Retail, health care players take bold action to boost scale

NEW YORK — The U.S. health care industry has been in flux for a number of years, but the pace of transformation now appears to be accelerating rapidly.

Several of the biggest players in the U.S. health care sector are making moves to confront an uncertain future — one that may bring unwelcome competition and even heightened government regulation.

One key development is a possible buyout of drug wholesaler AmerisourceBergen Corp. by Walgreens Boots Alliance (WBA). Citing unidentified sources “familiar with the matter,” The Wall Street Journal reported that the two companies are in early-stage discussions and that a deal is neither imminent nor certain. WBA is already Amerisource’s largest shareholder with a 26% stake.

Compared with other recent developments, the WBA-Amerisource report sparked only modest interest on Wall Street, and a number of analysts questioned the strategic value of such a deal for WBA, since the two companies’ joint venture to purchase generic drugs already provides WBA with most of the synergies an acquisition would yield.

The WBA-Amerisource report followed the December announcement that CVS Health had agreed to acquire insurer Aetna Inc. in a deal valued at approximately $77 billion. The two companies tout the combination as a “unique opportunity to redefine access to high-quality care in lower-cost, local settings, whether in the community, at home or through digital tools.”

That would be achieved by combining Aetna’s extensive network of health care providers with CVS’ approximately 9,700 pharmacy locations, 1,100 MinuteClinic walk-in clinics and other services. If the deal is approved, many CVS Pharmacy outlets will be modified to include space for wellness, clinical and pharmacy services as well as vision, hearing and medical equipment, all in addition to present front-end product assortments. In many locations, the companies promise, “an entirely new health services offering … will function as a community-based health hub dedicated to connecting the pathways needed to improve health.”

Aetna’s Mark Bertolini with merger
partner Larry Merlo of CVS Health.

Looming over these possible moves by the two biggest players in chain drug retail, of course, is the ominous shadow of Amazon.com. For months, the specter of the online behemoth’s entry into the health care arena, and the pharmacy sector in particular, has haunted the industry and negatively impacted the stock value of several major companies, including pharmacy benefits managers as well as drug chains.

The current wave of anxiety was kicked off last May, when CNBC reported that Amazon was seriously considering moving into the pharmacy space. The company’s demonstrated ability to disrupt and eventually dominate different businesses by bringing greater efficiency and lower costs to the market unquestionably poses a threat to a pharmacy supply chain marked by complexity, lack of transparency, inefficiency and skyrocketing costs for payers and uninsured patients.

However, as a Bloomberg News analysis pointed out, the proposed CVS-Aetna match may be inspired less by Amazon and more by the expansion of UnitedHealth Group Inc., the nation’s largest health insurer, into an increasingly broad array of health-related services, including pharmacy benefits management, health care analytics, physician clinics, outpatient services and urgent care centers.

In a drive to gain more control over how care is delivered, UnitedHealth has been expanding its OptumCare arm, which owns clinics and surgery centers. Even before it acquired approximately 300 physician practices from DaVita Inc. in December, OptumCare had about 30,000 affiliated doctors.

“The path here has been led by UNH/Optum,” wrote Matthew Borsch, an analyst with BMO Capital Markets, in a research note discussing the CVS-Aetna agreement. “We see a bold strategy to match (and possibly leap-frog) the health care/PBM integration strategy.”

At the end of January, though, Amazon delivered another blockbuster announcement, this time in concert with Berkshire Hathaway and JPMorgan Chase & Co. The three financial giants unveiled a plan to form an independent, not-for-profit company to explore ways to reduce their employees’ health costs. The project is still in very early planning stages, but will probably involve the application of technology to reduce costs and improve patient satisfaction and outcomes.

With the industry still reeling from that jolt, The Journal reported that Amazon is moving ahead with plans to become a major supplier of medical products to U.S. hospitals and outpatient clinics. The initiative would build on Amazon’s present distribution of a limited array of medical supplies through its business-to-business marketplace, Amazon Business.

In addition to the multiple forays by Amazon, the health care industry has other worries. Some recent analyses have bluntly noted that, despite a great deal of lip service paid to lowering the price of prescription drugs, the major stakeholders in the pharmaceutical distribution business continue to profit from ongoing cost ­increases.

Patience with their complacency may be wearing thin: A consortium of hospitals recently announced a plan to cooperate in establishing the manufacture of certain generic drugs that are either frequently unavailable or egregiously expensive. And long before the Amazon-Berkshire Hathaway-JPMorgan alliance was revealed, 20 large companies formed the Health Transformation Alliance in 2016 to rein in the cost of providing health benefits to their employees. The group now totals more than 40 members and includes such major corporate names as American Express, Coca-Cola Co., IBM Corp., Macy’s Inc. and Shell Oil Co.

The 2019 federal budget proposal issued recently by the White House includes a number of measures intended to lower the price of prescription drugs, including offering certain generics for free and putting a ceiling on out-of-pocket expenditures for Medicare beneficiaries. Admittedly, there may be little likelihood of such action in an election year.

In addition, though, the White House Council of Economic Advisors has issued a report that emphasizes the role of PBMs in causing high drug prices. Noting that three PBMs, CVS Health, Express Scripts Holdings and UnitedHealth, control two-thirds of the market, the report charges that PBMs and other middlemen garner 20% of drug expenditures.

Looming over retail health care stakeholders is the shadow of
Amazon, seen as a potential yet formidable health sector player.

The recent initiatives by WBA and by CVS Health represent two different approaches to the seismic shifts unsettling the pharmacy business. Both companies’ planned acquisitions represent efforts at vertical integration, a strategy that some analysts suggest might be less likely to raise the hackles of regulators than horizontal integration, as represented by WBA’s planned acquisition of Rite Aid Corp., which was stymied and scaled back to a purchase of 1,932 Rite Aid stores and related assets. That deal is approaching completion, as 1,114 stores and their related assets have been handed over to WBA as of early February, according to Rite Aid.

Under the leadership of its executive vice chairman and chief executive officer, Stefano Pessina, WBA has remained focused on the core drug retail and wholesale businesses. Speaking at the J.P. Morgan Health Care Conference in January, Pessina stated that vertical integration could help simplify and bring efficiency to “the very complicated U.S. system.”

Unlike the speculated WBA-Amerisource tie-up, which some analysts view as a low-risk (and low-reward) move, CVS Health’s proposed acquisition of Aetna is much more ambitious and far less certain in its outcome. For instance, some observers question whether CVS Health will have the cash to invest in revamping a large number of its stores to fill a new, expanded role as health care hubs after taking on a heavy debt burden.

And more recently, Rite Aid has found a new merger partner, food and drug retailer Albertsons Cos. The deal, valued at about $24 billion, would give both retailers some much-needed scale in the fast-consolidating health care and retailing arenas. The combined company would generate pro forma revenue of about $83 billion and operate approximately 4,900 stores, 4,350 pharmacy locations and 320 in-store health clinics across 38 states and Washington, D.C., serving more than 40 million customers per week.

“This powerful combination enables us to become a truly differentiated leader in delivering value, choice, and flexibility to meet customers’ evolving food, health, and wellness needs,” stated Rite Aid chairman and CEO John Standley, who would serve as CEO of the merged company.

With change coming from multiple and perhaps unexpected directions, the industry’s leading players may have little choice but to act. Increased government scrutiny of drug prices might signal an approaching end to the laissez-faire tolerance of escalating health care costs that has prevailed up to now.

But even if meaningful government action remains a chimera, as seems likely, there is still Amazon, restlessly prowling along the perimeter of an industry that looks ripe for major competitive disruption.