CVS bid for Aetna: A $66 billion guess on slicing drug prices

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NEW YORK (Reuters) – The proposed merger between U.S. pharmacy operator CVS Well being Corp and No. three well being insurer Aetna Inc represents a $66 billion guess that insurers can drive down excessive U.S. drug costs by slicing out the intermediary.

FILE PHOTO: The CVS emblem is seen at certainly one of their shops in Manhattan, New York, U.S., August 1, 2016. REUTERS/Andrew Kelly/File Photograph

The transfer is the most costly effort up to now that will allow a nationwide well being insurer to take again full management of prescription medicines for his or her prospects by negotiating costs with pharmaceutical producers and setting buyer out-of-pocket prices for every drug.

CVS, one of many largest U.S. pharmacy advantages managers, has supplied to purchase No. three well being insurer Aetna for greater than $200 per share, sources mentioned on Thursday. It may take at the least a number of weeks for any deal to materialize.

If the deal occurs, it will seemingly strain rival insurers, drugmakers, pharmaceutical advantages managers, and retail pharmacies to additionally think about mergers or switching companions to attempt to sustain with the potential healthcare value financial savings or enhance in revenue margins.

“It’s an alternate mannequin at this level. It’s not clear that it’s undoubtedly a greater one,” BMO Capital Markets analyst Matt Borsch mentioned. “Extra consolidation may result in strain on among the brand-name drug costs and a greater counterweight to the massive pharma firms.”

For years, insurers paid drug advantages managers like CVS and Specific Scripts Holdings Co to barter down drug costs, with each events taking a share of any low cost by the point a drugs was paid for by customers.

However outrage over the excessive prices of medicine has grown as customers have picked up a bigger portion of the tab for drug prices and it’s threatening revenue margins all alongside the drug provide chain, from producers to distributors, insurers and pharmacies.

UnitedHealth Group Inc and Humana Inc at present have in-house pharmacy advantages companies, and say that it has helped them preserve medical prices down.

Anthem Inc not too long ago determined to go down that very same path. It minimize ties with Specific Scripts throughout a $three billion authorized combat, and mentioned it will use CVS to construct its personal pharmacy advantages enterprise within the subsequent few years. That tie-up may now be in danger if CVS reaches a deal to purchase Aetna, Leerink analyst Ana Gupta mentioned.

    CVS additionally supplies administration companies for Aetna rival Cigna Corp. If CVS buys Aetna, that would revive Cigna’s curiosity in shopping for Humana, analyst Christine Arnold of funding financial institution Cowen & Co mentioned in a analysis notice.

Aetna earlier this 12 months closed the door on a cope with rival insurer Humana Inc after antitrust regulators mentioned that mixture and a rival deal between Anthem Inc and Cigna Corp have been anti-competitive.

The pharmacy chain Walgreens Boots Alliance may must match its enterprise mannequin nearer to CVS to aim to remain aggressive, Arnold mentioned in a notice, and will have a look at shopping for Specific Scripts.

Jefferies analyst Brian Tanquilut mentioned that Specific Scripts may be a goal for Amazon Inc which is reported to be trying to get into the pharmacy enterprise.

    SWINGING PENDULUM

Over the previous decade, well being insurers have diverged on the worth of the pharmacy advantages enterprise.

Anthem offered its pharmacy profit supervisor to Specific Scripts and outsourced virtually all the enterprise in 2010.

UnitedHealth took the alternative method when it determined in 2011 to convey its pharmacy advantages administration in home, then purchased a fair greater standalone advantages supervisor, Catamaran, in 2015.

    Humana operates its personal pharmacy profit supervisor and Cigna and Aetna have hybrid approaches the place they handle some components in home and outsource others.  

    Till not too long ago, insurers sought to broaden their revenue margins by decreasing their spending on hospital companies, utilizing their measurement to barter down what they pay to healthcare suppliers.

However with these earnings in hand, and with drug costs representing an even bigger proportion of total healthcare spending, they see new alternative in focusing on the pharmacy advantages, Leerink’s Gupta mentioned.

    One other potential lure of a deal for Aetna could be to capitalize on the rising variety of easy well being companies supplied in a CVS retailer, from flu pictures to blood strain checks. Reimbursing such affected person care exterior of a physician’s workplace or hospital may minimize healthcare prices, Gupta mentioned.

Reporting by Caroline Humer and Carl O’Donnell; modifying by Michele Gershberg and Meredith Mazzilli

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