As of October 26, 2017, the Wall Street Journal announced that CVS Health Corporation is in discussions with Aetna Inc. regarding a prospective acquisition.¹ This transaction would potentially give CVS a strategic marketplace advantage over one of its main competitors, Amazon,² which is expected to enter the pharmacy business after having acquired licenses in several states to operate as a pharmacy wholesaler.³ The acquisition would join Aetna’s insurance division with CVS’s pharmacy benefit management (PBM) division,⁴ allowing CVS to expand on and secure the number of members for its PBM,⁵ as well as providing the entity with more leverage over pharmaceutical manufacturers when negotiating the cost of drugs.⁶ The consolidation could happen as early as December 2017,⁷ and would be the largest business transaction of the year,⁸ totaling more than $70 billion.⁹ However, the Department of Justice (DOJ) may challenge this acquisition, given the large market shares held by both Aetna and CVS, and the acquisition’s potential negative effects on consumers.¹⁰ The acquisition may also significantly impact the healthcare industry, and may pose a direct threat to competitors of CVS and Aetna, including: Amazon, Anthem, Express Scripts, Centene, WellCare, and Humana.¹¹ In this Health Capital Topics article, the potential effects of consolidation between Aetna and CVS on both consumers and the healthcare industry will be discussed.

It remains to be seen whether this proposed consolidation will elicit attention from the DOJ, which could ultimately lead to the abandonment of acquisition plans.¹² In the past, several proposed consolidations failed to advance after encountering legal scrutiny from the DOJ and federal judges, such as the proposed 2017 Cigna-Anthem merger and the proposed 2017 Aetna-Humana merger,¹³ because they had the potential to harm consumers.¹⁴ However, unlike the proposed Cigna-Anthem or Aetna-Humana mergers, which were examples of horizontal integration, i.e., integration between two similar types of entities, the CVS-Aetna proposed merger is an example of vertical integration, or integration between a buyer and supplier, making the effects of the acquisition more unclear due to the lack of legal precedence for these types of antitrust cases.¹⁵ The DOJ may argue that the CVS-Aetna merger is more harmful to consumers than the Cigna-Anthem or Aetna-Humana mergers because of an effect termed the double margins puzzle.¹⁶ With vertical integration, at least two types of organizations with different profit-earning motives consolidate to form two profit centers along a supply chain, unlike horizontal integration, in which at least two types of organizations with similar profit-earning motives consolidate to form one profit center.¹⁷ Vertical integration may be more harmful to consumers because the formation of two profit centers along a supply chain may give the companies more leverage to negotiate for higher prices, increasing the price of goods and services more so than if the companies only had one profit center.¹⁸ Conversely, CVS and Aetna may argue that the integration of CVS’s PBM division and Aetna’s insurance division facilitates cost savings that will ultimately lower the cost of services for consumers.¹⁹ Such efficiencies may primarily arise from the increased leverage that the joined companies would have over pharmaceutical companies when negotiating drug prices.²⁰ However, the DOJ may argue that CVS and Aetna will have little incentive to allocate some of the cost savings to consumers, and will instead retain the profits for themselves.²¹

The acquisition of Aetna by CVS will likely alter the dynamic of the healthcare industry. For example, consolidation is likely to make CVS and Aetna a competitor to Amazon, which, as noted above, is seeking to enter the pharmaceutical wholesaler business after receiving licenses to do so in several states.²² Further, vertical integration between CVS’s PBM arm and Aetna’s health insurance arm allows for the elimination of a separate PBM middle-man, increasing organizational efficiencies, and posing a threat to stand-alone PBMs such as Express Scripts, as well as insurers, such as WellCare, Centene, Anthem, and Humana, who are all direct competitors.²³ Anthem, which recently terminated its partnership with Express Scripts,²⁴ is now partnering with CVS to form its own PBM.²⁵ An acquisition of Aetna by CVS may generate a conflict of interest, in which CVS may have to terminate its relationship with Anthem, requiring Anthem to find a new PBM with which to partner.²⁶ Overall, the acquisition is likely to spur change within the healthcare industry, with not only horizontal integration continuing to occur, but with vertical integration becoming increasingly common as well.

If the acquisition of Aetna by CVS is allowed to proceed, it would be one of the largest transactions in the U.S. healthcare industry, as CVS currently holds 25 percent of the U.S. market share for prescription drug sales,²⁷ and Aetna holds 6 percent of the market share for health insurance plans.²⁸ An acquisition of this size may give rise to regulatory scrutiny from the DOJ due to concerns over the potential negative effects that the consolidation may have on consumers.²⁹ If the DOJ determines that the acquisition is in fact harmful to consumers, then acquisition plans are likely to come to a halt, and a legal precedent is likely to be set for future vertical integration cases among other healthcare organizations.³⁰ However, CVS and Aetna may argue that vertical integration between the two companies will help lower the cost of providing healthcare services through increased efficiencies, effectively benefitting consumers.³¹ Consolidation among the two entities may also bring significant change to the healthcare industry, and may pose a threat to their competitors, such as other health insurers and PBMs.³² In recent years, consolidation has become a more common practice among healthcare entities, as the cost of providing healthcare services is becoming increasingly unaffordable for these organizations, due to the rising costs of medical supplies and pharmaceuticals,³³ as well as declining reimbursement rates from payors.³⁴ Consolidation may help these organizations persevere in an increasingly competitive healthcare environment.