Dan Haar: Aetna-CVS deal calls for skepticism
Updated 9:13 pm, Monday, December 4, 2017
The top executives of two brand-name national firms come together in what they promise will be an explosive merger, creating a supermarket of services for consumers who would save hugely and have access to the best information in one place.
One is an aggressive, publicity-loving visionary who heads a historic Hartford insurer but favors New York culture. He melds his company with a larger corporation that has thousands of retail locations.
Aetna’s Mark T. Bertolini joining forces with CVS?
No, it was the creation of Citigroup 19 years ago. Sandy Weill’s Travelers Group merged with Citicorp in what was then the largest ever acquisition.
And it failed miserably.
Like Aetna-CVS, it was touted as a match made in heaven, not just strategic, not just financial, but both — plus a whole new way of serving customers under one roof. Like Aetna-CVS, it tested the bounds of antitrust rules.
The cultures clashed. Marketing staffs didn’t cross-sell. Clients didn’t see the need for investment banking, insurance, brokerage services, commercial lending and retail branches under one red umbrella. Investors sent the shares down nearly 30 percent in 10 years.
The same could easily happen to CVS and Aetna. On Monday, the CEOs failed to give a convincing argument beyond a lot of soaring but ultimately meaningless rhetoric.
“We will use our high-touch connectivity to become the front door to health care consumers,” said Larry J. Merlo, the CVS chief executive, who started his career as a pharmacist.
Say what? Thanks, Larry, but my doctor’s office already fills that role.
I stopped into my local CVS after the merger conference call and it felt more like an old-fashioned general store, with candy at the cashier counter and rows of sundries.
“Our combined data and analytics will provide a more holistic view of each individual,” Bertolini said. “Think of the Genius Bar at Apple, this ability to go into the store and get help.”
OK, I’m starting to catch on. Aetna and CVS both have millions of terabytes of medical records which, when combined, tell them what they need to sell me and whether they even want me as a customer. I definitely see how that helps them — less so, me.
Two questions come to mind: First, why can’t they do that now, without merging into one company that threatens to muscle out other players such as doctors, smaller pharmacists and competitors? Aetna contracts with CVS’s Caremark for pharmacy benefits management on behalf of its 22 million members. Why can’t they increase their joint offerings in a creative way?
“We both agreed that a combination was an important enabler,” Merlo said.
“Owner economics matter here,” Bertolini said. “How you track matters.”
Think about that. What they’re saying is that they can only really drive cost out of the health care system — their stated purpose in the deal — by joining forces in a way that gives them more market power.
Which leads us to the second question: Market power to what end? Remember, as it stands now, the two companies reach an arms-length contract where each one protects its own interests. That’s good for the consumer and now it will be lost.
“The patient is sort of caught in this vice,” said Robert Lamb, a professor of finance and management at the Stern School of Business at New York University, who studies mergers. “The specific arrangement that the two organizations have with each other means that you don’t have, one, freedom of choice but two, they’ve already made an agreement that there will not be outsiders, there cannot be outsiders. … That’s the problem.”
“There has to be scrutiny to make sure that consumers actually benefit,” Sen. Richard Blumenthal said Monday, but such guarantees are tough to lock down.
Merlo made a point that competing health insurers will not be locked out. That’s a factor the U.S. Department of Justice will examine in scrutiny that’s likely to lead to approval.
The bigger question is how promises like this from Merlo — “Clients through the combined entity will be able to help address the growing cost of treating chronic conditions” — will work for the market.
It failed for Citigroup. We are watching.