January 14, 2019
Economist's Perspective

Economic insights into the CVS-Aetna deal

Fred McKinney

There are two significant forces driving unprecedented changes in the market for health insurance, and the market for other consumer health products and services: technology and the prospect of single-payer health insurance.

These forces pose the largest challenges for health insurers.

In 2017, the Department of Justice prohibited the mergers of Aetna with Humana and Anthem with Cigna because it determined these deals would result in a significant reduction in competition.

This decision signaled that increased concentration could not be used to solve the insurance industry's long-term profitability dilemma.

Largely in reaction to this roadblock, insurance companies began looking at ways to solidify vertical relationships with their customers and suppliers. Two of the insurance industry's biggest suppliers are pharmaceutical benefits management (PBM) companies and the retail pharmaceutical industry, which, ironically, is more concentrated than the national insurance market.

We're seeing a game of musical chairs as health insurance companies vie for partnerships with giant retailers and PBM companies.

Here's how the lineups look right now: CVS and Aetna; Cigna and Express Scripts; and Walgreens and Humana. Unlike the horizontal merger attempts — Aetna with Humana and Anthem with Cigna — the Department of Justice has approved these vertical combinations.

For now, there are several unanswered questions in regard to the recent deals:

• What will happen to health insurance and pharmaceutical prices?

• Will there be any impact on other healthcare prices, such as physician or hospital services?

• How will these changes affect relationships between the combined companies and their large employer customers?

• What will be the impact of technology companies like Amazon's entry into both the pharma and insurance business?

• What role(s) will these new vertically integrated healthcare companies play when — not if — single payer becomes a reality?

• Are there more combinations to come? Specifically, with CVS, Walgreens, Walmart and other retailers opening walk-in, non-emergency clinics, will these mega healthcare organizations start buying up major hospital systems and large physician practices?

Economic theory is silent on what happens to consumer prices when vertical mergers occur. The companies in these mergers, CVS and Aetna and Cigna and Express Scripts, argue that greater efficiencies will result in lower cost and potentially consumer savings. Time will tell whether any of these greater efficiencies, lower cost or consumer savings will become reality.

In 2003, Congress passed the Medicare Modernization Act, which prohibits the federal government from directly negotiating with pharmaceutical companies to lower prices. Medicare and Medicaid have more than 59 million and 75 million recipients, respectively.

The federal government, by abdicating its market power to buy effectively, has surrendered to big pharma. In a single-payer system, reclaiming this federal buying power would be one of the first things to change.

When we look at the CVS-Aetna combination, it appears that competition among the major insurance companies may keep prices in check. However, this concentration of vertically integrated healthcare Fortune 100 companies increases the risks that consumers will face higher prices for health insurance, pharmaceuticals, or both.

Looking toward the future, we can expect the disruptive force of technology and the impact of single-payer health insurance to transform both health insurance and retail pharma into something that is unrecognizable today.

Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business.

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