CVS/Aetna, Cigna/Express Scripts Megamergers Could Lower Long-term Medical Costs

The vaguely outlined collaborative between Amazon, Berkshire Hathaway, and J.P. Chase Morgan poses no short-term threats to established health insurance companies, Moody's says.

The proposed acquisition of Aetna by CVS Health and Cigna Corp. acquisition of Express Scripts will be a short-term ding on their credit outlooks but could lower medical costs in the long run, Moody's Investors Service says.

"Both of these mergers are designed to better control rising medical costs, which is one of the most vexing problems facing health insurers," Moody's says this week in its Healthcare Quarterly.

Prescription drug prices are a big driver of rising medical costs, and the Health Care Cost Institute reports that prescription drugs increased from 17% to 19% of the total healthcare spend between 2012 and 2016.

"The annual medical cost trend for insurers, which consists of the level of utilization, medical inflation, the impact of technology advances and the sources of medical care (i.e. low-cost clinics versus high-cost hospitals), has been moderating in recent years. But it still came in at approximately 6% in 2017, well above inflation," Moody's says.

According to Moody's:

• The CVS/Aetna merger has the potential to lower medical costs as Aetna will be better able to engage with its members as they purchase drugs at CVS retail pharmacies or through its prescription drug programs. The combination will foster increased use of lower-cost care as Aetna members access routine care at CVS stores and Minute Clinics.
   
• Cigna will incrementally benefit from its purchase of Express Scripts by combining its own integrated solutions with Express Scripts' ability to manage pharmacy costs. While Express Scripts does not have a retail presence, Cigna will benefit from a more diversified revenue stream.
   
• The impact of these mergers on the health insurance sector is limited. When finalized, the three largest PBMs will each be part of a vertically integrated entity that includes a large health insurer. That trend started in 2015 when UnitedHealth Group bought Catamaran, now known as OptumRx.
   
• As a result of these deals, most other health insurers will have to contract with a PBM that is owned by a competing health insurer. Competition among the PBMs for market share will remain intense. Their offerings to third parties will have to be competitive with their internal offerings or they'll risk losing customers. Because of that these vertically integrated offerings could benefit the broader industry over time.
   
• The mergers are a credit negative for branded drug makers. For example, Aetna could encourage policyholders to buy generics at CVS pharmacies or through its prescription drug programs. The mergers will have little impact on generic drug makers, since both CVS and Express Scripts are already part of large generic drug purchasing alliances.

Amazon, Berkshire Hathaway, J.P. Morgan Chase

In a separate analysis, Moody's says the announcement in January that Amazon, Berkshire Hathaway Inc., and J.P Morgan Chase would combine to form some sort of health insurance venture likely would have little short-term credit impact on the commercial healthcare sector.

"The new venture is likely to have little, if any, credit impact on the health insurance sector over the next three years," Moody's says. "The three companies combined have less than one million employees, which is a fraction of the membership of the large, publicly traded health insurers."

The three companies provided scant details on what their combined initiative would involve, but Moody's says it likely would be designed to leverage the companies' bargaining powers with payers and providers.

"Whether or not the announcement is a harbinger of more heated competition from non-traditional participants in health insurance, outside of these three companies, remains the larger question," Moody's says.

"Our view is that the industry leaders are not sitting still and are taking steps to enhance capabilities. While improvements by new competitors are always possible, we do not see any immediate threat to the large incumbents."