How Might The CVS Aetna Deal Impact Customers?

by Trefis Team
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Confirming speculations, pharmacy giant CVS Health (NYSE:CVS) has recently announced its decision to acquire Aetna, the third-largest insurer in the United States. The total value of the transaction is expected to be around $69 billion, and including the assumption of Aetna’s debt will amount to around $77 billion. Touted as one of the biggest deals in the healthcare sector, this raises questions about how the various stakeholders might be impacted by this merger. In this article, we talk about the end user, that is the customers, and how this deal might impact their lives. We have an $80 price estimate for CVS Health’s stock, which is around 10% higher than the current market price.

Consumers Might Reap The Benefit Of CVS’ Better Bargaining Power With Drug Manufacturers

According to experts, even though deals between hospital chains and health insurers are aplenty, this particular type of merger is a very rare one. CVS has one of the largest chain of drugstores and it is also one of the biggest pharmacy benefit managers in the United States. Pharmacy benefit managers (PBMs) negotiate drug prices on the behalf of insurance companies, hence the acquisition of Aetna will imply that the latter will have its own in-house pharmacy benefit manager. This might simply translate to a gain for the consumers, as CVS, (which is the PBM) might try to negotiate even better prices from the pharmaceutical manufacturers for an insurer that is essentially a part of its own business. This in turn might result in consumers having to pay less for their drug purchases.

In fact, it is also believed by industry experts that sometimes PBMs raise prescription drug prices in order to boost their own profit margins (as they tend to keep the rebates that are given by drug manufacturers for themselves) making their own profits directly proportional to the rise of drug prices. After the CVS and Aetna merger, the former will not be a middleman between drug manufacturers and the health insurer and hence, there would be no point in artificially marking up prices for the health insurer.

However, There Is A Bigger Concern

However, on the flip side, the newly merged entity can easily continue marking up prices for the end users, instead of passing on the benefits to them. If there was better competition in the health insurance market then CVS and Aetna might offer lower premiums to lure customers to their business. Competition is low in this sector and this deal may further perpetuate the industry consolidation that has been going on for quite sometime now. Competition is always a welcome factor in an industry as that ensures that the consumers get to choose the best possible alternative, but since that is not the case, consumers might not end up being highly benefited from this deal, after all.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ctrip 

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