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CVS-Aetna merger could trigger a wave of takeovers

Insurance saves lives

While a takeover of health insurer Aetna (AET) by retail pharmacy chain CVS Health (CVS) remains a rumor, reports that a deal is in the works is already stirring speculation about its potential impact on consumers and the insurance industry at large.

One possible outcome: Your local drugstore could soon become your health insurer.

"A potential merger with Aetna would give CVS greater influence over where the 23 million Aetna plan participants get their prescriptions in the future," said senior analyst Joseph Agnese of CFRA Research, a New York City-based independent financial research firm. "It would likely reduce consumer options because Aetna plan participants would be subject to higher co-pays when choosing a non-CVS related mail order or drugstore to fill their prescriptions."

Combining the companies would definitely benefit CVS in one way given that, in business, size matters. Having a secure, and larger, base of people using CVS would give the nation's second-largest drugstore chain more negotiating power with drug manufacturers, as well as helping it keep prices low.

"If more plan participants fill their prescriptions through CVS's mail order and drugstore businesses, it would gain negotiating leverage when purchasing drugs from manufacturers," Agnese said. "Increasing drug purchasing power has been a goal for drugstore operators in recent years as they seek to offset the tremendous pricing pressures they're experiencing."

Not that CVS doesn't already have a lot of negotiating power. As a pharmacy benefits manager (PBM), the company fills more than a billion prescriptions annually. But analysts envision an possible threat from giant online retailer Amazon (AMZN), which reportedly has been approved to sell pharmaceuticals in 12 states.

"In the future you could say, "Alexa [Amazon's voice-activated personal assistant], refill my prescriptions," J.P. Morgan analyst Lisa Gill told CNBC, noting that the deal has been rumored for nearly a year. "Or Alexa could ask: 'Did you remember to order your Lexapro?'"

Agnese doesn't think Amazon is the catalyst for CVS circling Aetna. "However, I think a merger would make the combined company a stronger business which would be better positioned to defend itself against a potential Amazon threat," he added.

After Aetna shares hovered around $160 for the past week, rumors of a possible acquisition at a price of $200 per share sent the stock up to $173.12 at the close of trade on Friday, valuing the nation's third-largest health insurer at more than $57 billion. CVS shares slumped after The Wall Street Journal reported on Thursday that the companies were in talks. 

The nation's major health insurers have been under pressure to address losses suffered from former President Barack Obama's Affordable Care Act and were already experiencing cutbacks in program offerings. The situation grew worse when President Donald Trump attempted to eliminate "Obamacare," and from his recent remarks about health insurers making too much money.

Four health insurers had already planned to consolidate in 2015, but with each other. The merger of Aetna with Humana (HUM) and Cigna (CI) with Anthem (ANTM) was blocked by the Justice Department, which filed antitrust suits against them a year later. After two federal judges ruled against the deals, merger plans were dropped in early 2017.

In July of this year, CVS Caremark, the drug retailer's specialty pharmacy arm, signed a 12-year contract to be the PBM for 9.7 million Aetna customers. CVS Caremark would administer approximately $9.5 billion in annual drug spending. Both CVS and Aetna are based in the Northeast – CVS in Woonsocket, Rhode Island and Aetna in Hartford, Connecticut.

Analysts say that if the CVS-Aetna deal goes through, it could cause a wave of industry consolidation, with Walgreens Boots Alliance (WBA) and Rite-Aid (RAD) seeking mergers or acquisitions with other major health insurers. Health insurer UnitedHealth Group (UNH) has been mentioned as a possible buyer.

There's no way of knowing if the CVS-Aetna deal would succeed -- most mergers don't, falling victim to culture clashes and distracted management. Still, it may be a necessity for both sides even considering the risks.

"Health care mergers and acquisitions have been on a tear in the past few years," according to the website Healthcare Finance. "The savings tied to economies of scale become even more important as margins tighten."

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