Are Disruptive Forces in U.S. Healthcare Accelerating Now? Notes on the Now-Approved CVS-Aetna Deal

Oct. 11, 2018
The Department of Justice’s approval Wednesday of the CVS-Aetna merger signals a new phase in the healthcare business world—and it’s time for patient care executives to rethink the meaning of competition—and of market disruption

As Associate Editor Heather Landi noted in her news report Oct. 10, on Wednesday, the Department of Justice (DoJ) approved a proposed $69 billion merger between CVS Health and health insurer Aetna, after Aetna entered into an agreement with the Department to divest its Medicare Part D prescription drug plan business.

“The deal,” Landi wrote, “is the latest in a wave of combinations among healthcare companies, including many pharmacy benefit manager (PBM) and insurer integrations. Last month, the Justice Department approved Cigna’s $67 billion takeover of Express Scripts. CVS Health announced in early December 2017 its intention to acquire Aetna in a $69 billion-dollar merger, marking the largest ever in the health insurance industry. Woonsocket, R.I.-based CVS operates the nation’s largest retail pharmacy chain, owns a large pharmacy benefit manager called Caremark, and is the nation’s second-largest provider of individual prescription drug plans, with approximately 4.8 million members. CVS earned revenues of approximately $185 billion in 2017. Aetna, headquartered in Hartford, Connecticut, is the nation’s third-largest health-insurance company and fourth-largest individual prescription drug plan insurer, with over two million prescription drug plan members. Aetna earned revenues of approximately $60 billion in 2017.”

As Reed Abelson wrote in a report in Wednesday’s New York Times, “The approval marks the close of an era, during which powerful pharmacy benefit managers brokered drug prices among pharmaceutical companies, insurers and employers. But a combined CVS-Aetna may be even more formidable. As the last major free-standing pharmacy manager, CVS Health had revenues of about $185 billion last year, and provided prescription plans to roughly 94 million customers. Aetna, one of the nation’s largest insurers with about $60 billion in revenue last year, covers 22 million people in its health plans.”

And, while executives from the two mega-companies assert that this merger will allow them to better coordinate care for consumers, while also better controlling costs, some consumer advocates believe that the opposite could actually take place—that consumers could lose both choice and reasonable medication costs. “This type of consolidation in a market already dominated by a few, powerful players presents the very real possibility of reduced competition that harms consumer choice and quality,” George Slover, senior policy counsel for Consumers Union, an advocacy group, said in a statement. “The combination of CVS and Aetna creates an enormous market force that we haven’t seen before.” The consumer organization, the Times report noted, had opposed the Aetna-CVS merger, arguing that people enrolled in Aetna health plans could be forced to seek care at CVS retail clinics, and that those who were not insured by Aetna could pay higher prices for drugs than those who were.

Meanwhile, what fascinates me in all this is the potentially accumulative impact of all the various disruptive business combinations that have been emerging in U.S. healthcare—not just CVS/Aetna, but also the Amazon/Berkshire Hathaway/JP Morgan Chase collaboration on healthcare costs and other challenges; Wal-Mart’s interest in potentially acquiring Humana; and the forays into consumer-facing healthcare IT on the part of Google and Microsoft.

All of these business deals, collaborations, and potential connections involve either “interspecies” combinations, or forays into new areas on the part of companies from outside those core business areas. And that should concern traditionalist-thinking leaders in patient care organizations, especially senior executives in tradition-bound hospitals and health systems, who have historically thought about competition as being direct hospital organization to hospital organization competition. With all sorts of non-traditional business combinations emerging, that kind of thinking ends up being not just limiting, but potentially debilitating.

The reality is that every part of the policy, business and operational landscape on which hospital-based organizations is now in motion—at the same time. Physicians are coalescing into ever-larger multispecialty physician groups, some of them affiliated with hospital-based integrated health systems, but many of them totally independent. Health plans are acquiring physician practices, and are, in many markets direct competitors with hospitals in the acquisition of those practices. Health plans are also continuing to consolidate among themselves. Employer-purchasers are eliminating the health plan “middleman,” and setting up direct contracting with some of the largest and best-known nationally branded patient care organizations; and on and on.

I wrote last year about attending a fascinating session on employer direct contracting that took place at the World Health Care Congress in Washington, D.C. last spring. Employer-purchaser executives talked with great enthusiasm about such contracts. One executive, representing the nationwide Lowes home improvement retail company, shared his enthusiastic response to contracting directly with the Mayo Clinic, to bring patients from places as faraway as Montana and Mississippi, to Cleveland, for total joint replacement surgeries, at scale.

I quoted Bob Ihrie, who had recently retired as senior vice president, compensation and benefits, at the North Wilkesboro, North Carolina-based Lowe’s Companies, about that contracted relationship. “As Ihrie noted, for an extremely far-flung self-insured employer like Lowe’s, with its 1,800-plus home improvement stores spread across the U.S., doing what the Chicago-based Boeing Corporation, with its massive plants in Washington state, California, Missouri, and South Carolina, and its ability to build bricks-and-mortar corporate medical clinics in those locations, the options for Lowe’s are rather different,” I wrote. “Thus, the desire to create systems to improve their patient outcomes for their covered lives, and improve costs.” Indeed, I wrote that Ihrie told that World Health Care Congress audience, that, “The quality results have been so overwhelming that for Lowe’s for 2017, if you elect not to go to a center of excellence, you need a mandatory second opinion, and if it doesn’t approve, you won’t be covered.” He further noted that “Wal-Mart actually mandates travel to a center of excellence.”

In other words, the old thinking among hospital organization senior executives—to think primarily about market competition as being illustrated by the fact that the hospital down the road is building a new facility—is hopelessly outdated at this point. Indeed, it’s time to consider that market competition may now mean a major nationwide retailer with a strong local presence, compelling its employees and their family members to fly across the country to a patient care organization with national branding and presence, rather than to one’s own facility, or to the facility down the street.

In short, it’s time for hospital executives to think very differently about what market competition and market disruption might mean for their organizations. It’s time to start playing three-dimensional chess.

And I haven’t even discussed the role that consumer-facing technologies, many of them spread through online apps and wearable technologies, will begin to play in all this. That adds yet another cross-hatch factor to this entire discussion.

So it’s time for healthcare executives to rethink the very definition of market competition, and to think in unprecedented ways about market disruption; because this DoJ approval of the CVS-Aetna merger should absolutely be taken as a sign of things yet to come.

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