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April 16, 2018

Retail’s Recent Interest in Healthcare Insurance Tie-Ups

MHT Partners  | Consumer Investment Bank

In this two-part series, members of MHT Partners’ Consumer and Healthcare Practices analyze the impact generated by several proposed mergers/acquisitions between retail pharmacies and commercial insurance groups.

Part I: What it Could Mean for Your Wallet

The last 18 months have seen an abundance of mergers and acquisitions across the board, however few deals have garnered more interest and caused more confusion than the recent spate of tie-ups between traditional retailers like Walmart and CVS and commercial insurance payors like Humana and Aetna. While the success of these transactions will remain unknown for now, MHT believes that these creative combinations have the promise to deliver cost savings to consumers and make healthcare more accessible to the masses.

Leading this round of M&A is CVS Healthcare Corporation’s proposed acquisition of healthcare insurance giant Aetna Inc. That’s right, the nation’s leading drugstore chain with nearly 10,000 locations wants to buy one of the third largest health insurance companies with over 46 million subscribers. The deal is currently being reviewed by federal regulators, however many experts are bullish on the tie-up receiving the green light, in contrast to Aetna’s failed attempt to acquire major competitor Humana and Walgreens’ failed attempt to acquire Rite Aid. Regulators deemed that those proposed acquisitions would ultimately reduce competition in their respective markets (although Walgreens is buying 1,932 Rite Aid stores). A combined CVS-Aetna represents vertical (as opposed to horizontal) integration in the increasingly complex healthcare industry and quite possibly a remedy for declining performance in the non-healthcare aisles within CVS. It is important to note that the two companies are not recent acquaintances, as CVS has been managing Aetna’s pharmacy benefits program since 2010.

So what would this merger mean for consumers? MHT Partners weighs in on a combined CVS-Aetna from the retail and healthcare angles:

Pharmacy departments have long been the golden geese of drug stores, providing high margins and drawing customers through aisles of otherwise undifferentiated merchandise. Whether or not consumers realize it, the non-pharmacy / non-clinical “front end” of CVS, and many other retailers, has been in decline for many quarters, as measured by same-store sales, and in the current retail environment, opening new stores is not a solution either. Tobacco products are several years removed from its stores and CVS has been struggling to backfill its assortment with high margin, high velocity products, mostly through expanding its personal care and beauty sections. The company began to offer same-day and next-day delivery from stores this year to compete with Amazon.com. Further refining its assortment, customers can expect more fresh produce and grab-and-go meals and snacks, appealing to health-conscience consumers trying to avoid packaged foods. Longer term, consumers should expect fewer shelves and fewer traditional aisles, as CVS will leverage more of the store footprint for its MinuteClinics and additional clinical services. Lastly, don’t forget the power of big data! Combining the vast databases from CVS’ ExtraCare loyalty program and Aetna’s subscriber health records is a holy grail for data-driven marketers.

Part II: What it Could Mean for Your Health

To be continued . . .

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