Consolidation Reshaping Healthcare
There was blockbuster news this weekend when it was confirmed that CVS Health will buy Aetna in the largest ever healthcare deal. The recent rumors have spawned talk of many other mergers.
Why would CVS want to buy Aetna? It’s simple. It is all about the numbers and the future of healthcare.
First, the numbers: CVS is already one of the largest public companies (#7 on the Fortune list) and acquiring Aetna (#43) would likely make it the second largest company, behind Walmart at #1 (which would still have twice the revenue). Second, the future of healthcare: A combined company would be a virtual dominant force. CVS owns just short of 10,000 retail pharmacies, a large specialty pharmacy, nationwide in-pharmacy clinics, and is one of the top three pharmacy benefits managers (PBMs) in the nation serving 90 million members. Aetna, a CVS PBM customer, is a national insurer with about 50 million members in all lines of business. It is a strong Medicare national provider.
Together, the combined entity will dominate vast shares of the nation’s medical and pharmacy spend, creating huge leverage in the marketplace to reduce costs and drive quality. The announcement will drive other consolidation, despite major setbacks for mergers the past few years at the hands of opposition from the anti-trust division of the Department of Justice. A few possible mergers:
- Worried it will not command insurance or medical lives, Walmart could acquire a national insurer, perhaps Humana due to its lucrative Medicare membership.
- Although Walgreen’s (#17) shed its PBM business a number of years ago, it may look to acquire Humana or another insurer. Walgreen’s has a nationwide clinic operation in its retail pharmacies.
- Cigna’s (#70) Medicare footprint is somewhat small with HealthSpring and could vie for Humana’s Medicare portfolio as well. As junior partners, both Cigna and Humana have cash after their failed mergers with Anthem and Aetna, respectively.
- Anthem (#29) announced it was allying with CVS to form a nationwide PBM due to its toxic relationship with Express Scripts (ESI), #22. The proposed PBM could be at risk now with the Aetna merger and Anthem might look to acquire another insurer and find another PBM deal. Anthem has kept up its acquisition of smaller Medicare plans.
- Despite the risks of a PBM, Walgreens likely may be fretting over its disposal of its PBM and could look to merge with ESI as well.
While consolidation is important and will be a prime focus for insurers, plans also need the ability to better control drug costs and drive pharmacy quality. Much of the consolidation could be driven by the fact that Amazon wishes to enter the drug marketplace in possibly a number of forms – bricks-and-mortar retail pharmacy, mail-order pharmacy, and PBM. Amazon sits at number 12 on the Fortune list and yet has a measly 1.7% profit. In some ways that is just the point. Amazon has gone for years without substantial profit to achieve market share, operating cash flow, and revenue. It will likely do the same as it seeks to capture a major piece of the drug spend market.
This has Walmart, traditional insurers and PBMs worried. Walmart’s pharmacy business is relatively small against total revenue. With healthcare sitting at 20 percent of the gross domestic product (GDP), it knows it has to grow in the healthcare world and not be left behind. It needs to compete with Amazon online in all areas. Insurers are worried because they in general don’t control their own destiny on drug spend and quality unless they own their own PBM. PBMs are concerned because a very opaque pricing and operational structure could give way to a huge amount of transparency when Amazon gets in the business.
For all these reasons, Amazon more than anyone may be driving the future of healthcare.
Tax Reform Bill Impacts Healthcare – A lot!
Congressional Republicans and President Donald Trump appear to be close to their first significant legislative victory, perhaps the second if you include the confirmation of Neil Gorsuch to the Supreme Court. Last week, the Senate passed a similar comprehensive tax bill to the House’s and the bill now heads to a conference committee to sort out the differences. For those who grew up on School House Rock and this blogger’s favorite segment “I’m Just a Bill,” we know we are very close. While predictions are always bad to make regarding Capitol Hill, there is near no chance that this deal falls apart at this stage.
We are a healthcare blog, so why are we writing about taxes? Because the tax bill has numerous provisions impacting healthcare. Here are a few of the key elements:
- The most obvious example is the repeal of the Obamacare individual mandate. Technically, the mandate is still in law but the tax penalty enforcing it would be repealed. As we stated in our last blog, we are of two-minds on the mandate. We doubt its repeal will have the effect that the Congressional Budget Office (CBO) thinks – 13 million losing coverage and a further increase in premiums. We think that number is closer to what private estimates are – say 4 million – as the subsidies drive enrollment. Nonetheless, we think a mandate may be a necessary evil in a truly functional system in the future and that some further damage will be done if it is repealed today. The more conservative House would need to bow to this repeal and likely will do so in conference.
- Repeal of itemization of medical expenses. This provision is in the House bill but not the Senate. Expenses over 10% of adjusted gross income can be deducted today. About a quarter of all people today itemize and that will be reduced with the expansion of the standard exemption (perhaps drop to 15%). An even smaller number of people today qualify today to take the medical expense deduction – 9 million filers. But it should be noted that these folks by nature have catastrophic medical expenses for a member of the family – sometimes these are one-time medical events that go away but more often are ongoing to care for those with chronic disabling conditions. In an effort to simplify the tax code, the elimination is understandable, but these folks clearly will be impacted in a very meaningful way if the provision is kept.
- Last, the tax bill could actually lead to automatic healthcare spending cuts (say what???). Here’s why: because of the burgeoning federal deficits over the past many years, a 2010 budget law called “Pay Go” requires automatic spending cuts by the executive Office of Management and Budget (OMB) if the deficit is forecast to increase. Usually the increase in the deficit is tied to unfettered spending, but in this case the tax cuts could lead to a deficit spike that would trigger such cuts. Now, we tend to agree with the so-called “dynamic scorers” who believe that ultimately the deficit shrinks because the economy grows and the tax cuts actually lead to more revenues into the budget coffers. But the more static scorers that dominate the CBO see lower upside on revenues from the baseline revenue projections over time. The resultant revenue after both the Kennedy and Regan era tax cuts seem to bolster the dynamic scoring camp. But in the meantime, the more static CBO approach could trigger cuts due to the fact that deficit is forecast to increase by as much as $1 trillion over the next decade due to the tax plan.
To avoid the cuts, Pay Go would have to be specifically waived or a “sequestration” of funds would occur to avoid an increase in the deficit. Sequestration has occurred in the past when the parties could not come together to pass a budget that reduced the deficit. FFY 2018’s cuts would amount to between $85 billion and $138 billion (depending on whose calculation you go by) from certain programs, including $25 billion in Medicare. That is about 4 percent of Medicare net outlays.
To get enough GOP moderates on board, Senate Majority Leader Mitch McConnell, R-KY, had to give two rather squishy commitments. First, a commitment that the tax cuts would not lead to Medicare cuts. It is hard to understand how that commitment can be made as 60 votes in the Senate would be needed (i.e., Democratic support) to waive Pay Go as it must be done outside of the budget reconciliation process. Further, GOPers seem to have a hankering to reform or reduce Medicare spending at some point this congressional session. Second, because the mandate repeal was in there, McConnell promises to support two measures later in the year that would stabilize Obamacare (Alexander-Murray and funding cost-sharing reduction (CSR) subsidies for two years). While McConnell can pass it in the Senate, the House is more questionable and then there is Trump’s views to consider. But for the time being, the commitment attracted enough votes to pass the bill in the Senate.