After being evaluated by the Justice Department, one of the largest mergers of the year happened this week when CVS agreed to buy Aetna Inc. for $69 billion. The payout will be done with 70 percent in cash and 30 percent in CVS shares, at $207 per share.
CVS CEO, Larry Merlo, stated that consumers will notice not only a change in the company’s products but also in the quality of services received to assure their best health.
Consumers are wondering how a merger such as this could shake the already booming health and pharmaceutical business. To give an idea of the industry’s size, U.S. citizens spend an average of $255 billion on branded prescription drugs and $115 billion on generic prescription drugs.
National healthcare expenditure is estimated to be over $3 trillion annually. Even with these large numbers, most of the revenue is raked in by a handful of notable players. Among CVS’ competition, there is Walgreens, Walmart and Kroger, who are all said to be affected by this recent deal.
Aetna’s CEO, Mark Bertolini, looks forward to the simplicity that the new merger can provide to consumers. Insurance users may soon see a monumental change regarding how they receive checkups and see doctors. CVS already has over 1,100 walk-in health clinics set up, but Aetna is ready to add to the functionality of the clinics by specializing them for emergency care and equipping them with health experts.
This could make visits to the doctor less necessary, because people could just ask questions about their health and medical conditions at their nearby clinic.
Additionally, Aetna is hoping to make it cheaper for customers to refill prescriptions that will stabilize their health and keep them out of the hospital.
This is because doctor visits are becoming a great expense to insurance companies, therefore making it better for both sides to prevent them.
Consumers may benefit from insurance companies, the ones not directly working with CVS, being pressured into conducting their business at a lower cost.
With faster access to medical attention and prescription fills, customers will have a stronger inclination for choosing CVS and Aetna over other health companies.
This partnership means that all of a patient’s records will be kept nearly fully together, thus adding to the simplicity of patient treatment at the clinics because doctors will have everything already on hand. Coordinating files also helps to reduce errors in medical diagnoses. While this structure does add benefits and convenience to customers, it also reduces their options to seek help at other facilities.
Some worry that if this type of merger becomes a trend in the health industry, consumer options will be limited to only their insurance company’s partners.
Scrutiny of the merger brought up comparisons to the recent block on AT&T’s proposal to buy Time Warner Cable by the Justice Department.
Both were considered to be vertical mergers that bind distributors and suppliers rather than absorb the competition. Both were also done to create a competitive edge.
In the CVS-Aetna case, it is likely that the two companies felt threatened by Amazon’s announcement that it will launch into the pharmaceutical world, along with health giant UnitedHealth Group’s recent growth through acquisitions.
A big concern of this merger is that its effect on drug prices is good only in the short run. Once CVS is able to provide drugs at much lower prices, new entries in the market will find it increasingly difficult to negotiate lower prices.
In the long term, this will give too much price control power to one group.
While previous attempts at horizontal mergers were denied by the Justice Department, such as Aetna’s earlier deals to buy Humana Inc., vertical mergers have almost always been passed.
This may influence more companies to go for similar deals in order to level with such competition.
As a business that affects people’s lives directly, it is no surprise how much the media is analyzing the effects of the CVS-Aetna merger. Scrutiny of the merger is especially relevant since the healthcare industry has gained a negative public reputation in recent years, owning up to tactics such as the price gouging of pharmaceutical drugs. CVS and Aetna should realize that their potential for long-term profit is dependent on how well they genuinely prioritize consumer health.
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