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Aetna a Step Closer to CVS Merger, Sells Medicare Business

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 Aetna Inc. has announced that it plans to sell its stand-alone Medicare Part D drug plan business to WellCare Health Plans Inc. (WCG - Free Report) under an asset purchase agreement. The amount of the deal has not been disclosed.

Aetna took this step to reduce business overlapping with CVS Health Corp. (CVS - Free Report) . The company is on course to be merged with CVS Health in a $69-billion deal.

With this step, Aetna has moved a step closer to its deal with CVS Health. Last year Aetna made the same move to sell its Medicare assets to Molina Health for gaining a nod for its merger with Humana, which was finally blocked by the regulators due to concerns related to competition.

CVS Health views the sale as a major step toward the success of its merger with Aetna by gaining the Department of Justice's review regarding its proposed acquisition. In the last week, the regulators gave green signal to the $67-billion acquisition deal of Express Scripts Holding Co. (ESRX - Free Report) by Cigna Corp. CI.

The passing of this deal created optimism for the CVS-Aetna deal. However, Cigna and Express Scripts easily received approval as the companies did not have any overlapping business.

Aetna, the third largest company with Medicare business, first and second ranks being held by CVS Health and UnitedHealth, respectively, would lose nearly 2.2 million of its Medicare members via this divestiture. However, Aetna stated that the sale would not have material effects on its business since the combined company (CVS and Aetna) will still have a sizable portion of the industry’s Medicare business.

The divestiture deal will be effective on Dec 31, 2018, and Aetna will continue to provide administrative services through 2018. The divestiture is contingent on the closing of the Aetna CVS Health deal.

Year to date, shares of Aetna have gained 1.7% compared with the industry growth of 10.2%.


On the other hand, WellCare Health would be the actual beneficiary of the deal. The news drove the company’s shares to reach its 52-week high of $323.50.

WellCare Health has been making moves to expand its Medicare business. Subsidized by the federal government, Medicare Part D plans offer prescription-drug insurance for elderly and disabled. It is a growing market and the increasing baby boomer population, who are the main users of this service, is expected to aid this market. WellCare recently  acquired Meridian to expand its Medicare business

Deals between a pharmacy benefit manager and an insurance company are seen in the healthcare space. These deals are likely to transform the healthcare space into a more integrated one, with companies building their backward and forward chains.

Collaboration of a pharmacy benefit business with a health insurance company should aid the companies in controlling drug pricing cost to some extent, which is one of the significant reasons behind soaring medical costs. It will also help pharmacy benefit managers to deal with competition arising from the entry of Amazon in the healthcare space.

Currently, Aetna and CVS Health 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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