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A health merger expert explains the CVS-Aetna deal

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CVS is reportedly getting quite close to purchasing the health insurance plan Aetna, a merger that could have major effects on the American health care system.

I've had my head in the tax bill and needed a primer on what this would mean and how consumers stand to be affected by a CVS-Aetna merger. So I called up Martin Gaynor, the smartest guy I know on health care mergers, to chat.

Gaynor is a professor of health economics and policy at Carnegie Mellon University. He is a former director of the Bureau of Economics at the Federal Trade Commission, and has spent lots of time thinking about mergers and antitrust in the health care space. We spoke Monday afternoon about what the CVS-Aetna merger could mean and the possible upsides and downsides for consumers.

Here are the five most important things he told me.

1) This type of merger is rare. We're used to a lot of mergers in health care between hospital chains or between health insurance plans. There are a lot fewer "vertical mergers" of actors in the health care system that do different things. Aetna is a health insurance plan. CVS is a chain of drugstores and a pharmacy benefit manager (we'll get to what that means in a moment). "This is a new kind of thing, which makes it intriguing," Gaynor said.

2) This isn't really about drugstores. Most of us know CVS as a chain of pharmacy stores, where we might pop in to fill a prescription or pick up some snacks. But the thing that Gaynor and other experts are watching closely is an entire other side of CVS's business — one that consumers don't interact with.

CVS is one of the country's largest pharmacy benefit managers. This means that it will often contract with large health insurance plans to manage their drug benefits. So right now, it's often CVS that sits down and negotiates prices with pharmaceutical manufacturers. Then a health plan like Aetna will contract with CVS to pay for that suite of negotiated drug prices.

This is the integration between CVS and Aetna that health wonks are especially interested — how the health care system would change if the pharmacy benefit manager (PBM) and insurance company were essentially the same company.

3) It's possible this type of merger could actually be good for consumers. Austin Frakt makes the case for this in a great piece published Sunday in the Upshot. The pharmacy benefit manager is often a middleman between drug companies and insurance plans. Integrating the PBM into the health insurer itself could cut down on spending:

Many health industry experts believe that pharmacy benefits managers effectively increase prescription drug prices to raise their own profits. This is because they make money through opaque rebates that are tied to drug prices (so their profits rise as those prices do). Competition among pharmacy benefits management companies could push these profits down, but it is a highly concentrated market dominated by a few firms, CVS among the largest.

This removal of profit-taking middlemen could be good for consumers in the short run if it leads to lower drug prices.

4) Even if the merger does eliminate some of the costs of a middleman, that doesn't mean consumers necessarily benefit. Gaynor outlined one particular example of how a merger could reduce costs but not necessarily benefit consumers.

Pharmacy benefit managers often get rebates from the drug companies they contract with. There is some suspicion that these PBMs pocket those rebates rather than pass them along to the insurance plan (which could in turn pass them along to consumers in the form of lower profits).

If Aetna and CVS were the same company, those rebates would belong to the big new health firm. There would be no company in the middle holding on to them. But what's to stop a newly merged Aetna-CVS from engaging in the same behavior?

In competitive markets, Aetna-CVS would want low premiums to win business from other health insurance plans. But health insurance markets aren't always competitive — so it's fair to wonder whether those rebates would mostly benefit the new, larger entity.

5) This merger could be totally clear of antitrust violations and still hurt consumers. I asked Gaynor to put his old FTC hat on and talk about how he would evaluate this merger from an antitrust perspective.

"Unlike hospital mergers or big health insurance mergers, it's less obvious what the harms to competition are here," he says. "But I don't have all the information I'd need to assess that. One thing to keep in mind is that deals that don't violate antitrust laws don't always benefit consumers. So I don't know what will actually happen with this. It could pass merger review, but that doesn't necessarily mean it will end up being a great thing for consumers."

Chart of the Day

Javier Zarracina/Vox

The price of facility fees has surged in recent years. My newest story on emergency room billing looks at facility fees. The price of this ER fee has risen by 89 percent since 2009, growing more than four times as quickly as overall health care spending. Read more here.

Kliff’s Notes

With research help from Caitlin Davis

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