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OVERVIEW We have been super skeptical that regulators will allow the CVS-AET merger to proceed without intervention. We found an ally in that view with the American Medical Association’s announcement today that they oppose the merger. We don’t buy the whole “won’t the Department of Justice look silly if it challenges another vertical merger after that whole T/TWX thing” because, well, we read the news and the avoidance of foolishness does not appear to be a priority of this administration.* Plus, we aren’t entirely sure the CVS/AET combination is entirely a vertical merger. This administration, in a Council of Economic Advisors report, and in rulemaking and speeches and testimony has noted the negative effects of market concentration in pharmacy benefit management. The previous administration based their opposition to the AET/HUM and CI/ANTM mergers on concentration in Medicare Part C and D plans. Finally, CVS has earned the enmity of political leaders and insurance commissioners across the nation due to their alleged use of Part D DIR fees and other rebate mechanisms to force non-CVS pharmacies from the market making for some interesting hearings before state insurance commissioners like the one today. |
Vertical or horizontal? The CVS-AET combination is being characterized as a vertical merger because, as the companies asserted before the California Insurance Commissioner today, they are in two different businesses. CVS operates retail stores and fills prescriptions and AET is in the health insurance business. Except that both companies are in the Medicare Part D business.
CVS’s Caremark division manages a stand-alone Part D plan through its Silverscript insurance companies. Stand-alone PDPs are typically used by beneficiaries as a complement to traditional Medicare. AET offers both stand-alone PDPs and Medicare Advantage plans paired with a PDP.
If the merger goes through, CVS and AET will have a combined enrollment of 8.3 million people or 33 percent of stand-alone PDP enrollment and 23 percent of all enrollment in stand-alone and MA-PDP plans. Four companies - CVS/AET, ESRX, HUM, UNH - will control 83 percent of stand-alone PDP enrollment. The same four companies control 72 percent of all MA-PDP and stand-alone MA-PDP plans.
Recall that the Obama Administration opposed the insurance company mergers in 2016 because of its concerns about market concentration in Medicare Advantage plans. The insurance companies tried to make the argument that Medicare FFS and Medicare Advantage were the same markets. The court did not buy it.
Ok, yes this problem could be solved by the divestiture of Part D plans. However, Medicare Part C and D are considered growth areas in the insurance sector given demographics and federal policy. Divestiture of Part D seems like the elimination of a major reason for the merger.
What is more foolish? Even if we accept that the CVS/AET combination is a vertical merger the administration has declared that market concentration in the pharmacy benefit management and wholesaler business is driving up list prices of drugs. More generally, the White House has expressed concerns about mergers in the health care sector.
If the administration moves to block the merger and is called foolish for doing so because of the T/TWX loss, don’t they look equally as foolish for making some bold statements about market concentration and not following through when the opportunity presents itself so nicely?
Will the DOJ reward bad behavior? Finally, CVS has not exactly endeared themselves to insurance commissioners around the country through what some have deemed anti-competitive practices designed to push independent and competing pharmacies out of the market. The Governor of Arkansas actually called a special legislative session to pass a bill designed to rein in PBM practices. CVS was a centerpiece of most complaints from independent pharmacists that supported the legislation.
Of course, the CVS/AET merger will be considered by insurance commissioners across the country. Today’s hearing in California was a version of what we think we can expect in other states. California’s Insurance Commissioner Doug Jones, asked a number of pointed questions about savings and benefits to plan members and was often met with “don’t knows” from the companies.
It is still early in the game but the CVS/AET combination looks right now to be treading the same path as HUM/AET in 2016/17
Call with questions and comments. We were right in 2016 but would like to know why history may not repeat itself this time.
*That isn't a partisan statement. Peer pressure just isn't the Trump administration's thing.
