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With the Proposed CVS Bid for Aetna, Time for Healthcare Leaders to Think in Three-Dimensional Chess Terms

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The spate of media reports on Friday, October 26, revealing that CVS Health is in talks to purchase Aetna at a reported cost of $66 billion, caused a frisson of exited—and anxious—reactions across the healthcare industry. As Managing Editor Rajiv Leventhal noted in a report on that day, The Wall Street Journal first broke the news of the talks. And if the deal were to go through, it would be the biggest of its kind ever in healthcare, and particularly significant, given the players involved.

As a report on CNBC’s website explained it, “CVS talks to buy health insurer Aetna for as much as $66 billion makes sense because the drugstore operator and prescription benefit manager has been facing threats from all sides, including from Amazon, a leading analyst told CNBC on Friday. A deal of this nature would add health insurance plans to the CVS Health portfolio.” In that report, CNBC’s Berkeley Lovelace Jr. quoted Ana Gupte, a senior healthcare services analyst at Leerink Partners, as saying that “CVS has so many threats coming at them”. Gupte told Lovelace that one threat in particular is from OptumRx, UnitedHealth Group’s pharmacy benefit management business. So-called PBMs such as OptumRx and CVS’ Caremark unit negotiate drug benefits for insurance plans and employers. Amazon is also “clearly a huge piece of this,” Gupte added in a “Squawk Box” interview. “The online retail giant has been exploring ways to expand into the drug industry, including selling prescription drugs online,” Lovelance wrote. Gupte says Amazon is thinking hard about its decision, but she added that “all signs” point to Amazon entering into the pharmaceutical industry. “They may choose to say, ‘Hey, should we hurt our brand with all this government scrutiny in an industry and where profit margins are a threat?'” Gupte said. “But, Amazon has always been the leader, and margins will compress, and Amazon is fine with that. They’re going to disrupt the whole thing like they did for the bookstore industry,” she added.

Amazon is also “clearly a huge piece of this,” Gupte added in a “Squawk Box” interview on CNBC online. The online retail giant has been exploring ways to expand into the drug industry, including selling prescription drugs online. Gupte says Amazon is thinking hard about its decision, but she added that “all signs” point to Amazon entering into the pharmaceutical industry. “They may choose to say, ‘Hey, should we hurt our brand with all this government scrutiny in an industry and where profit margins are a threat?'” Gupte said. “But, Amazon has always been the leader, and margins will compress, and Amazon is fine with that. They’re going to disrupt the whole thing like they did for the bookstore industry,” she added.

There are so many angles to this developing story. In a BloombergMarkets article on Oct. 27 entitled “CVS-Aetna Deal Could Mean End of Era in How Drugs Are Paid For,” Robert Langreth and David McLaughlin wrote that “If Aetna Inc. is eventually swallowed by CVS Health Corp., an important part of the health-care business will be changed—perhaps for good. For years,” they noted, “pharmacy benefits were largely carved out from the rest of a medical coverage plan. But increasingly the two services are being combined, a move that in theory will make it easier to verify whether expensive drugs are worth the cost. A merger of the third-biggest health insurer with the largest U.S. drugstore chain, which also operates a pharmacy-benefit management company, could speed the process.” And they quoted Pratap Kheadkar, managing principal at consulting firm ZS Associates, as saying that “You are hearing the warning for the end of the road for the classic standalone” pharmacy-benefit business.

And as Tom Murphy wrote on Friday in the New Jersey Herald, “Insurers and pharmacy benefits managers have long wanted to do more than just process claims and pay bills. They believe the key to controlling health care costs is making sure people stay on their medicines, get care at the right locations and do whatever they can to avoid expensive hospital stays. The idea is to work with patients while they are healthy instead of waiting until they’re sick. For example,” Murphy noted, “Aetna could use the CVS network of clinics to help patients with diabetes keep tabs on their blood sugar and cholesterol levels. That could stave off more serious complications like a heart attack. The combined company also could push the clinics and telemedicine as an alternative to expensive emergency rooms. Insurers have long fought to curb the use of ERs for anything that isn’t life threatening. Retail clinics can cost a third of the price for an ER visit, Leerink analyst David Larsen said in a research note late Thursday to investors.”

What’s more, Mizuho Securities USA analyst Ann Hynes said in another note, CVS could expand its clinics or create small urgent care centers—which can handle a wider array of ailments—in its store. Then it could steer people to them by waiving co-payments for those options and charge $500 if they went to an ER instead.”

Time for providers to wake up and smell the coffee

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