Aetna, one of the nation’s leading managed care providers, and CVS, America’s largest pharmacy chain, agreed to a merger announced in December 2017, in which CVS would buy the insurance giant for $69 billion. Earlier this month, shareholders for both companies approved the deal.
From shifts in health care costs to changes in how emergency and primary care is delivered to patients, the consequences of the merger are expected to be significant. The deal still needs approval from the federal Department of Justice.
Mihaylo Finance Professor Xiaoying Xie, who specializes in insurance studies, believes that there are potentially positive benefits from such a deal.
“Theoretically, an M&A deal would create value if it brings operating strategy between the acquirer and target. Aetna is the fifth largest health insurer in the U.S. ranked by direct premiums written. Before this deal, Aetna’s bid to merge with Humana, the third largest health insurer in the U.S., was blocked for its anti-competitive nature,” she says. “The current deal with CVS, however, is a vertical integration. Technically such integration will not negatively affect the competitiveness of health insurance markets. Instead, its potential operating synergy may help lower the overall cost of health care and benefit consumers.”
Xie believes that convenience would result from the integration of insurance, medical providers and pharmacy services. “The extensive networks and the possible community-based health hubs would provide convenience for members,” she says. “It may possibly lower the overall health care costs through offering a one-stop solution for minor medical services and helping members manage their chronic diseases more cost-effectively.”
While horizontal consolidation, involving mergers among competitors, may not become the wave of the future in health care, Xie notes that the Aetna/CVS deal is emblematic of the growth of vertical consolidation in health care, which involves deals with firms up or down the supply chain.
“Back in 2015, UnitedHealth, the largest US health insurance company, purchased pharmacy-benefit manager Catamaran and combined it with UnitedHealth’s OptumRx to become the third largest pharmacy-benefit manager,” she notes. “More recently, UnitedHealth’s Optum announced its acquisition of DaVita Medical Group, which is another example of vertical integration between health insurers and medical providers. The most striking deal following the CVS/Aetna merger is Cigna’s $67 billion acquisition of Express Scripts Holding Co., which was announced earlier this month. Cigna had a similar experience to Aetna in that its attempted merger with another large health insurer – in this case Anthem – was blocked by regulators.”
The HMO Impact
The Aetna/CVS merger would create a format similar to the health maintenance organization (HMO), which provides economic efficiency through the integration of services. Xie notes that Kaiser Permanente, the largest insurer in California, is an example of this structure in current practice.
“In nature, Kaiser’s model is the integration of insurance, medical providers and pharmacy services which is considered to be a very successful model as reflected from Kaiser’s rising market share in the health insurance market in recent years,” she says. “In the Aetna/CVS case, this practice may bring down the cost of prescription drugs, however, whether it will reduce the transparency of drug prices for employers or whether it will increase the over-the-counter drug prices is still an open question.”
Opportunities in Health Insurance
According to a report from the Insurance Information Institute regarding employment trends, in 2017, 470,000 employees worked in the American health insurance industry, though regulatory changes and new technologies are expected to significantly change this field in the future.
“Business students can prepare themselves for this change in several ways. First, get a better understanding of the ongoing transformation in the health insurance industry and the challenges and opportunities the industry faces now. Second, broaden your knowledge regarding the operation of health-related industries, such as medical, pharmaceutical, pharmacy benefits management, and health insurance operations, so you can better understand and discover the vertical integration opportunities. The new business model will demand broad knowledge and a creative mindset,” says Xie. “Lastly, learn more about the opportunities and challenges brought by new technologies such as mobile apps, cloud computing, virtual reality, and artificial intelligence, as well as the shared economy that may very well shape the future of healthcare.”
For More Information
For more on preparing for insurance careers, visit CIS at SGMH 4280. The center hosts various speakers and offers academic undergraduate and graduate insurance programs, scholarships, and job-placement resources.