Verticality of CVS-Aetna Deal Likely Means No Regulatory Challenges

Merging a pharmaceutical line with a major insurer creates a huge player in the industry but not a monopoly. It also opens the possibility of CVS Health buying hospitals and other outlets.

The acquisition of Aetna by CVS Health is likely to go through without antitrust challenges by federal regulators and could spur more vertical integration of healthcare entities, one analyst says.

The size of the merger is not enough to make it a problem for the U.S. Department of Justice, says Randal L. Schultz, a partner at the law firm of Lathrop Gage and chair of the firm's Healthcare Strategic Business Planning Practice group.   

CVS Health announced recently it had agreed to buy Aetna for about $69 billion, blending two giants in the retail drugstore and health insurance markets.

The deal is different from the $48 billion deal to merge insurance giants Anthem and Cigna that was halted by a federal judge in February, Schultz says. That proposed merger ran into antitrust concerns because the resulting company would have monopolized too much of the healthcare insurance market. The other potential antitrust concern is price fixing, and that does not seem to be likely with this merger, he says.

Vertical integration

Unlike the horizontal merging of two large health insurers, combining CVS and Aetna will be vertical integration, and that makes all the difference, Schultz says.

"CVS Health is a pharmacy buying network. That's their big power, where they're really a big player and capture the market, even though they're in the business of retail drug stores too," he says. "This has the potential for changing the healthcare industry because it introduces entrepreneurial ideas into the healthcare marketplace, and we don't have that now. It doesn't create a horizontal monopoly that would violate antitrust laws, and it doesn't create a system in which this one large player is able to control prices across the board."

Schultz notes the prominence of the CVS Minute Clinics in the company's drug stores, which serve a consumer need for efficient and convenient healthcare services while drawing customers in for more profitable retail purchases. More Aetna customers will be driven to those clinics for care, Schultz expects, because it is more cost effective for the insurer and can be more appropriate than patients going to emergency rooms and other expensive settings.

The vertical integration streamlines a decentralized healthcare delivery system that is full of waste and duplications, he says. Other players in the market could follow the lead of CVS Health, which also could build on this initial step, Schultz says.

"If you're huge in pharmaceutical distribution and you buy a big insurer that controls lives and where they go for care, you're creating a more lean, mean, efficient machine," he says. "It's almost backwards because if the insurers were smart they would have bought the pharmaceutical distribution organizations and the physician practices. They're the ones with all the data you need to guide patients to more cost-effective delivery models."

Possible next steps

The next step for the newly combined CVS Health and Aetna could be buying hospitals or ambulatory surgery centers, Schultz says.

"Why not? You could have a vertically integrated healthcare organization that is driven by business people," he says. "There will be concerns that the healthcare professionals don't know each other and people are separated geographically, but the industry will work that out. Just look at how telemedicine is advancing and erasing some of those concerns about distance and separation."

Schultz supports the CVS Health move, saying the healthcare industry has long needed this type of change. CVS is filling a niche, he says, by providing a medical service through the combination of minimal professional care, the pharmaceutical line, and a financing vehicle.

"If I were running CVS Health, I would have one big multispecialty clinic in every area where we operate, and I'd have a contract with a hospital instead of building my own brick-and-mortar facilities," he says. "We'd have our own procedure rooms at the hospital tied to that multispecialty clinic, so we could do the procedures that hospitals don't need to do and let them focus on the kind of care they deliver best. That could be the direction this is heading."