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ALDA & Associates International, Inc. Newsletter

March/April 2018

The CVS-Aetna Merger: Is This A Health-Care Giant That is Not Built Around Doctors-A different perspective by David H. Fater

With the CVS-Aetna merger on the horizon, it is useful to examine whether the rationale behind the merger is to create something with little precedent: an integrated health-care enterprise that isn’t built around doctors. The combination of the two companies, in a deal valued at $69 billion, is supposed to bring together Aetna’s patient data and CVS’s sprawling network of nearly 10,000 brick-and-mortar sites to squeeze out costs while improving the quality of care and increase convenience for the patients. Major health care deals to date have involved providers whether they be hospitals or doctors. But no major health-care company has tried to build a vertical system around the combination of drugstores, insurance and pharmacy-benefit management, the main businesses of CVS and Aetna. 

The merged company will not possess a key ingredient which is a strong foundation of its own doctors, who make many of the decisions that influence both costs and quality of care. It is well known that physicians control 80% of health care costs (despite the fact they only receive 20% of the total costs in the system. CVS has made it known that it will consider adding its own physicians. It also intends to coordinate care closely with the  patients’ existing doctors to close gaps in their care. This lack of coordinated care is what drives health care costs through the roof. CVS believes that this combination is a complement to the care that is provided for by the physicians,

Creating the new foundation of care will require heavy lifting operationally, in my opinion as a managed-care veteran. The former CEO of Kaiser Permanente believes that health care organizations don’t have to own every part of the health-care food chain to achieve gains from a vertical integration. He speaks from experience since Kaiser Permanente is a large insurer and health-care provider.The key, as with any merger, is implementation of the integration plan (which should really be part of the due diligence process).

An example of this coordination is that information such as prescription renewals and test results need to flow easily to all of those who provide care for a patient, including (and especially) physicians.

Other vertical integrators in health care have taken a totally different path. UnitedHealth Group Inc. (a major competitor of Aetna) owns a growing roster of physician practices, surgery centers and urgent-care clinics, as well as the nation’s biggest insurer and a major pharmacy-benefit manager, or PBM. Big integrated players such as Kaiser Permanente and Geisinger Health System bring together the full spectrum of health-care services, including health plans, hospitals, clinics and physicians. Large hospital systems have been buying up physician practices again (this is the fourth cycle of this activity), as well as merging with one another.

It is much harder to have a cost and quality advantage if you’re owning an ancillary part of the health-care delivery system, not the main part. CVS has around 1,100 retail clinics in its stores, with nurse practitioners and physician assistants offering services such as vaccinations. But it is physicians who traditionally stand at the center of patients’ care. Doctors write prescriptions, order imaging scans, make referrals and recommend treatments. They also play a little-known but hugely important role in documentation and other practices needed for insurers to generate profits in the increasingly central Medicare business.

The reason individual doctors are so credible is because patients are generally pretty happy with their individual doctors. That’s a huge advantage,” said Glenn Steele, former CEO of Geisinger. But, he said, “there’s a huge amount that is doable conceptually outside the classic doctor-run medical system.”

The merged CVS’s vertical reach may also bring a risk, as the combined CVS-Aetna seeks business from companies that may now become direct competitors. The merger will result in a loss of insurers who value having a stand-alone PBM.  The companies have announced that Aetna will be operated as a stand-alone unit under CVS with strong firewalls to protect confidentiality, and that they expect to continue to win business from competitors. That will remain to be seen.

CVS and Aetna believe that by integrating pharmacy-benefit and medical coverage, as well as offering expanded health-care offerings at its stores, the combined company will be able to bring down costs and fill gaps that physician practices may not cover. They believe that better care for patients with chronic conditions and fewer expensive, avoidable events such readmission to the hospital will result from the merger. CVS believes that they can become a complement the physician especially between visits. One immediate focus obviously would be to reduce emergency-room use through the retail clinics. However, will the physicians allow that to happen or be concerned that they may lose their patients for routine matters. On the other hand, will the patients accept being treated by a Nurse Practitioner or Physician Assistant?

The merged CVS’s stores will offer wellness services, as well as vision, hearing, nutrition and medical equipment. Among other possible offerings are blood draws for lab testing, infusion of specialty medications, and help with durable medical equipment, a category that includes products such as wheelchairs. Some stores will become health hubs, the company believes with staff able to answer questions about insurance coverage as well as clinical queries.


Lawton Robert Burns, a professor at the University of Pennsylvania’s Wharton School who has long studied health-care providers, says he is “skeptical because it’s a super-big challenge” to re-engineer patterns of care on a national scale. Health care is a national issue but it is delivered locally.
 

Beyond its existing retail clinics, CVS has already been moving in this direction by slowly beginning to convert retail space to other health-service sites, swapping magazines and cigarettes for eye-care and audiology centers. The efforts are difficult to quantify. The company said it has reduced drug expenses through a program to manage diabetes that it plans to expand to other chronic diseases. But a decision in 2014 to bolster its health-care credentials by pulling tobacco products from its shelves cost the company around $2 billion a year in revenue.

Time will tell as to whether this merger without physicians will bring benefits to the combined entity or we will be reading about a spinoff in the future.


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To explore ways in which we can provide assistance in assisting with your merger and acquisition strategy in this evolving health care environment, please contact David H. Fater at dfater@alda-associates.com or Richard M. Cohen at rcohen@alda-associates.com

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