NEW YORK (Reuters Breakingviews) - A bid for Aetna is a defensive prescription for CVS Health. The drugstore and pharmacy-benefit company should be able to generate some cost savings if its $66 billion offer for the health insurer prevails. Even more important, it could help the firm resist Amazon’s entry into drug distribution, and the unpleasant side effects of transparency and low margins that may follow.
Getting drugs from producers to consumers is a complex and foggy business, with multiple middlemen capturing bits and pieces along the way. Combining CVS and Aetna would create a single business able to negotiate a lower price from a drugmaker, dispense the medicine, and insure customers so they can pay for it.
That could mean savings from fewer administrative staff and combined IT systems. The nation’s largest health insurer, UnitedHealth Group, runs a prescription drug benefit business in-house that has done well. There may be a cost though. Rival insurer Anthem recently partnered with CVS to form a drug-benefit business due to start in 2020. Whether Anthem would want to play ball with Aetna in the picture is a big question.
Yet it’s notable that this overture became public the same day that the St. Louis Post-Dispatch confirmed Amazon had received approval from multiple states to become a wholesale pharmaceutical distributer. Rumor and logic suggest strongly that the retailer will ultimately offer prescriptions online.
That news caused widespread damage to drug middlemen stocks earlier in the day. CVS, for example, saw its shares initially fall up to 6 percent on the news. Currently pharmacy-benefit managers can negotiate discounts with drugmakers in the dark, push customers toward captive pharmacies and extract a profit. It’s one of the reasons why healthcare is so much more costly and complex in America than in most developed countries. Amazon on the other hand, is notorious for disrupting businesses, focusing on customers, and being willing to accept nearly non-existent margins. For CVS, having an insurer steer a lot of customers its way might help neuter the Amazon threat.
Of course, CVS’s strategy may have side effects of its own. U.S. politicians and consumers have become increasingly critical of the high cost and murkiness of drug pricing. Transparency may be coming regardless of what deals are made.
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