CVS Health to acquire Aetna in a $69 billion transaction; Major move to reduce costs and improve access to health care – December 5, 2017

CVS Health just announced that it has entered a definitive merger agreement to acquire Aetna in a ~$69 billion deal ($77 billion including the assumption of Aetna’s debt). The transaction, which will be subject to regulatory approval, is expected to close in the second half of 2018 and represents the first partnership of its kind between a major retailer with a pharmacy benefit manager (PBM) arm and an insurance company. The combination of CVS’s clinical competence and extensive brick-and-mortar presence with Aetna’s health care benefits services is being touted as an opportunity to redefine and modernize consumer healthcare experiences, creating an integrated community-based system.

Indeed, the concept of combining medical and pharmacy claims data is powerful. Ideally, the new combined healthcare platform would increase the speed and efficiency of treatments and reduce long-term costs for patients and employers. If successful, CVS stores and pharmacies will provide increased clinical care to patients, which – through early intervention – will improve outcomes. We imagine that hospitals and physicians will lose revenue with fewer patient visits. We were pleased to hear so overtly in this announcement that the partnership plans to address the growing costs of chronic disease. In fact, diabetes was the only disease mentioned in the CVS announcement, which noted that patients with diabetes will be able receive care in between doctor’s visits through face‐to‐face counseling at a CVS‐based health hub. This at least conceptually seems like a very big deal, but the implementation will be key.  The goal is to move care closer to the patient, in the community and the home, and that includes greater use of remote monitoring – by Aetna health care professionals - to follow blood sugar levels, weight gain, etc. (Remote monitoring is already part of Aetna’s care services for some of its members.)

Financial benefits were emphasized: According to Aetna CEO Mr. Mark Bertolini, integrating medical care with pharmacy will produce up to $117 in monthly savings for each member with a chronic condition. We imagine that potential savings would vary quite a lot patient, so we’ll have to wait to see how this plays out also. As we pointed out in our “Week in Review,” Mr. Bertolini has historically emphasized the long-term cost of diabetes complications – costs levied on Aetna and eventually on governments – and he has envisioned CVS stores as places to go for blood draws, X-rays, A1c tests, and eye and foot exams – and even dialysis, which was rather surprising to read. He envisions a complete reconfiguration of CVS stores so they more closely resemble – thematically if not physically – Apple stores, where people want to visit and spend their time and money.

We’d also love to see less junk food sold, and this may even be part of things longer term – CVS leader Helena Foulkes led the charge to get tobacco out of CVS, and there may be more here on a related front, though historically the company has not mentioned this. We are keen on this fundamental remodeling of how people receive health care, which is more in line with the convenience- and cost-driven modern consumer, and we only hope CVS holds the same ambitions of Mr. Bertolini.

In an era of marked concern over drug formulary trends, however, we also have some questions about this deal: Aetna provides commercial insurance for 22 million Americans, and the PBM arm of CVS Health would become the sole gatekeeper to their drug access. To our understanding, PBMs leverage their patient access to negotiate higher rebates for payers from manufacturers – higher rebates mean PBMs receive a bigger cut “off the top” – in turn driving manufacturer list prices higher to maintain profit margins. To be sure, however, the PBM world is murky at best, and these negotiations happen behind closed doors. We are optimistic that cost savings can be passed on to patients, but it’s difficult to predict how this deal will affect drug prices, other PBMs and payers, and consumers not in the CVS/Aetna ecosystem. We think this deal could lend itself well to more outcomes-based contracting, which can both improve access to medications and lower costs for payers – Aetna has experience with these, and CVS tied obesity drug rebates to weight based outcomes for 2018. Notably, CVS Health itself manages coverage for 90 million Americans (many not covered by Aetna), and we’re curious how their coverage will be impacted. Earlier this year, the formulary announced an initiative with Epic to make lower-cost drug alternative easier to find – we understand this more as a user-interface initiative rather than any change to CVS’ business, but were pleased at the patient-centeredness of the project.

As for the key transaction terms, CVS Health will acquire all outstanding shares of Aetna for a combination of cash and stock. CVS and Aetna shareholders will own 78% and 22% of combined company, respectively. Aetna will still operate as a stand-alone business unit within CVS and will be led by members of the current management team, who will play a major role in the combined company. Three of Aetna’s directors will be added at closing to CVS Health’s Board of Directors, including Mr. Bertolini, but he will no longer be responsible for day-to-day management.  We are very pleased to see him at the forefront of this high-impact deal, as Mr. Bertolini has been an exceptional leader in healthcare: We highly recommend checking out this NYT profile, a Forbes piece on Aetna wages, and a compelling interview on “preventive disruption” with PWC.

-- by Elizaveta Maslak, Ann Carracher, Abigail Dove, and Kelly Close