Just 3 months after CVS Health announced its intention to acquire Aetna, Cigna agrees to buy PBM Express Scripts and Albertsons agrees to buy Rite Aid stores. Experts in healthcare are saying these mergers and acquisitions have the potential to reshape the nation’s health care industry. But what about antitrust issues? Here is summary of mergers and acquisitions that have taken place or have been in consideration since 2015:
CVS Health buys Omnicare (institutional pharmacy provider) for $12.7 billion on May 21, 2015.
United Health acquires PBM Catamaran for $12.8 billion on July 24, 2015 and creates PBM, OptumRx.
Walgreens Boot Alliance purchases AmerisourceBergen shares for 26% ownership on August 25, 2016.
Anthem abandons acquisition of Cigna for $54 billion on February 14, 2017 due to antitrust concerns.
Aetna’s cancels plans to acquire Humana for $37 billion on February 14, 2017 due to antitrust concerns.
Walgreen Boots Alliance and KKR (an investment firm) announced completion of a $1.4 billion partial acquisition of PharMerica (institutional pharmacy provider) on August 2, 2017.
Walgreens Boots Alliance buys Rite Aid September 19, 2017 while regulators reduce the purchase from 4,600 to 1,962 Rite Aid stores.
In October 2017, Anthem drops PBM Express Scripts and partners with CVS to launch a new PBM IngenioRx in 2020.
CVS Health announced on December 3, 2017 intent to acquire Aetna for $69 billion, pending Justice Department approval.
Walgreens Boots Alliance considers buying the rest of Amerisource Bergen, announced February 13, 2018.
Albertsons agrees to buy remaining Rite Aid stores (after Walgreen purchase) on February 20, 2018.
On March 8, 2018, Cigna revealed an agreement to buy PBM Express Scripts in $67 billion deal, pending Justice Department approval.
What is the reason for all these mergers?
- Create a more efficient organization that will weed out redundancy and bolster innovation, resulting in better products or services at lower prices.
- Build negotiating clout.
- Address financial pressures and expanding competition.
As you review this list of mergers and acquisitions, it is evident that pharmacies are looking to diversify by purchasing wholesalers, pharmacy benefit managers and insurance companies. Insurance companies want to merge with PBMs. The more pieces an entity owns of the health care system, the greater their market presence and the better their safeguard against the unknown future of the Affordable Care Act and new competitors such as Amazon.
PBMs have been consolidating for years with the result that the three largest PBMs control 80% of health plan related purchases: CVS Health (aka Caremark), Express Scripts, and OptumRx (a subsidiary of UnitedHealth). Cigna’s acquisition of Express Scripts, if successful, could possibly end the stand-alone PBM model. The function of PBMs changed from just processing prescription transactions to managing the pharmacy benefit for health plans. This included negotiating drug discounts and securing rebates from pharmaceutical manufacturers and providing drug utilization reviews and disease management. PBMs also created formularies “encouraging” health plan participants to use preferred formulary products.
It makes sense that insurance companies would want to own a PBM. Insurers have had concerns whether enough of the savings that PBMs were obtaining through their negotiations with drug manufacturers were being passed on them and their patients. Case in point – Anthem accused Express Scripts of price gouging and sued the PBM for $15 billion.
The largest U.S. health insurer, UnitedHealth Group Inc., purchased the PBM Catamaran Corp. for $12.8 billion in 2015 through its healthcare delivery subsidiary Optum. With that acquisition, Optum developed its own PBM, called OptumRx, which has become the third-largest PBM in the U.S. by revenue, helping propel UnitedHealth to record profits year after year. The top two PBMs, Express Scripts and CVS’ Caremark, are now being merged with large insurers in a race to compete with UnitedHealth’s behemoth position in the market.
What are the antitrust implications with these mergers? There are two types of mergers – horizontal and vertical.
Horizontal mergers are:
- Between two companies in the same business,
- Shown to potentially reduce competition and harm consumers,
- Open to serious antitrust implications and are
- Closely scrutinized by the U.S. Department of Justice.
Horizontal mergers between Anthem and Cigna, and also between Aetna and Humana were denied whle the Walgreens and Rite Aid merger was limited to a reduced number of pharmacies.
Vertical mergers are:
- Between two companies in different but related markets,
- Unknown with regard to competition and harm to consumers,
- Susceptible to possible antitrust implications in which the Department of Justice is more permissive.
Both the CVS/ Aetna; and Express Scripts/ Cigna vertical mergers remain pending.
Vertical mergers are viewed by some as good or at least non-threatening to competition. The theory is that the benefits of increased efficiency will be passed along to the consumer. However, vertical mergers can be anti-competitive if either of the companies is a dominant player in its market and its markets aren’t all that competitive. Many believe that this certainly applies to the CVS and Aetna merger. The deal would create a company with combined annual revenues of $240 billion.
Although antitrust regulators have been more permissive of vertical mergers, the Department of Justice has asked for more information on the CVS-Aetna deal. It’s unclear what additional information the Justice Department wants from either company, but such requests are common and don’t always mean an effort to stop the merger is coming. Both companies had shareholder votes on March 20, 2018 and overwhelmingly approved CVS’s proposed $69 billion deal to acquire health insurer Aetna. Will the Department of Justice do the same? How many more vertical mergers does the future hold? How will these mergers affect your practice?