Executives of Aetna Inc. and CVS Health Corp. on Monday touted the $69 billion purchase of the Hartford insurer as the tip of the spear in a new, more accessible health care system.
But while Aetna will remain as a separate unit of CVS, the insurer’s CEO, Mark Bertolini, will step away from management operations and join the board of CVS. Bertolini could receive $88.3 million in stock awards, severance and other compensation if he’s let go within two years of the transaction, according to Bloomberg News.
“What we are announcing today is the natural evolution of our two companies, a combination of two great organizations with the expertise to remake the consumer health care experience,” CVS Chief Executive Larry Merlo said on a conference call with investor analysts. The two companies will integrate the work of doctors, pharmacists and health care professionals with a health benefits company to create a new entity that aims to be more accessible and more affordable.
And for Connecticut, which has been home to Aetna for 164 years, its future as an insurance hub is more in doubt than before the two companies announced the deal Sunday. Aetna will have a minority stake in CVS and a newly merged CVS will be looking at “streamlining of corporate functions” that may affect Aetna’s headquarters in Hartford.
Neither of the two companies had anything to say about Aetna’s costly plans to move its headquarters to New York. After a nationwide search, Aetna announced it would move its corporate offices to New York earlier this year as the company refocuses on a digital future and pursues a “diverse talent pool and vibrant workforce.” The company plans to spend $85 million for 145,741 square feet of office space at 61 9th Ave.
Bertolini said during an investors call Monday that the CVS deal opens a “new front door to the health care system” and called it a major step forward in creating “consumer-centric health care.”
When the deal closes in the second half of 2018, the merged company will improve affordable and quality health care and eliminate unnecessary complexities that frustrate consumers, he said.
The CVS-Aetna deal still requires federal and state approvals.
Although Bertolini and Merlo spoke enthusiastically to investors and journalists of a health company that reduces costs while providing better care and access to services at the company’s 10,000 locations, Wall Street was less effusive. Investors Monday were cool to the proposal, focusing on the $45 billion in debt and $21 billion in new stock to be issued to finance the deal. CVS shares closed at $71.69, down 4.5 percent. Aetna ended the day at $178.70, off 1.5 percent.
David Denton, chief financial officer of CVS, told investor analysts on a conference call that the Woonsocket, R.I., pharmacy company intends to “quickly get back” to reduced leverage from higher levels that will finance the deal.
“There’s a heavy debt load,” said Spencer Perlman, managing partner and director of health care research at Veda Partners. “CVS is making it a priority to mitigate that over time.”
In addition, an analyst threw cold water on what CVS said is the deal’s potential to deliver $750 million in cost savings. Denton told analysts CVS is looking at streamlining corporate offices and combining pharmacy operations.
Ana Gupte, an analyst at Leerink Research, said in a note to investors the transaction “looks at best neutral” to earnings in the second year after the deal closes, or 2020.
In addition, pharmaceutical cost savings will have to be passed on to customers — not shareholders — for CVS to defend its market share against United Health Group Inc. and its health services business, Optum, she said.
And rising revenue from more aggressive steps to steer Aetna members to CVS stores will likely be offset by a divestiture of Medicare Part D business to win approval from regulators, Gupte said.
CVS’ Merlo said the company is “pretty confident” the transaction is complementary to the value of the newly merged company for the consumer and payor, the party that reimburses health care costs.
“And keep in mind that one of the big payors is the federal government and we’ll certainly be sitting down with regulators to show them … how that value is created and how it comes to life,” he told investor analysts.
Perlman said the deal doesn’t immediately raise alarms that regulators would reject it.
“There’s nothing that shouts to me there’s no chance,” he said.
Some questions could be raised by an overlap between the two companies with Medicare Part D business, analysts said.
The CVS-Aetna deal is a vertical merger, an arrangement involving two or more firms operating at different levels within an industry’s supply chain. They’ve typically not drawn antitrust action, though the U.S. Department of Justice last month sued to stop AT&T’s proposed purchase of Time Warner.
“It just shows the unpredictability of the current administration,” said Jason McGorman, a senior industry analyst at Bloomberg Intelligence. “Just because it’s logical and should go through, doesn’t mean it will.”
Health care is a “very political issue,” he said.
“It will still get a lengthy review. They want to make sure people are not steered just to CVS,” McGorman said.
Sen. Richard Blumenthal, D-Conn., said scrutiny is needed for consumers to benefit from the deal and no “anti-competitive effects” such as price increases, result.
He said he will focus on the number of jobs affected by the deal, to ensure the deal is “not an excuse to move jobs in massive numbers” out of Connecticut.
Perlman said the deal shows a new direction in health care “and it makes sense.”
Some analysts see the CVS-Aetna deal as defensive against Amazon’s move into pharmacy products. Perlman said it’s also a response to industry shifts combining health insurance with pharmacy products, such as United Health Group Inc.’s health services business, Optum.
“We’re seeing a lot of silos in health care being torn down,” he said.
McGorman said one surprising aspect of the CVS-Aetna deal was that both companies see the initiative as “very long-term.”
“It’s not going to happen in the next year or two,” he said. “It’s a much bigger investment. The health care system is notorious to adopt these things.”
Though Bertolini said he and Merlo first raised the possibility of a deal two years ago, McGorman said industry changes set the deal in motion several years ago.
Pfizer Inc. bought Wyeth, a pharmaceutical company, in 2009 and health insurance consolidated shortly after the Affordable Care Act became law in 2010, he said.
“It set in motion a lot of consolidation,” McGorman said.
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