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US Regulators Clear $69 Billion CVS, Aetna Merger That May Lead to More Health Care Centers

Deal May Change the Nature of Pharmacy Properties
October 10, 2018
CVS at 1046-1054 Cass Ave. in Woonsocket, Rhode Island.

Federal regulators approved pharmacy and health care provider CVS Health Corp.'s $69 billion purchase of insurer Aetna Inc., a deal that may reshape the U.S. retail and health care real estate markets.

The Department of Justice clearance is a key milestone toward completing the deal that is also subject to state regulatory approvals, many of which have been granted. The purchase remains on track to close in the early part of this quarter.

With about $245 billion in combined revenue, CVS and Aetna are relying on the potential to redefine the way individuals access health care services in lower-cost, retail pharmacy properties. Aisles of greeting cards and soft drinks could eventually make room for wellness treatments, clinical and pharmacy services, vision and hearing testing, as well as the expected nutrition, beauty and medical equipment offerings.

In a note discussing the merger, Vikram Malhotra, an analyst at Morgan Stanley Research, said he expects the combined company to accelerate investments in low-cost care properties.

The combined company's retail-based property model represents another form of competition for hospitals. As peers pursue physician center acquisitions as the preferred method of meeting consumers, CVS and Aetna adopt a different, retail-based approach to bend the cost curve, according to Morgan Stanley. Retail clinics are typically staffed by physician assistants or nurse practitioners.

"Post-close of merger with Aetna, we expect the CVS/Aetna model to alter the typical retail clinic offering with additional depth of services as well as expanding the existing footprint. The proliferation of lower cost care centers will likely be a headwind to hospital admissions, particularly [emergency room] volumes in the near-to-midterm as consumers have greater choice and lower-cost alternative in addressing healthcare issues," Malhotra wrote.

Under the agreement with regulators, Aetna must divest its individual prescription drug plan business to WellCare Health Plans Inc., an established insurer focused on government-sponsored health plans, including Medicare Part D individual prescription drug coverage. WellCare will also have the opportunity to hire key employees who now operate the business. Aetna is required to assist WellCare in running the business during the transition and in transferring the affected customers.

"DOJ clearance is an important step toward bringing together the strengths and capabilities of our two companies to improve the consumer health care experience," Larry J. Merlo, CVS Health president and chief executive, said in a statement the company issued. "We are pleased to have reached an agreement with the DOJ that maintains the strategic benefits and value creation potential of our combination with Aetna. We are now working to complete the remaining state reviews."

Merlo added that CVS Health and Aetna have the opportunity to "combine capabilities in technology, data and analytics to develop new ways to engage patients in their total health and wellness. Our focus will be at the local and community level, taking advantage of our thousands of locations and touchpoints throughout the country to intervene with consumers to help predict and prevent potential health problems before they occur."

Following the close of the transaction, Aetna will operate as a standalone business within the CVS Health enterprise and will be led by members of its current management team.

CVS, based in Woonsocket, Rhode Island, operates the nation’s largest retail pharmacy chain, owns a large pharmacy benefit manager called Caremark and is the nation’s second-largest provider of individual prescription drug plans, with about 4.8 million members. CVS generated revenue of about $185 billion in 2017.

Aetna, based in Hartford, Connecticut, is the nation’s third-largest health-insurance company and fourth-biggest individual prescription drug plan insurer, with more than 2 million prescription drug plan members. Aetna generated revenue of about $60 billion in 2017.

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