Will big market mergers help healthcare?

U.S. healthcare costs are spiraling upward at an unsustainable rate and, try as we can to change that, inertia makes efficiency and cost reduction battles difficult to win. “Bigger” hasn’t done much to reduce costs. The health insurance market is down to four players and, as seen by the failed mergers of Aetna-Humana and Cigna-Anthem, regulators don’t seem to have much of an appetite to reduce competition further.

This market is ripe for disruption and we are seeing an incredible amount of money being thrown at healthcare technology. Entrenched market leaders are growing more and more concerned that they will be left behind with innovation. Recently, UnitedHealth Group created a $250 million tech incubator fund in an effort to get ahead of game-changing ideas. And Amazon’s acquisition of Whole Foods, coupled with rumored forays into pharmacy, really shook the walls of the pharmacy companies. BUCA (Blue Cross, UnitedHealthcare, Cigna and Aetna) are scrambling to remake healthcare before innovation or regulation take it over from them.

David Paul Morris/Bloomberg

So, the announced $69 billion merger between CVS and Aetna is the result. Aetna feared that as the No. 3 market leader with 22 million members, they were losing the discount game — and CVS felt its 9,700 brick and mortar locations could not compete with retail killer Amazon. Drug sales bring customers in the doors of their pharmacy, but if Amazon had lower drug costs, there would be fewer toothpaste and chewing gum sales for CVS. Vertical integration is the industry’s answer as hospitals buy doctors. Recently, UHG announced a $4.9 billion deal for DaVita Clinics, a dialysis provider.

Also see: “Acquisitions in the healthcare market leave employers uneasy.”

CVS-Aetna would be able to deliver more across the healthcare delivery spectrum. Pharmacy costs represent 25% of total spend and this is growing. And as I have written about here, here and here, this cost is full of margin begging to be squeezed out. And with the CVS MinuteClinics, CVS-Aetna would have the potential to take over costly, and previously difficult-to-control, primary care costs. I wrote a blog called “The New Front Door to Healthcare,” which pointed out that urgent care clinics have the potential to be the new portal to accessing secondary and tertiary care. Well here it is: The market redefined.

I for one, think the CVS-Aetna deal has the potential to do what we have been unable to do: bend the trend in healthcare costs. It will also drive other similar deals — so watch out, Walgreens.