Benefits of CVS/Aetna merger far outweigh the costs

Big is bad, in the view of many, and bigger is badder. In the context of many proposed business mergers, that stance makes far less sense than commonly assumed, and it is likely to lead to adverse effects for the very same consumers and U.S. economy that are the supposed beneficiaries of antitrust enforcement.

This pavlovian opposition to mergers almost always shunts aside the potential cost savings for consumers or other efficiencies made possible by combined operations, as well as the possibility that a combination of firms might offset the market power — a substantial ability to influence prices or other parameters — of others in some related dimension of the relevant economic sector.

{mosads}This analytic error is serious enough in the case of horizontal mergers of firms in the same industry, but it becomes glaring in the case of vertical mergers of firms that do not actually compete because they operate in different industries.


Consider as an example the proposed merger of Aetna, a large insurer, and CVS, a large retail pharmacy network and pharmacy benefit manager (PBM) that negotiates prices and formularies with pharmaceutical producers and insurers.

Three important efficiencies promised by this merger are obvious: a reduction in the cost of clinical care and emergency room visits, improved care coordination for patients and an increase in the customer base for the CVS MinuteClinic walk-in system for basic care.

Customers for medical care to a substantial degree are insulated from the prices of medical services by myriad insurance regulations and other realities that have transformed health coverage from classic insurance toward a form of pre-payment.

Most patients bear only a small portion of the costs of their health-care choices and have poor information about the prices of medical services, a condition magnified by the growing role of government in the financing of health-care services.

Accordingly, it is no surprise that health-care utilization has skyrocketed even controlling for the effects of an aging population, thus stressing the provision of services by hospitals and physicians. One result: When an adverse health event occurs, it is difficult to see one’s primary-care physician quickly.

Thus, the emergency rooms have become the default option for many patients in need of sudden and unexpected non-emergency basic care (e.g., the flu), an expensive option that insurers must finance through rising premiums.

For many such immediate health-care needs, local retail clinics providing basic services on a walk-in basis are an alternative source of quality care at a cost vastly lower than possible for emergency rooms. 

That is a clear benefit of the Aetna/CVS merger: Aetna can cover treatment for non-emergency health-care needs much more effectively and at a lower cost by promoting the CVS walk-in clinics.

Moreover, Aetna’s presence in the CVS stores is likely to yield additional benefits for patients attempting to navigate multiple clinic and pharmacy options, with referrals to primary-care physicians when needed.

Both companies have indicated that by working together they would be able better to support patients with chronic conditions; for example, CVS announced recently its first program to provide dialysis services.

For the health-care system, can anyone argue that this would not be a real boon, in the form of lower aggregate costs for non-emergency patient health-care needs and for enhanced care coordination? 

For CVS, the merger provides a mechanism with which to provide better individualized care and tools with which patients can improve the management of their own health. It is a way also for CVS to increase utilization of its walk-in clinics and thus achievement of additional scale economies by spreading more broadly the fixed costs of its clinics.

CVS would benefit also from an increase in traffic in its stores. The opponents of the merger will scream “monopolization,” a knee-jerk response so mindless that it is tempting to believe that it is driven far more by ideological imperatives rather than actual analytics. 

So unthinking have been the reactions by opponents of the merger that they can be found prominently to argue that it would harm both “consumers and independent pharmacies” simultaneously, presumably by engineering drug prices both higher and lower, a blatant inconsistency that is only the beginning of the analytic problems underlying opposition to this merger. 

An example: Opponents argue that the PBM market is highly concentrated; but it is not quite clear how a merger between an insurer and a PBM would worsen that condition. (Actually, high concentration in the PBM market is likely to be a natural and efficient response to the need to negotiate with large pharmaceutical producers, large hospital chains and huge government bureaucracies, a topic for another day).

Another example: Opponents argue that Aetna in combination with CVS would have incentives to exclude or discriminate against competing pharmacies from coverage under Aetna insurance plans, an argument that amounts to an assertion that Aetna will take actions to reduce the market value of its insurance plans by making it more difficult or costly for patients to acquire their medications. Seriously?

The opponents’ arguments are numerous and varied and go downhill from there. More broadly, that competing pharmacies and pharmacy chains oppose the merger is a clear sign that it would increase rather than reduce competition.

The opposition of the antitrust attorneys also is understandable on grounds that have nothing to do with competition or consumer wellbeing.

It is revealing that the critics of such mergers argue against bigness while almost never applying that mantra to government. “Competition” is not the same as the number of competitors, in particular because “competing” is not costless.

Ask not why a proposed merger might harm someone somewhere under some hypothetical set of conditions, a question utterly inconsistent with the creative destruction that is the very nature of competitive free enterprise. Ask instead how it might reduce costs and improve services in the world in which we actually live.

Benjamin Zycher is a resident scholar at the American Enterprise Institute. Formerly, Zycher was a fellow at the Pacific Research Institute and the Manhattan Institute where his research focused on health-care policy.  

Tags Aetna Competition Competition law CVS Health CVS Pharmacy Health Health insurance in the United States healthcare economics Mergers and acquisitions Pharmacy Pharmacy benefit management Specialty drugs

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