Walmart and CVS have 15,000 combined stores. Why are both trying to buy health insurance companies?

April 20, 2018 by Dana P. Goldman And Erin E. Trish, Los Angeles Times

The economics of healthcare in America is making for some strange bedfellows. CVS, the behemoth pharmacy chain, plans to buy Aetna, a 22-million member health insurer, for $69 billion. Less than two weeks ago, it became public that Walmart, where one in four Americans shop each week, is considering an acquisition of another insurer, Humana.

Why would these two massive retailers want to buy health insurers? Think millions of customers under one roof buying insurance, visiting health clinics and—importantly—filling prescriptions. These merged insurer-retailers could have lots of price-setting leverage in dealing with pharmaceutical companies and hospitals. But consolidation like this also can threaten competition—and in healthcare markets, that is a demonstrated danger.

To see clearly what's going on here, it helps to distinguish, as regulators do, between horizontal and vertical mergers. When two competitors in the same business consolidate, that's a horizontal merger. Hospitals, for instance, have been merging horizontally for decades. There is some evidence that such mergers can improve quality of care, particularly if two small hospitals join forces and become more efficient. But there's also plenty of data showing that when regional health systems get too big, that can drive up prices. Some believe the reason prices for inpatient hospital care in Southern California are 70 percent lower than in Northern California is because the hospital market down here is very competitive compared with the highly consolidated picture up north.

Last year the federal government stopped two big attempted horizontal mergers in the health insurance industry: Anthem's proposed takeover of CIGNA and Aetna's proposed merger with Humana. The Department of Justice blocked both citing concerns about reduced competition, increased prices and stifled innovation.

So the insurers are taking a different tack by going vertical. A vertical merger is when companies at different stages of the production process merge.

Regulators from the Justice Department and the Federal Trade Commission will take a close look again. But this time insurers hope to make the case that by integrating with retailers they will be getting bigger in a way that creates more competition, not less. They will stress that for some forms of healthcare, they will be able to compete directly with hospitals and physician groups. With 5,000 Walmart stores and nearly 10,000 CVS stores in the United States, they can also claim an ability to make healthcare more accessible and affordable in many communities.

Two other factors are driving these retailers' interest in healthcare. First, it's where the money is. Americans spent an average of $10,348 per person on health care in 2016, accounting for 17.9 percent of the nation's Gross Domestic Product. For retailers—who routinely operate with low profit margins—the high margins of healthcare must look very attractive.

Second, Amazon—the giant of consumer sales and noted disrupter of traditional business models—announced in January that it was partnering with Berkshire Hathaway and JP Morgan Chase to create a new company. Its initial goal is to use technology to reduce costs and improve outcomes for the three firms' combined 1 million employees. But no one forgets that Amazon also started out selling just books. This is another motivator for the retailers and insurance companies to merge quickly.

Once merged, these huge retail-health systems could steer policy holders to less expensive services—like clinic visits or pharmacist visits—and possibly drive down drug prices as well. Health outcomes may even improve. But prices could also rise. If a big CVS-Aetna or Walmart-Humana system dominates a region, it could negotiate better prices from drug manufacturers and hospitals—but just keep those savings as profits for themselves.

Vertical integration could also reduce competition through exclusivity. Consumers could be harmed if, say, CVS refused to fill Humana policyholders' prescriptions, or Walmart charged Aetna customers higher prices. This may seem hypothetical, but regulators care about hypotheticals. In November, the Department of Justice sued to block another vertical merger—AT&T's proposed acquisition of Time Warner—over concerns that the integrated company would withhold their shows from other internet providers and cable companies.

Healthcare is ripe for a shakeup. Soon Amazon drones may be delivering prescriptions, Walmart doing blood tests, and CVS providing urgent care. Let's hope the Trump administration regulators are ready.

Explore further: Aetna, Humana call off $34 billion deal

Related Stories

Aetna, Humana call off $34 billion deal

February 14, 2017
Major health insurers Aetna and Humana called off their $34 billion combination after a federal judge, citing concerns about prices and benefits, rejected the deal.

US drugstore chain CVS to buy medical insurer Aetna for $69 billion

December 4, 2017
US drugstore chain CVS Health announced Sunday it would buy medical insurer Aetna for about $69 billion, in a move that would create a new giant in the healthcare sector.

Federal judge swats Aetna-Humana insurer combo

January 23, 2017
A federal judge has rejected health insurer Aetna's bid to buy rival Humana on grounds that the deal would hurt competition in hundreds of Medicare Advantage markets, ultimately affecting the price consumers pay for coverage.

Runaway costs prompt another big US health merger

March 8, 2018
The need to address runaway health care costs in the US prompted another megamerger Thursday with insurer Cigna announcing the $67 billion purchase of pharmacy benefits manager Express Scripts.

Feds say health mergers would increase costs, threaten care

July 21, 2016
The U.S. government is suing to stop two major health insurance mergers, a move regulators say is needed to protect Americans from potential cost hikes and lower quality care.

Recommended for you

Receiving genetic information can change risk

December 11, 2018
Millions of people in the United States alone have submitted their DNA for analysis and received information that not only predicts their risk for disease but, it turns out, in some cases might also have influenced that risk, ...

Effect of oral alfacalcidol on clinical outcomes in patients without secondary hyperparathyroidism

December 11, 2018
Treatment with active vitamin D did not decrease cardiovascular events in kidney patients undergoing hemodialysis, according to a research group in Japan. They have reported their research results in the December 11 issue ...

Yes please to yoghurt and cheese: The new improved Mediterranean diet

December 11, 2018
Thousands of Australians can take heart as new research from the University of South Australia shows a dairy-enhanced Mediterranean diet will significantly increase health outcomes for those at risk of cardiovascular disease ...

Licence to Swill: James Bond's drinking over six decades

December 10, 2018
He may be licensed to kill but fictional British secret service agent James Bond has a severe alcohol use disorder, according to an analysis of his drinking behaviour published in the Medical Journal of Australia's Christmas ...

Obesity, risk of cognitive dysfunction? Consider high-intensity interval exercise

December 10, 2018
It's fast-paced, takes less time to do, and burns a lot of calories. High-intensity interval exercise is widely recognized as the most time-efficient and effective way to exercise. In a first-of-its-kind study, researchers ...

How to survive on 'Game of Thrones': Switch allegiances

December 9, 2018
Characters in the Game of Thrones TV series are more likely to die if they do not switch allegiance, and are male, according to an article published in the open access journal Injury Epidemiology.

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.