The idea of the place that sells you toothpaste also managing your health insurance may feel odd. But that’s set to be a new reality after CVS Health Corp.’s announcement on Sunday that it will acquire Aetna Inc. for about $67.5 billion in cash and stock.
In order to justify the hefty cost of this deal, CVS and Aetna need to embrace that oddness and become a far more prominent player in the health care market.
Part of the motivation for the deal is prosaic. Aetna’s key Medicare Advantage market is growing more competitive, but the company has limited options to make a big deal in that space; the government has not been friendly to insurer mega-mergers.
CVS, similarly, has few options to bulk up further in the already concentrated retail pharmacy and pharmacy benefit management (PBM) sectors. Meanwhile, Amazon.com Inc. is contributing to a tough environment for retail sales, amid rumors it might also get into the pharmacy business. Even without Amazon, CVS’s PBM arm faces lower-cost competitors and government scrutiny.
The deal will cut drug costs for Aetna and provide a captive market of insurance customers for CVS’s retail and pharmacy businesses. But given the $45 billion in new debt CVS is raising, the deal will have to do more than that.
The new company has an obvious role model in UnitedHealth Group Inc., which has used in-house PBM OptumRX and other non-insurance businesses to become the most valuable health insurer in the U.S. But matching UnitedHealth isn’t easy.
CVS’s PBM is larger than OptumRX. And it will get even bigger after Anthem Inc.’s planned switch to CVS from rival Express Scripts Holding Co. But its current lead isn’t huge, and the fact that Anthem is starting its own PBM means CVS will have a limited and low-margin role in that relationship.