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

Oct. 30, 2017
The proposed acquisition of health insurer Aetna by mega-retail pharmacy chain CVS may well signal a key turning point in the market-competitive landscape of U.S. healthcare—and provider leaders had better start engaging in scenario-planning for that new world

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 excited—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 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

Given all these elements, it really is time now for hospital and physician group leaders to consider very broadly what all this might mean for the provider sector in healthcare. Pushed by retail marketing behemoth Amazon, CVS is about to make a move that—if approved by federal regulatory authorities—could dramatically disrupt numerous different healthcare sectors at once, including the retail pharmacy sector, the pharmaceutical manufacturing sector, the health insurance sector, the physician practice sector, and the hospital sector—as well as the employer-purchaser benefits sector, in terms of its potential impact on pharmacy benefit management. Let’s face it: that is huge.

More specifically to the point, a combined CVS/Aetna entity could put accelerating pressure on physicians in practice to dramatically improve their access in terms of hours and locations, and also to dramatically improve their patient, family, and community satisfaction. Already, physicians in private practice, facing rapidly accelerating regulatory and business demands, with hospital-based systems acquiring operationally inefficient practices while relieving them of some of the data and IT operational burdens they face under MACRA/MIPS and private health plan value-based purchasing demands; and physician consolidation acceleration has in turn led to further consolidation, as physicians not already practicing in larger groups have been finding themselves literally “outnumbered” by those practicing in larger, presumably more efficient, groups.

All these diverse developments are now creating “cross-hatch” scenarios in terms of inter-sector disruptive potentialities. Some self-insured employer-purchasers, while hospital-based systems were already allying in various local markets with retail pharmacy chains like CVS and Walgreens, to provide increased access to minute clinic-based care delivery, and large retailers like Wal-Mart were trying to move into the space that CVS and Walgreens had already occupied, building on their own embedded pharmacy presences to add their own minute clinics. One honestly needs some kind of scorecard to keep all of this sorted out in one’s mind.

Here's the bottom line, though: with all of these different players from all of these different sectors bumping up against each other and attempting to steal market share and presence in various areas from one another, the leaders of patient care organizations had better be planning right now for a very different future from the present they’ve been living in. Put plainly, if the folks at Memorial Hospital think that at least a portion of their main business competition has been from Community Hospital down the road, they need to think again. It could be from Happy Health Plan; or from Physicians-R-Us; or from Walgreens; or from this potential new, combined CVS-Aetna combined organization. Zounds! Suddenly, everyone’s going to need to be playing multi-level chess now.

And, a key element in all of this is the physicians, specifically the primary care physicians. If Hospital System A’s leaders think that it’s hard now to keep local physicians engaged as they try to build their first ACO, just wait—things are going to get a lot more complicated, fast.

And all of this holds tremendous implications for population health, especially for what it will become, and for who will do it--with no answers to any possible questions around the subject.

What's more, inside all of this, all practicing physicians are going to need to figure out how to manage the accelerating demands coming out of the MACRA/MIPS requirements, as well as out of private health insurers—and the data and IT demands are going to accelerate beyond their capability to manage them in the classic “onesie-twosie” doc groups that still form the bulk of physician organizations in many communities. And healthcare IT leaders are poised to be potential heroes in all this—but they’ve got to understand what’s going on, and, in the immortal words of Wayne Gretzky—they’ve got to skate to where that strategic puck is going.

So provider leaders need to move forward on some really intensive and effective scenario planning, quickly, now. Because the healthcare competition landscape map is beginning to open up dramatically to countless new possibilities, on numerous levels. And this revelation of this proposed business merger may be just the opening salvo in the evolution of a truly new business-competitive landscape.

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