On Monday, pharmacy retailer CVS announced it is acquiring the health payer Aetna in a $69 billion deal. The unorthodox merger is raising many questions in the healthcare industry and M&A circles. Since every day West Monroe’s M&A practice helps merging companies understand their technology “to-do list” pre- and post-merger, we have several thoughts on what lies ahead for the new company.
Overall, to create the right vision of a combined CVS-Aetna, there will have to be a level of technology integration and data sharing that is unprecedented, and extremely uncommon in organizations of this size. Through our experience across health plans, pharmacy benefit managers, and clinics, the core systems that store data are mostly disorganized, on legacy architecture, and pull from disparate databases.
The cost to achieve the desired state of a one-stop shop for consumers would cost hundreds of millions and take 18 to 24 months, if not longer. Let’s unpack this further:
- From a patient perspective, there will likely be mounting concerns over privacy. Do patients want their insurer to know they’re buying junk food or alcohol with their CVS card? There are obvious reasons a CVS-Aetna would want to combine as much data as possible into a customer-centric view of data – I am Bob Jones, here is my group number and insurance ID/plan, here are the prescription medications I’m taking, here is my patient chart, and here is my purchase history. At West Monroe, we always recommend a customer-centric view of your organization. But in a vertically integrated company like this in healthcare, that gets tricky because of privacy laws. HIPAA requires written consent from an individual for any use or disclosure of protected health information – that includes condition treatment, benefits eligibility, payment history, etc. There could be a scenario where the company seeks that consent from its customers, to be able to integrate all this data together, and transmit it back and forth. But they would have to go about it extremely carefully, and the risks for possible violations greatly increases.
- Further complicating this customer-centric view of data are the various state-by-state laws. When you cross-reference 50 different sets of rules around loyalty cards with 50 different state health insurance laws, a data integration between the retail side and the healthcare side gets vastly complicated. Also, laws change all the time. The cost of that bureaucracy could easily surmount the benefits.
- They will need to give extraordinary consideration to customer expectations. Some customers will be comfortable with, and even expect, an integration of their data. Think “I have a loyalty card, can’t you align my over-the-counter drug history with my medical chart from your clinic?” However, others will feel that level of integration is a violation of their privacy. Consumers and expect to know what data is shared, who it’s shared with, for how long, and the benefits and risks of sharing that data. Then, they want to be given fine-grained control. Any violation of this expectation dramatically lowers consumer trust, and this merger makes transparency all the more vital to the success of both the retail and payer business models.
- Even if this type of dynamic data infrastructure is possible, should they do it? Because a data integration like this is only valuable if you do something with the information. For a very specific example, will they stop sending a person coupons for peanuts because their medical history on file at the clinic denotes they have an allergy? How they plan to use the data together to affect outcomes should drive the data structure and integration. That will take a long time to determine.
- On the cost side, the deal is claiming about $750 million in cost synergies. That’s a lot of dough. For a company that doesn’t use much of the same technology, that seems high, in our experience. They’re not using the same business process systems, and at their respective sizes they’ve already achieved great economies of scale.
While much of the deal’s news coverage has focused on consumer “benefits,” they are mostly futuristic. The two companies merged for business reasons: We live in a capitalistic society, and both CVS and Aetna have investors to answer to. Aetna’s failed merger with Humana was a sign they should look outside horizontal integrations in the payer world and look for vertical integration. They found it with CVS. Likewise, CVS could not grow to match the footprint of rival Walgreens, and with Amazon looming as a potential retail pharmacy competitor, it was forced to seek new revenue opportunities.
We expect it will be a long road to reap the value of integrating and coordinating technology. Before getting carried away with speculative consumer “benefits,” we must recognize the time and investment required to achieve meaningful integration.