CVS Aetna takeover creates an Amazon buffer

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CVS Health President and
CEO Larry J. Merlo

Reuters

  • CVS Health’s potential
     deal to
    buy Aetna has a lot to do with Amazon, and it
    illustrates just how serious a threat the tech giant is to
    traditional healthcare companies.
  • The move would give CVS control over more of the
    chain between a drugmaker and a patient, possibly bolstering
    profits.
     
  • But it remains to be seen if a deal like this can
    protect healthcare companies from being “Amazon’d.”

 

Amazon’s notorious for stepping into new businesses and crushing
the competition with low price, fast delivery, and its massive
network of loyal shoppers. When Amazon
bought the grocer Whole Foods
, shares of other supermarket
chains plunged, out of fear they’d be Amazon’d. 

Now, the e-commerce giant has its eye on the pharmacy business,
and one of the biggest drug retailers — CVS Health — is
trying to stay one step ahead. 

CVS, which has more than 9,700 stores nationwide, is reportedly
in talks to buy health insurer Aetna in a $60 billion
plus deal that would create a new type of company that
includes a health insurer, a retail pharmacy, and a company that
negotiates prescription drug prices with drugmakers.
That CVS had offered to buy Aetna was reported by
The Wall Street Journal, which also reported
on Thursday
, that the deal has a lot to do with
Amazon.

It’s no coincidence. Speculation that Amazon might be
getting into the pharmacy business has been rampant for months —
and it came to a head, coincidentally, on Thursday when
the 

St.
Louis Post-Dispatch
 reported that Amazon has been
approved for wholesale pharmacy licenses for at least 12
states.

There are two ways in which a tie-up with an insurer like Aetna —
which covers
46.7 million Americans
  — could help protect CVS
from this. 

  • It would give CVS control over more of the chain between a
    drugmaker and a patient, possibly bolstering profits by letting
    it keep more of a cut of each sale.
  • Directing Aetna clients into CVS pharmacies for their
    medicines would keep the foot traffic coming into its retail
    locations, and let it keep selling high-margin groceries to those
    shoppers.

Fending off Amazon

Should Aetna merge with CVS, it would bring the largest pharmacy,
one of the largest pharmacy benefits managers, and the third
largest insurer all under one roof. Each one of those pieces is
part of the complicated process of paying for prescriptions
drugs. 

Essentially, CVS would own every step of the process with the
exception of drug
wholesalers, which are in
charge of shipping drugs
 to pharmacies and
hospitals, and the pharmaceutical companies that actually make
the drugs. That would keep much of the money changing hands
within the same company.

Here’s a chart explaining how a drug travels from pharmaceutical
manufacturer to a patient, and who takes a cut in the process.
It’s a complicated web of payments and rebates, but the
simplified outcome of a deal that puts pharmacy, insurer, and PBM
in one company is that the combined business walks away with more
of a drug’s sale price in the end.

With the Aetna deal, CVS would control everything that happens
once a wholesaler has handed off the drug.


Who pays for your medication pharma CVS Aetna takeover creates an Amazon buffer bi graphics big 20pharma 20v04Skye Gould/Business Insider

Already, CVS and Aetna are heavily linked in the pharmacy
area. In 2010, Aetna entered
into a 12-year contract with CVS Caremark
, CVS’s PBM arm to
manage its prescription drug spending.

PBMs and insurers also have a lot of power over what prescription
drugs get paid after a doctor prescribes them. For example, it
can choose to only cover the generic form of a medication or a
lower cost competitor — and those decisions certainly impact the
insurer.

CVS wouldn’t be alone in controlling both the insurer and PBM
part of paying for prescriptions. UnitedHealthcare,
for example, owns the PBM OptumRx, while Anthem, which owns
a variety of Blue Cross Blue Shield health insurance firms, will
be launching its own PBM 
called IngenioRx.

But CVS would be unique in owning three parts of the
chain.

Foot traffic

While most of what we know about Amazon’s potential interest in
getting into the pharmacy business is
speculation
, it’s clear that if patients could get their
medications shipped directly from Amazon, that could hurt the
retail pharmacy business. 

Robert Handfield, a professor of supply-chain management at
North Carolina State University, told Business Insider that one
area where this deal would help CVS out is by directing Aetna
members to CVS’s pharmacy locations. The actual amount of money
prescriptions bring into pharmacies isn’t all that much,
Handfield said, it’s what else you buy while you’re at the
pharmacy — snacks, drinks, beauty products, etc. — that makes
pharmacies a booming business.

Say that prescription portion went online, it would be
much harder for retail pharmacies to compete with convenience
stores, grocery stores and anyone else selling candy bars
and deodorant. But say you’re an Aetna member, the preferred way
to get your prescription might be by going to a CVS pharmacy,
bringing foot traffic that might not come
organically. 

It remains to be seen whether Amazon does get into the pharmacy
business, and if it does, if this kind of deal has what it takes
to make healthcare companies Amazon-proof. 

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