CVS-Aetna and Optum-DaVita deals take aim at costly hospital care
The billion-dollar deals between CVS Health and Aetna, and UnitedHealth and dialysis giant DaVita’s physician group take aim at healthcare spending by attempting to shift patient care away from costly inpatient facilities. While that may benefit patients, hospitals are left in the crosshairs.
Through their $69 billion deal, in which health insurer Aetna will become a stand-alone unit inside of drugstore chain and pharmacy benefit manager CVS, the companies plan to build a new kind of care model that’s lower cost and more convenient for the consumer by shifting the site of care to retail stores and clinics.
They are following a blueprint laid out by UnitedHealth, which has been gobbling up urgent-care centers and outpatient surgery clinics for the past few years. This time around, the nation’s largest insurer is buying DaVita Medical Group for $4.9 billion in a move that analysts predict will better position it to lower costs by keeping patients out of the hospital.
As healthcare spending grows and customers demand more convenient care, insurers are teaming up with nontraditional partners to find new ways to rein in costs. By putting pharmacy management and medical benefits under one roof—something that UnitedHealth has already done successfully—insurers and their partners may be better equipped to keep patients healthy and out of the hospital. Hospitals that get most of their revenue from expensive inpatient operations will have to evolve to stay afloat.
“What they’re talking about is having less medical spending, and particularly what they’re talking about is having less spending at the hospital,” said Craig Garthwaite, a health economist at Northwestern University, referring to the CVS-Aetna deal. The goal is the same for UnitedHealth, he said. “If I were a hospital that has a pretty big footprint (in inpatient care), I would be a little worried about that.”
CVS and Aetna are hoping that patients seek care from CVS’ more than 1,100 walk-in clinics instead of heading to the costlier emergency department. They also plan to convert CVS’ 9,700 retail store locations to community-based healthcare hubs where patients, especially those with chronic diseases, can access some form of treatment as a complement to their normal primary-care physician visits.
“We’re in the community, we’re seeing those patients, we’re becoming part of their daily lives and routines. We can get them on that care plan, help them achieve their best health and, at the same time, reduce the cost of care that we’re incurring today,” CVS CEO Larry Merlo said in a conference call with investors to discuss the deal.
CVS is also securing a huge captive market for its PBM by buying Aetna, said Nathan Ray, senior manager in the healthcare practice at consulting firm West Monroe Partners. That will help it compete on more equal footing with UnitedHealth’s OptumRx and Anthem’s new PBM, IngenioRx, which is expected to launch in 2020. Anthem is partnering with CVS to build IngenioRx. It remains to be seen
CVS has more than 1,100 clinics in 9,700 retail stores
how that will shake out during in the Aetna deal.
Patients may stand to gain from a better coordinated medical and pharmacy benefit, as well as the combined company’s emphasis on retail care.
“This brings Aetna out closer to the consumer, and with CVS’ retail strategy and Aetna’s membership, it’s a way to really expedite the movement away from reactive inpatient care to proactive retail and in-home care,” said David Gregory, healthcare consulting practice leader at advisory firm Baker Tilly.
Employers are also optimistic that the CVS-Aetna combination, which still must be approved by shareholders and regulators, will shake out in their favor. “There’s potentially a lot of upside in this for both patients and for employer plans,” said Steve Wojcik, vice president of public policy at the National Business Group on Health. “Some of the stand-alone retail clinics have not been very much integrated into overall healthcare delivery, and this could spur that and lead to lower health plan costs.”
The response to the CVS-Aetna deal so far stands in stark contrast to the uproar from hospitals, doctors, consumer advocates and employers prompted by the attempted merger between Aetna and rival Humana, which was abandoned in February after being successfully challenged by the U.S. Justice Department. The provider industry fought hard against that merger, as well as another between Anthem and Cigna Corp., over concerns about the power the combined insurers would have over reimbursement.
The American Medical Association hasn’t come out against the CVS-Aetna deal, though in a statement President Dr. David Barbe did say the AMA is reviewing “all issues triggered by this proposed merger.” The American Hospital Association declined to comment.
The threat to providers isn’t as overt this time around, but it’s there. The CVS-Aetna combination “takes away from the centrality of hospitals providing the most care,” said David Jarrard, CEO of healthcare consulting firm Jarrard Phillips Cate & Hancock. Of course, the type of care they’re focused on is low-acuity care and maintenance care for chronic conditions. A patient with cancer would still rely on the hospital.
UnitedHealth has a similar endgame in mind with its proposed $4.9 billion takeover of dialysis giant DaVita’s physician group. DaVita Medical Group, which will become part of the UnitedHealth’s healthcare services subsidiary Optum, serves about 1.7 million patients annually through 300 medical clinics. It also operates 35 urgent-care centers and six outpatient surgery centers.
The deal will advance UnitedHealth’s strategy of shifting patient care to lower-cost outpatient facilities and away from hospitals. Earlier this year, UnitedHealth’s Optum bought Surgical Care Affiliates, a chain of outpatient surgery centers, for $2.3 billion. Optum also bought MedExpress, an operator of urgent-care centers, in 2015 for the same reason.
Hospitals have already started responding to the patient demand for lower-cost care and convenience. While inpatient admissions have dropped, hospitals have been investing more in outpatient care and opening urgent-care centers and retail clinics or partnering with established ones to capture patients and pull them into their systems. The cost of care at a retail clinic is much lower than in a doctor’s office, and evidence has shown that the care quality is equal to care delivered in an ED.
Sacramento, Calif.-based Sutter Health, Downers Grove, Ill.-based Advocate Health Care, and Dallas-based Tenet Healthcare Corp. are just a few health systems that have invested heavily in outpatient clinics.
Questions remain about the bargaining power a combined CVS-Aetna, together with roughly $240 billion in annual revenue, would have over other industry stakeholders. Industry analysts anticipate fewer antitrust hurdles than were present when Aetna tried to buy Humana. However, both companies operate Medicare Part D prescription drug plans and may have to divest customers to seal the deal.
Aetna had to pay Humana a $1 billion breakup fee after the deal went south. If the CVS-Aetna deal fails, CVS could owe Aetna $2.1 billion, according to the companies’ merger agreement.
The takeover also could spark further consolidation among insurers and pharmacy services providers, which could be detrimental to competition in the healthcare industry as a whole.
If CVS and Aetna close the deal, “that’s going to make it harder for a new entrant to come into insurance market, and the only way customers benefit from lower premiums is if we end up with competition among the insurers,” Garthwaite said. “We might be worried that CVS and UnitedHealth are successful in their efforts to lower spending, but the result of that is greater profits for the insurer, and not lower premiums.”
DaVita Medical Group serves 1.7 million patients at 300 clinics