Over the weekend, CVS announced its intent to acquire Aetna for $69 billion. If approved, it would represent one of the largest M&A deals this decade, and the largest in the healthcare industry. The combined entity will have revenue of more than $220 billion and an EBITDA of $18.5 billion. This vertical integration, if they can pull it off, could significantly accelerate the drive to consumer-centric care.

With so much at stake, Chilmark Research offers this analysis of how the CVS-Aetna merger would impact various touch-points of healthcare delivery and payment. Our key assessments:

• Near-term: direct combination of CVS Caremark’s PBM service with Aetna will be attractive to self-insured employers as some “service” costs will be eliminated.
• Express Scripts, the last national, independent PBM will likely benefit as payers previously aligned with CVS Caremark, see them now as a competitive threat.
• Longer-term: Aetna members will be incentivized to visit CVS Minute Clinics, which will disrupt traditional primary care practices.
• Aetna’s aggressive development of high performance networks will be further accelerated with addition of CVS’s Transform Care Program.
• Epic’s Healthy Planet PHM platform will likely become the core IT nerve center for care processes and provider-payer-pharmacy convergence enablement.

As an IT analyst firm, we have little interest in what this deal may portend in the pharmaceutical benefits management (PBM) space (see here or here for that coverage). We are far more interested in its impact on the healthcare delivery chain (HCDC), what it means for the convergence trend we highlighted at our recent conference, as well as the supporting IT infrastructure that will enable the HCDC.

HCDC Impact: Community Care Hubs

With more than 1,100 MinuteClinics, and a target of 1,500 locations, CVS is leading the move to consumer-centric, retail health in the U.S. The combined entity will have massive consumer reach and could pose a significant threat to basic primary care practices as incentives will likely be used to encourage Aetna members to use CVS Minute Clinic services. This has the potential to drive near-term disruption, and it’s consistent with Aetna Chairman and CEO Mark Bertolini’s desire to move care into the home and community, closer to the consumer.

Through the Transform Care program, CVS hopes to drive better outcomes through coordinated disease state management — an area where payers such as Aetna have clear incentives to get members to participate. The program started with diabetes and plans to address four more disease states in the next 24 months: Asthma, hypertension, hypercholesterolemia, and depression.

Through the Transform Care program, CVS hopes to drive better outcomes through coordinated disease state management…However, transitioning CVS’s retail stores into community health hubs is fraught with execution challenges and will require significant capital expenditure.

Beyond its MinuteClinics, CVS has 9,600 pharmacies across the country. As most consumers interact with their pharmacists far more frequently then their doctor, having the ability to leverage pharmacists as part of an extended care team for Aetna’s members could be quite powerful. In addition to assisting with chronic disease management, exposing such information as an Aetna member’s care gaps to a pharmacist to encourage follow-up or even schedule an appointment can improve critical metrics under value-based care programs such as CMS’s Medicare Shared Savings Program.

It is also important to note that Aetna has aggressively been building high-performance networks in partnership with providers. Currently, Aetna has established numerous Accountable Care Organizations (ACOs) with providers across the country as well as five joint ventures, with notable providers Allina Health, Banner Health, Inova Health, Sutter Health, and Texas Health Resources.

Critical to the success of these partnerships in value-based care models is minimizing leakage (patients going out-of-network to receive care). Often, these out-of-network visits are simply done out of convenience. Aetna now has the opportunity to leverage MinuteClinics as part of its high-performance value based networks (ACOs & JVs) incentivizing members – no co-pay if member goes to CVS MinuteClinic versus say a $50 co-pay if member goes to an out-of-network provider. This will be attractive to large self-insured employers and their employees.

However, transitioning CVS’s retail stores into community health hubs is fraught with execution challenges and will require significant capital expenditure. Leaders of CVS and Aetna said “pilot” and “test and learn” throughout a joint conference call following the announcement. This may give Walgreens, Walmart, and other players an opportunity to pivot while a merged CVS-Aetna takes time to plan and execute.

Health IT Impact: Integrated Service Offerings

CVS is actively deploying the Epic EHR across all MinuteClinic locations (including those in recently acquired Target pharmacy locations). This provides the IT infrastructure to broaden the scope of services provided to the consumer including facilitating hand-offs/referrals, with local IDNs (CVS has more than 40 clinical affiliations across the country).

In addition to using the Epic EHR across all MinuteClinics, CVS announced in October that it was also partnering with Epic to leverage the Epic population health platform, Healthy Planet. We expect that Healthy Planet will become the core platform bridging many of the core provider-payer activities that are associated with value based models of care across the HCDC.

A combined CVS-Aetna would be well positioned to improve predictive analytics, given the addition of clinical, pharmacy, and consumer data to claims data… Here, the impact will be greatest in consumer engagement, potentially managed through the CVS Health Engagement Engine.

A combined CVS-Aetna would be well positioned to improve predictive analytics, given the addition of clinical, pharmacy, and consumer data to claims data, and to recommend CVS’s wellness or disease management programs to the most appropriate members. Here, the impact will be greatest in consumer engagement, potentially managed through the CVS Health Engagement Engine. (See Figure 1.)

Figure 1. CVS Health Engagement Engine Overview. Source: CVS Health

Over the years, Aetna has acquired and subsequently offered a wide breadth of software solutions and professional services focused on member engagement and provider enablement. These include ActiveHealth, Health Data Management Systems, Medicity, and iTriage. None of these have been a huge success for Aetna, and some will likely be spun off in due time.

Where many payers and providers struggle with engagement, CVS owns this touchpoint. About 30% of CVS customers use the retailer’s text messaging platform for prescription pickup and refill; plus, customers who pick up prescriptions on a monthly basis visit CVS more often than they see their PCP.

In addition, CVS has partnered with three telehealth companies (American Well, Doctor on Demand, and Teladoc) to offer customers another venue for receiving low-acuity care. Aetna is also Teladoc’s biggest client (along with a number of other insurers). This merger gives CVS an opportunity to create a new integrated services offering, since not a single health plan has a comprehensive virtual health strategy to manage care and customer engagement.

This integration of service offerings raises key questions, though.

• Who will manages these low-acuity and/or holistic interventions: CVS pharmacists, Aetna care managers, or newly hired health coaches in a reporting structure TBD?
• Will Aetna, in a sense, outsource member engagement to CVS? What will this mean for non-CVS customers who are covered by Aetna?
• How will PCPs and HCOs react to this? Will providers cut their ties with an insurer that is interested in driving utilization to a retail health or telehealth provider?

Looking Ahead

Unlike the failed Humana-Aetna proposed merger, the CVS-Aetna merger is expected to be granted conditional approval. A merged CVS/Aetna creates a healthcare services behemoth, with combined revenue of more than $220B and EBITDA of $18.5B, rivaled only by UnitedHealth. (See Figure 2).

Figure 2. Projected Revenue Breakdowns by Operating Segment, CY2018. Source: Cowen and Company

A challenge to UnitedHealth? The deal sets up CVS to capitalize on its longer-term vision for a UnitedHealth-like model that vertically aligns the insurer, PBM, and retail businesses, helping to drive down costs and attract consumers into its bricks-and-mortar presence. OptumRx is comparable in size to Caremark. CVS plans to ramp up its investments in retail clinics, which is similar to UnitedHealth’s ramp up of its MedExpress business.

Execution risk is high. We share CVS-Aetna management’s views on the need for a more integrated and community-based healthcare approach and believe that CVS is a strategic asset with the ability to position itself as a unique player that can fill this void in the US healthcare system.

That said, the transformation that CVS’s retail footprint will have to undergo, not to mention the capital and effort required to restructure its 9,700-plus store footprint, poses meaningful operational risk to the combined entity, as well as drag that a broad renovation project will likely bring to CVS’s retail store performance over the next three years.

Competitors will wait and see. While UnitedHealth already operates an integrated health insurer/PBM model, the ability for CVS-Aetna to offer the direct consumer touchpoint via the retail pharmacy would be unique in the market. The only other play we may see of similar nature is a rumored Walmart acquisition of Humana, which would be similar in nature but targeted more toward Medicare Advantage members, where Humana has a strong presence.

Disruption from Amazon is unlikely. The real game-changer would be Amazon accelerating its entrance into the market with the purchase of an existing player such as Rite Aid or Express Scripts. However, Amazon’s potential entry into the pharmaceutical distribution and/or retail market has its own execution risks, thus near-term disruption unlikely.

Impact to primary care in question. CVS’s MinuteClinics offer a convenience and often a cost savings to the consumer that is unmatched by a primary care practice or local hospital ER. Yet the primary care practice often has the long-term, close, and personal relationship with a consumer/patient. It remains to be seen just how readily consumers will forgo relationships for convenience and whether or not incentives provided to Aetna members to use MinuteClinics will have a substantial impact on smaller primary care practices. The threat is certainly there – it’s the magnitude that remains in question.

The CVS retail pharmacy front-end will change substantially, eliminating some of the retail risk by moving toward healthcare services offerings such as vision, hearing, and wellness. The PBM will be a tool to help grow the enterprise, with PBM margin being less important than when it was part of CVS alone. In the end, CVS Health will be the place for Aetna members to go to get healthy and stay healthy, with the idea that the new model will attract members into the network due to cost, convenience and better outcomes. This is what a healthcare service company is idealistically supposed to do.