CVS-Aetna Deal: What's Hot, What's Not

CVS Health Corporation’s (NYSE:CVS) historic decision to acquire health insurance giant Aetna (NYSE:AET) has created quite a buzz in the entire healthcare space. Most economists consider this coming together of two stalwarts — consolidation of CVS Health’s pharmacy benefit management (“PBM”) business with Aetna’s large and unshakable insurance base — as a new dimension added to healthcare landscape. However, critics are of the view that the gains from this combined entity will be short-lived for the healthcare society at large to benefit from.

Vision in Favor of the Deal

People supporting this proposed integration between CVS Health and Aetna opine that this merger has fair chances to pass the regulatory hurdles. They see this consolidation as a vertical integration instead of a horizontal one, thus leading to efficiency gain and a formidable cost-cutting strategy of CVS Health’s PBM platform. Notably, a horizontal integration dreads the chances of forming a monopoly powerhouse in the market.

An article by Dana Blankenhorn published in InvestorPlace stated that based on this $69 billion deal, insurers will finally achieve the vertical integration they need to control costs. Per the article, the Humana (NYSE:HUM) acquisition deal proposed by Aetna was earlier rejected by the Obama administration because of its horizontal acquisition.

The economists lapping up the deal are looking much forward to this development as they think this vertical integration might finally put the brakes on America’s soaring health-care costs. Notably, total medical cost has inflated in the 6-7% range over the last four years based on the increasing bills of doctors, hospitals, medical devices and drugs (data published in The Economist article).

Blankenhorn in his article stated that to counter this problem, the CVC-Aetna deal will enable insurers to buy pharmacies to fight high drug prices through formularies and the lists of medicines that will be prescribed for various conditions. Using generics in formularies or choosing from branded drugs wherein generics aren’t available is a method to keep drug prices in check.

The Opposition

Those opposing the buyout comment that despite the two companies trying to strengthen their footprint in health care, both may finally end up paying severely for the merger. Akin to the supporters of the deal, the contrary view underscores the cost-control agenda highlighting that the consolidation will apparently push the United States’ third-largest insurer Aetna’s huge client base into CVS drugstores to get their prescriptions filled through CVS’ drug plans. This move will in turn eliminate the middlemen’s role and other intermediaries in queue, finally resulting in reduction of drug price and overall healthcare cost.

However, the critics believe this to be a short-lived scenario and in the longer term, patients could end up incurring more medical expenses. Per a recent Vox report, this is because mergers like this will gradually make it more difficult for the new insurers to enter the market since they won’t be able to negotiate lower drug prices like larger firms. This will in fact diminish competition in the sector leading to inflating prices.

To know more in detail, please read: CVS Health's Aetna Buyout to Change Healthcare Landscape

Share Price Comparison

Shares of CVS Health have outperformed the broader industry over the past three months. The stock has dropped 8.9%, comparing favorably with the industry’s 11.7% decline during the same time frame. Its current value is however, lower than the S&P 500's 7.5% gain.

Zacks Rank and Key Pick

CVS Health carries a Zacks Rank #3 (Hold). A better-ranked medical stock is Align Technology, Inc. (NASDAQ:ALGN) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technologyhas a long-term expected earnings growth rate of 28.9%. The stock has gained 134.6% in a year.

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