Author Affiliations: ¹University of Michigan Medical School, Ann Arbor, MI; ²Michigan Medicine, Department of Surgery, Ann Arbor, MI

Corresponding Author:

Adish Parikh, adparikh@umich.edu

Conflicts of interest:

Dr. Dimick is co-founder of ArborMetrics.

Introduction

Due to the tumultuous political landscape in healthcare, increased uncertainty among healthcare players has led to unprecedented megamergers, acquisitions, and partnerships in 2017 and 2018. This includes some of the biggest names in healthcare, such as Aetna, UnitedHealth, and CVS Health. Two of the biggest collaborations in healthcare over the past year will be discussed to understand their implications on our healthcare system.

Mergers and acquisitions between businesses have typically occurred in two forms: horizontal and vertical (Figure 1). Horizontal mergers, which have been very common in US healthcare, are defined as integrations of two different players at the same level in the supply chain. An example is when two different hospitals merge to be able to combine resources, lower overhead costs, and increase negotiating power when dealing with insurance agencies. Conversely, vertical integrations in healthcare are fairly new and involve combining different categories of stakeholders in the supply chain, such as an insurance corporation buying a large retail pharmacy.

Figure 1. Visual Depiction of Horizontal and Vertical Mergers

We will first review CVS Health’s announcement to spend $69 billion to vertically acquire the third largest US insurer, Aetna.[1] We will then review the insurance agency Humana, which landed a $4.1 billion deal to vertically purchase Kindred Healthcare, a large healthcare services company.[2] What are the motivations of these giant collaborations? How will they affect patients, providers, and payers? How will this transform the future of US healthcare? We hope to explore these questions using two case examples (Table 1).

CVS and Aetna Acquisition

As a result of the tax reform package that was signed by President Trump on December 12, 2017, insurers, hospitals, and pharmacy companies are preparing for the potential changes to government-funded programs, such as Medicare.[3] Rising medical costs, especially prescription drug prices, have caused many employers and consumers to struggle in the healthcare system.[4] These changes in the healthcare landscape directly contributed to a recently announced acquisition of Aetna, a major health insurance company, by CVS Health in December 2017 for $69 billion.[4] Upon closure, this deal will be the largest American health insurance acquisition of all time.[5] For Aetna, the merger with CVS brings with it over 9,700 CVS pharmacy locations and over 1,100 walk-in healthcare clinics, as CVS is currently one of the largest pharmacies in the country.[5]

The CVS and Aetna vertical merger came at a time that could dramatically impact the forms in which healthcare is delivered. Individually, these two companies affect several of the fundamental healthcare services that are routinely used by consumers, such as prescription medications, walk-in health clinics, and health insurance. The new company claims that it will “provide high-quality, low-cost medical care that is as close as your corner drugstore” and promised that “fewer people will fall through the cracks.”[6]

Critics of this acquisition claim that CVS and Aetna are not aiming to benefit consumers but to strengthen their competitive positions at a time when healthcare in the United States is rapidly changing.[6] Many individuals are concerned that the merging of large companies will eventually result in a few key companies controlling a large portion of US healthcare, which could result in fewer insurance and pharmaceutical options for consumers. Additionally, smaller pharmacy and insurance companies may struggle to retain consumers if large companies continue merging and attempt to monopolize the market. The merge may also result in increased prescription costs for patients who are not insured by Aetna. Due to this concern, on August 7, 2018, the American Medical Association (AMA) sent a letter to the United States Department of Justice urging them to block the merging of CVS and Aetna. In this letter, the AMA stated that “this merger would likely substantially lessen competition in many health care markets, to the detriment of patients.”[7]

The impact that vertical mergers such as CVS and Aetna will have on employers and consumers is still largely unknown, and it will be vital for the general public and policymakers to critically analyze how vertical mergers choose to run their companies.

Humana and Kindred Acquisition

On December 19, 2017, US health insurer Humana Inc. and two private equity firms—TPG Capital and Welsh, Carson, Anderson & Stowe—agreed to buy Kindred Healthcare for a total cost of approximately $4 billion, which was finalized in July 2018.[2] The merger split long-term care provider Kindred Healthcare into 2 companies, Kindred Healthcare and Kindred at Home. Kindred Healthcare will manage Kindred’s long-term acute care hospitals and inpatient rehabilitation facilities, while Kindred at Home will manage the rest of Kindred’s home health care, hospital, and community care businesses. Currently, Humana owns 40% of Kindred at Home, while the equity firms own the other 60%.[8] In 3 years, Humana will additionally have the option to purchase the rest of the stake in Kindred.[8]

With that background in mind, the potential economic benefits of the Humana and Kindred merger are substantial. Humana is the fourth largest US health insurer with a particular interest in Medicare,[8] and Kindred is the largest operator of post-acute facilities in home and hospice care, rehabilitation services, and long-term acute care in the United States.[2] The acquisition is designed to optimize home healthcare, particularly for geriatric patients as well as individuals with chronic and debilitating conditions. Per Humana's press release on the matter, other potential consumer benefits include providing “an additional avenue for the company to address activities of daily living, medication adherence and other health determinants, reinforcing its commitment to managing health holistically, not episodically.” The transition for patients may be relatively smooth as there is approximately a 65% overlap between Kindred and Humana’s individual Medicare advantage membership already.[9] Reduced emergency department visits, hospitalizations, and inpatient utilization can save Humana up to billions annually alone.[10] Lastly, this acquisition will allow them to take advantage of vastly increased data mining capabilities to create better long-term healthcare modeling in order to improve patient outcomes, reduce healthcare costs, and drive innovative approaches.[9][10] However, although there are many potential corporate and technological upsides to this merger, patients that are not covered by Humana may face higher costs when using Kindred services. Also, this deal may limit competition in the insurance marketplace as Humana coverage would give an advantage for care through Kindred.

Conclusion

Healthcare providers, and particularly medical students, receive little education on the business of medicine. As the pressure to consolidate continues, more and more innovative approaches to delivering healthcare will arise. We may be at the cusp of corporate involvement in healthcare that may substantially disrupt traditional healthcare models. It is critical for future providers to understand the implications of the these rapid changes in healthcare so that they can position themselves well to support their patients, succeed in the tomorrow’s healthcare environment, and even lead the fight against dangerous corporate pressures on medicine. By understanding the implications of the nontraditional cases explained above, we hope that our readers can appreciate the new types of influences in healthcare to feel better prepared for the future.

References

1. Livingston S. CVS and Aetna seek community-based care model in giant healthcare deal. Modern Healthcare website. http://www.modernhealthcare.com/article/20171204/NEWS/171209955. Published December 4, 2017.

2. Livingston S. Humana, two private equity firms will buy Kindred Healthcare for $4.1 billion. Modern Healthcare website. http://www.modernhealthcare.com/article/20171219/NEWS/171219881. Published December 19, 2017.

3. Radnofsky L. Trump signs sweeping tax overhaul into law. The Wall Street Journal. December 22, 2017. https://www.wsj.com/articles/trump-signs-sweeping-tax-overhaul-into-law-1513959753.

4. de la Merced MJ, Abelson R. CVS to buy Aetna for $69 billion in a deal that may reshape the health industry. The New York Times. December 3, 2017. https://www.nytimes.com/2017/12/03/business/dealbook/cvs-is-said-to-agree-to-buy-aetna-reshaping-health-care-industry.html.

5. Howard J, La Monica P. 4 ways CVS-Aetna merger could change your health care. CNN Health website. https://www.cnn.com/2017/12/05/health/cvs-aetna-merger-health-care/index.html. Published December 5, 2017.

6. Abelson R, Thomas K. CVS and Aetna say merger will improve your health care. Can they deliver? The New York Times. December 4, 2017. https://www.nytimes.com/2017/12/04/health/cvs-aetna-merger.html.

7. Mills RJ. AMA urges DOJ to challenge CVS-Aetna merger. AMA website. https://www.ama-assn.org/press-center/press-releases/ama-urges-doj-challenge-cvs-aetna-merger. Published August 8, 2018.

8. Humer C, Mishra M. Humana, private equity firms buy Kindred Healthcare for $810 million. Reuters. December 19, 2017. https://www.reuters.com/article/us-humana-kindred-hthcare-m-a/humana-private-equity-firms-buy-kindred-healthcare-for-810-million-idUSKBN1ED1MO.

9. Humana announces agreement to acquire a 40 percent minority interest in Kindred’s homecare business for approximately $800 million through a joint venture with an entity owned by TPG Capital and Welsh, Carson, Anderson & Stowe. Humana website. http://press.humana.com/press-release/current-releases/humana-announces-agreement-acquire-40-percent-minority-interest-kindr. Published December 2017.

10. Guldin M. Can Kindred help Humana bend the cost curve? Chilmark Research website. https://www.chilmarkresearch.com/can-kindred-help-humana-bend-the-cost-curve/. Published January 24, 2018.