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CVS Health a Step Closer to Aetna Merger: Boon or Bane?

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Keeping in line with the projected time of completion of the Aetna AET deal, CVS Health Corporation (CVS - Free Report) recently announced that its shareholders have voted in favor of the $69-billion acquisition of the health insurance giant. While the market is abuzz with this historically biggest healthcare deal nearing a step closer toward completion, investors are hesitant about its effectiveness.

The deal surfaced when three corporate behemoths — Amazon AMZN, Berkshire Hathaway BRK.A and JPMorgan Chase & co. JPM — disclosed their plans to transform America’s healthcare landscape through their newly formed joint venture in the space. This is forcing investors to think that the deal is an attempt by the healthcare giants to hold on to their position.

Supporting this, the former Aetna CEO John Rowe, in a CNBC report stated that both CVS Health and Aetna are trying to expand their footprint in healthcare with the entry of e-commerce and financial giants. According to him, “It's not quite explicit yet what they're planning on doing but whatever it is, it's scaring CVS.”

Vision in Favor of the Deal — A Vertical Integration?

According to CVS Health, with the closing of this consolidation, the combined company is expected to bring together two complementary businesses. This will lead to the creation of a new community-based open health care model that is user friendly and less expensive.

Rowe and many other economists also opined that this merger has fair chances of passing the regulatory hurdles. They see this consolidation as a vertical integration instead of a horizontal one, thus leading to efficiency gain and a formidable cost-cutting strategy of CVS Health’s PBM (Pharmacy Benefit Management) platform. Notably, a horizontal integration dreads the chances of forming a monopoly powerhouse in the market.

An article by Dana Blankenhorn published in InvestorPlace stated that based on this $69 billion deal, insurers will finally achieve the vertical integration they need to control costs. Per the article, the Humana HUM acquisition proposed by Aetna was earlier rejected by the Obama administration because of its horizontal acquisition.

The economists are looking forward to this development as they think this vertical integration might finally put brakes on America’s soaring health-care costs. Notably, total medical cost has inflated in the 6-7% range over the last four years based on the increasing bills of doctors, hospitals, medical devices and drugs (data published in The Economist article). Also, going by 2018 Deloitte data, global health care spending is projected to increase at an annual rate of 4.1% in 2017-2021, a significant escalation from just 1.3% in 2012-2016.

Blankenhorn, in his article stated that to counter this problem, the CVS Health-Aetna deal will enable insurers to buy pharmacies to fight high drug prices through formularies and the lists of medicines that will be prescribed for various conditions. Using generics in formularies or choosing from branded drugs wherein generics aren’t available is a method to keep drug prices in check.

The Opposition

Those opposing the buyout are of the opinion that despite the two companies trying to strengthen their footprint in health care, both may finally end up paying severely for the merger. Akin to the supporters of the deal, the contrary view also underscores the cost-control agenda highlighting that the consolidation will apparently push the third-largest U.S. insurer Aetna’s huge client base into CVS Health drugstores to get the prescriptions filled through CVS Health’ drug plans. This move will in turn eliminate the middlemen’s role and other intermediaries, resulting in reduction of drug price and overall healthcare cost.

However, the critics believe this to be a short-lived scenario and in the long term patients could end up incurring more medical expenses. Per a recent Vox report, this is because mergers like this will gradually make it more difficult for the new insurers to enter the market since they won’t be able to negotiate lower drug prices like larger firms. This will, in fact, diminish competition in the sector leading to inflated prices.

CVS Health and Aetna both carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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