Does This Merger Make Sense?

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Does This Merger Make Sense?

Lawrence Jia, International/Domestic News Editor

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Just over a week ago, drug retail store CVS and health insurer Aetna announced merger plans that are expected to be completed in 2018. Worth over $69 million, this merger would represent the largest healthcare industry deal in history, far surpassing the previous récord of a $29 million acquisition in 2012. However, the deal is not set in stone. Between today and date of the merger approval, both companies face numerous regulatory hurdles including antitrust activists. In the past, these regulators have been skeptic concerning healthcare mergers, including rejected deals in 2015 between Aetna and Humana ($34 million) and Anthem and Cigna ($54 million).

With Walmart making advances in the retail pharmacy market and sites such as Amazon posing new threats to the “Old Kingdom” companies of health insurance, Aetna and CVS are attempting to consolidate their existing share in the market. They are following a larger market trend in integrating healthcare services, especially after the passage of Obamacare, which some argue led to a decrease in consumer choice. For example, the merger between UnitedHealthcare and a pharmacy benefit management firm has formed OptumRx, which has been increasingly competitive with the services offered by both Aetna and CVS.

The two major arguments against this merger are that this deal is a threat to antitrust laws in healthcare and will hurt consumers. The first point is partly false while the second point will likely be true.

First, as the largest merger in healthcare history, antitrust regulators will certainly be quick to accuse both CVS and Aetna with current merger laws. However, the difference between vertical and horizontal mergers must be noted to accurately depict the merger’s impact on consumers. Past precedents of healthcare mergers such as the attempted deal between Aetna and Humana are examples of regulators rejecting horizontal mergers, which combines similar companies in the same industry. However, the current Aetna-CVS deal is almost purely a vertical integration in which both companies operate in the same industry, but perform different functions. This vertical integration can theoretically decrease input costs and strengthen the supply chain.

Second, it is true that although the merger will potentially clear the antitrust regulatory hurdles, company executives may not be able to fulfill the promise of reducing consumer costs. For example, when UnitedHealthcare merged to form OptumRx, they promised similar consumer savings in drug prices and easier access to markets. However, those savings did not materialize, as healthcare costs in the past few years have surged and prescription costs are at an all-time high. Vertical integration and consolidation can decrease costs with more negotiating power with large pharmaceutical companies, but may only improve the bottom line of the companies while consumers continue to bear the burden. Furthermore, since Aetna already has low transaction cost deals with CVS’s Caremark brand, a question of efficiency in reducing healthcare costs arises.

Regardless, it is up to antitrust regulators to decide whether the potential benefits to consumers outweigh risks of vertical integration in this situation. However, after years of skyrocketing healthcare costs and little to no change in public policy transparency, it is vital for consumers to join the conversation in healthcare choice and competition.

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