Changing dynamics: The CVS Health-Aetna merger forces the industry to adapt

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Changing dynamics: The CVS Health-Aetna merger forces the industry to adapt

By David Salazar - 01/08/2018
Another year, another pending merger that promises to shake up the retail pharmacy business as we know it. Only, unlike the scrapped merger between Walgreens and Rite Aid, CVS Health’s proposed acquisition of health insurer Aetna has the potential to upend the whole healthcare landscape, putting it in competition with other retailers on one front and with leading insurers on another.

In light of the trends the retail pharmacy has seen in the past several years, the merger seems like a natural move. The announcement came at the end of a year that saw companies facing a confluence of headwinds. Generic pricing — which Valley Forge, Pa.-based wholesaler AmerisourceBergen projected will continue to decrease by 7% to 9% in fiscal year 2018 — and lower store traffic, with RetailNext reporting that store traffic for November 2017 fell 11.4%, offer a one-two punch of pressure on retailers’ bottom lines. And, with healthcare costs making up 17.9% of the United States’ GDP in 2016, according to the Centers for Medicare and Medicaid Services, companies are under pressure to contain costs eating into profits.

As a result, the past year was rife with efforts from retail pharmacy giants to innovate by being more involved with pharmacy benefits managers and payers to strike deals that would increase their bottom lines. Notably, last April Walgreens created AllianceRx Walgreens Prime, a combined central specialty pharmacy and mail services company it formed with PBM Prime Therapeutics, which is owned by the nation’s 14 leading Blue Cross and Blue Shield Health Plans.

Even before the merger, Woonsocket, R.I.-based CVS Health forged new partnerships — from providing prescription fulfillment, claims processing and other support services to Anthem’s new PBM IngenioRx to creating its own limited performance-based network through its CVS Caremark PBM that included CVS Pharmacy, as well as Walgreens and 10,000 independent pharmacies.

Not even the specialty space has been immune to margin pressures, with leading specialty pharmacy Diplomat moving into a new approach to its business. In November, the Flint, Mich.-based company acquired two PBMs in two weeks, bringing together the claims processing platform from National Pharmaceutical Services and the mail-order, specialty pharmacies and clinical programs of LDI Integrated Pharmacy Solutions

“With 90% of traditional medications now filled as generics, it’s specialty pharmacy costs that are driving pharmacy spend for payers,” Diplomat president Joel Saban said. “To offer real solutions to today’s challenges, a new model with a diverse set of assets is needed. The need for specialty benefit management solutions has never been more urgent.”

The state of health care is an open question — though a repeal of the Affordable Care Act fell flat in August, an as-yet unreconciled tax bill contains a repeal of the ACA’s individual mandate, and CMS has slashed the budget for open-enrollment advertising. The retail pharmacy industry has a big role to play, and it’s one that the CVS Health-Aetna merger seems intent to fill, while expanding its offerings.

Paula Wade, principal analyst for market access insights at global healthcare data and market intelligence firm Decision Resources Group, said that the Aetna merger is as much about fighting retail margin pressures as it is about becoming a competitor to such companies as UnitedHealth — which has been expanding the reach of its Optum business beyond its OptumRx pharmacy benefits manager, including the acquisition of 300 DaVita infusion centers — and Express Scripts, which in October paid $3.6 billion for medical benefits management company eviCore.

“I think just as the insurance industry is chasing UnitedHealth’s very successful diversification model with Optum, on the other end of things the PBM industry is having to chase diversification, as well, so I think it’s both of those pressures coming together,” Wade said.

All this is to say that the state of retail pharmacy is one that is being forced on the offensive from several angles — most acutely the combination of CVS and Aetna, but on a more existential level, the potential impact that Amazon will have when, not if, it moves into the pharmacy space.

Given the plans that CVS Health has for an expanded role of the pharmacy, experts say the industry in the coming years will need to up its game to compete with the enhanced capabilities through the Aetna merger — and the still unknown threat from Amazon.

The new store
As a preamble to the announcement of its proposed Aetna acquisition, CVS Health spent most of 2017 steadily expanding its store footprint and building up its pharmacy services. It acquired 14 Doc’s Drugs stores in Illinois in July, 20 Indiana and Illinois Fagen Pharmacy locations in August and six Ohio ProMedica locations in September. It also revamped its front-end with a massive focus on health-and-wellness offerings across OTC and consumables, and a natural focus in its beauty aisles. It introduced ScriptPath, a new way for patients to visualize their daily medication that put its own twist on medication adherence efforts, and its promised next- and same-day delivery across various nationwide markets, rolling out same-day delivery in Manhattan in early December.

In a conference call that CVS Health president and CEO Larry Merlo conducted with Aetna chairman and CEO Mark Bertolini on Dec. 4, the two made clear that in retrospect, the yearlong buildup of CVS Pharmacy’s offerings was just the beginning.

“Think of an idea where we have 10,000 new front doors to the healthcare system, where people can walk in, they can ask for some help, [and] get guided through the system,” Bertolini told analysts. “We can make the insurance the back room of the operation, we can waive prior authorizations, we can waive copays as people use the system in a way that’s more effective so we can reduce costs. It’s simpler, it’s customized for the individual based on what they need and it’s cheaper.”

The companies plan to make CVS Pharmacy locations into healthcare hubs, where patients can ask questions about their health conditions, health benefits and prescription drug coverage. The pharmacy also will become even more of a resource for patients in need of medication evaluations, home monitoring and durable medical equipment, the companies said, noting that the merger brings the potential to offer remote monitoring to patients with such chronic conditions as diabetes.

[pb]“That is a huge thing from the care perspective, because when you imagine that you have all these people with various types of home diagnostic monitoring equipment and they see a reading that is troubling to them or maybe the equipment isn’t working right, they can call their number and be told you don’t have to go to the hospital, just go to your CVS Pharmacy clinic,” Wade said. “They’ll … solve that problem without that person having to go to the emergency room, which is a much more expensive level of care.

The hub will serve, ultimately, as a way to create more patient engagement and healthy outcomes that will cost the healthcare system — and ideally, patients — less money, with Merlo saying that the company’s biggest opportunity lies in the Medicare and Medicaid populations.

Bertolini sees the potential for stores to offer guidance to Medicare and Medicaid patients. “On the Medicare/Medicaid side, I think people are confused — they’re wandering through the system [with] multiple doctors, multiple medications,” he said. “And the opportunity [is there] to help them navigate that system, put them on a plan and actually make this a place … people want to go.”

DRG’s Wade noted that it’s still unknown what federal regulators might require the companies to divest, if anything, as part of a potential approval, but she pointed to Aetna’s Medicare Part D enrollment as a potential target. However, she sees likely in