a PBM, buying an insurance carrier.
Rumored Mergers and Acquisitions
Walgreens Boots Alliance-AmerisourceBergen Corp.
- On February 12, 2018, The Wall Street Journal reported that Walgreens had initiated talks to acquire AmerisourceBergen.
- Walgreens is the nation’s second largest retail pharmacy chain.
- AmerisourceBergen is a wholesale distributor of pharmaceutical products.
- In the U.S., three companies account for 90 percent of all revenues from drug distribution. AmerisourceBergen is the second largest of these distribution wholesalers, capturing approximately 35 percent of the drug distribution revenue (approximately $142 billion) in 2016.
- Walgreens currently owns approximately 26 percent of AmerisourceBergen.
- The acquisition would allow Walgreens to consolidate and streamline its supply chain, while also strengthening its global reach.
- On February 27, 2018, CNBC reported that talks had broken off between Walgreens and AmerisourceBergen, however, their source stated that the acquisition talks could resume.
Walmart Inc.-Humana Inc.
- On March 29, 2018, Reuters reported that Walmart had interest in acquiring Humana.
- Walmart is the nation’s largest retailer and one of the larger pharmacy chains with pharmacies located in around 4,600 of its stores, and Humana is the eighth largest health plan, capturing approximately 3 percent of all covered lives.
- Acquiring Humana would allow Walmart to have exclusive control over the health care offered to its employees, while keeping any profits made from administering the health care in house.
- As with the CVS Health/Aetna deal, Humana could also drive use of Walmart’s assets such as in-store health clinics and pharmacies.
- As of this time, the talks between Walmart and Humana are only in their early stages and there has been little indication if the talks will continue.
Kroger Co.-Rite Aid Corporation.
- Following the failure of Albertsons Companies LLC acquisition of Rite Aid, some analysts believe Kroger will look to acquire Rite Aid.
- The failure of the Albertsons-Rite Aid mergers is the second failed merger for Rite Aid in the past one-and-a-half-years. Rite Aid initially agreed to sell 1,932 stores and three distribution centers to Walgreens in January 2017.
- The acquisition of Rite Aid would allow Kroger to expand its interest in retail pharmacies and extend it presence nationally.
- Rite Aid may also consider selling off its PBM subsidiary, EnvisionRx.
The recent vertical mergers, headlined by the acquisitions proposed by CVS Health and Cigna and the potential acquisitions by Walmart and Walgreens, are mergers between companies that occupy different stages of the same industry. Past mergers, akin to Kroger’s proposed acquisition of Rite Aid, have been horizontal mergers between companies that occupy the same stage in the industry. As shown by the failed mergers of Aetna–Humana, Anthem–Cigna and Walgreens-Rite Aid, recent history has not been kind to large horizontal mergers in the health care industry. This same negativity has not been shown to the large vertical mergers that we have highlighted. Even though Makan Dalrahim, the Assistant Attorney General for the Department of Justice, has expressed his skepticism on the ability of large vertical mergers to generate significant efficiencies and believes they would reduce competition in the industry, both the CVS and Cigna acquisitions were approved by the Justice Department. Many analysts have noted the potential for anticompetitive effects of such a vertically integrated company that may result in the merged company failing to pass along any efficiencies and cost decreases to its customers. With the approvals of both acquisitions, those fears will now be tested.
The Talk of the Town
Pundits have speculated that some of the consolidation in the health care industry is in response to Amazon.com. Amazon has expressed interest in disrupting the health care industry. In October of 2017, Amazon began targeting hospitals with its Amazon business offering, selling a limited amount of medical supplies directly. In early February of 2018, Amazon started expanding such sales directly to dentists and doctors. In mid-April, Amazon decided to drop any plans to sell drugs to hospitals. In a further display of its efforts, in January of 2018 it was announced that Amazon, Berkshire Hathaway and J.P. Morgan would collaborate on a new health care company aimed at providing high-quality and transparent health care at a reasonable cost. On June 28, it was announced that Amazon has agreed to acquire PillPack. This confirmed many pundits’ suspicions that Amazon was just at the beginning of its journey into the health care industry. PillPack is licensed to mail prescription medications in 49 states and, once the deal goes through, Amazon will immediately gain access to those licenses, enabling Amazon to bypass some regulatory hurdles. It appears that Amazon has begun to do more than just dip its toe into the health care waters, and many think that there are more significant moves yet to come.
What Is A Plan Sponsor to Do?
Plan sponsors should take note of the market dynamics that these mergers, acquisitions and market disruptions are reinforcing. Plan sponsors must remember that the pharmacy supply chain is driven, first and foremost, by volume. Failure to effectively leverage scale while seeking transparency can create a situation where plan sponsors and participants are paying more, not less. A balanced approach, with prudent strategies and rooted in reality, typically leads to more favorable outcomes.
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- Profiles of the Eight Largest Health Insurers: 2016, AIS Health Data.
- 2016’s Top Retail Pharmacy Chains, According to Drug Store News, Drug Channels.