5 Insurance Innovation Lessons From CVS & Aetna


In early December 2017, CVS Health entered an agreement to buy Aetna for approximately $69 billion. While the merger has been in the works for some time, the announcement made the insurance industry sit up and take notice.

Not only would this acquisition be the largest health insurance deal currently on record, but it is also likely to change the face of the health insurance industry.

So what can we learn from it? Quite a bit.

In this paper, we’ll cover some background on CVS Health and Aetna, why this merger made sense, and how it is a sign of things to come in the insurance industry, particularly the insurance distribution business.


Background on CVS and Aetna

CVS Health Corporation is a retail pharmacy and health care company. It began in 1967 as a health and beauty aid store and then added the pharmacy component a few years later. It saw real expansion in the 1990s as it grew its retail operations and transformed into a hybrid drug-convenience store in the model of Albertsons.

In 2007, CVS merged with Caremark Rx, a pharmacy benefit management (PBM) brand. Today, CVS Health operates assets including CVS Caremark, CVS Pharmacy, CVS Speciality, and MinuteClinic — retail walk-in clinics in over 1,000 locations across America.

In 2017, CVS Health Corporation reported revenue of $184.77 billion.

Aetna first began in 1819 as a fire insurance company. Over the next 100 plus years, it grew to include various health and commercial insurance lines.

As of today, Aetna is a managed health care company that focuses primarily on health insurance plans and services. These include dental, medical, behavioural health, long term care, and disability. Currently, Aetna has approximately 23 million medical members and 14 million dental members.

In 2017, Aetna reported revenue of $60.53 billion.

Both companies are members of the Fortune 500 and combined, have more than 200,000 employees.

Where These Companies Overlap

Although they are technically in different lines of the health industry, there is quite a bit of overlap and some serious potential for synergy in a health insurance company joining up with a drugstore mega chain.

So let’s think about how the system typically works. In fact, it’s pretty likely most people have participated in this. You’re not feeling well, so you go to your primary care doctor. She writes a prescription, which you call into your local CVS, and then once ready you go pick up and pay based on the rates set by your insurance provider.

In its most basic sense, this acquisition is a classic vertical integration play. CVS Health already signaled that this was its preferred long-term strategy when it acquired Caremark. That acquisition allowed CVS Health to handle the off-premise fulfilment of certain medications. (That is to say that CVS can serve its market even without people coming into its stores.)

This merger with Aetna is looking to take things a step further. It moves to put the care aspect of health care forward.

Health insurance companies have discovered that consumers today are far more interested in having the ability to easily get preventative care in the form of checkups and the monitoring of minor issues than they have been in the past. Part of this is due to the changing landscape of health insurance, it’s not nearly as accessible or cost-friendly for many compared to previous generations.


CVS & Aetna Merger benefits


These shifting consumer preferences represent a boon in the making for retail and walk-in clinics. The emergence of a full-service, consumer-centric healthcare system that meets the customer/patient closer to home, at a lower cost, with greater comfort, and fewer middlemen represents the supply-side response to a demand-driven market disruption.

As CVS CEO Larry Merlo said when the merger was announced, “When you walk into CVS there’s the pharmacy. What if there’s a vision and audiology centre, and perhaps a nutritionist, and some sort of care manager?” As CVS will own more of the supply chain, they can exert more market influence and enjoy greater adaptability. This offers an important hedge at a time of great volatility in the industry. Between the ever evolving Affordable Care Act, the emergence of too-cheapto-compete competitor business models (think mailorder prescription services), and the prospect of new market entrants with deep pockets and a reputation for wholesale disruption (Amazon being the subject of much speculation and fear within the industry), CVS will need all the leverage it can muster.

One should also remember that CVS operates as a type of convenience story — selling packaged, frozen, and fresh food items. With the shifting consumer preference for preventative care and healthy lifestyle choices, CVS is also integrating this aspect of its business into its strategy. The company is enlisting its food retail operations to embrace the $1 trillion health and whole foods market. Combining this with its pharmacy and self-care offerings, CVS is reinventing itself as the ultimate customer-centric healthcare depot.

In many ways this is a case study on how businesses increasingly threatened by disruption and disintermediation are adapting to shifting market preferences and reinventing themselves for long-term success.

A combined insurer and pharmacy benefit management company can meet the increased demand in consumer needs while also cutting the fat from the supply chain.

Why this is not a one off deal but a sign of things to come?

There are a number of reasons why this acquisition shook the healthcare industry, the biggest being the potential this has to transform not only how healthcare is accessed, but also its costs.

Much like some clothing retailers, the healthcare providers set unrealistic “list prices” in order to create a false point of reference for the ultimate sale (via price anchoring). In effect, prices are inflated for the purpose of negotiation. While a large insurer, with millions of policyholders patronising healthcare services, has considerable leverage to bring to the table in negotiations, patients with high deductibles or no insurance at all do not. The result is that end-of-day costs to health insurance companies regularly come in 30% or more under the list price. Regular people on the other hand, have no recourse but to pay their share of farcical prices in full.

This situation has dragged on for decades in the US and skewed the market increasingly out of balance. Today, the under-insured effectively subsidise the healthcare of the well-insured. (The more the insurers hammer down the end-of-day prices, the more the hospitals and drug companies jack up the list price to offset the losses.) As a result, an ever growing number of consumers are struggling with the costs of medication and medical care.

People are understandably upset and are reexamining their relationship with healthcare suppliers. There’s more of an emphasis in preventative and early care (where price gouging is uncommon due to the less captive nature of the audience). At the same time, egregiously overpriced drugs are increasingly met with public backlash for the manufacturers behind them. More and more, people are unwilling to dole out great sums for their vital healthcare.

CVS is a company squarely focused on the middle market. It’s not a boutique, high-end, or suburb focussed business, so it’s directly and unavoidably impacted by the market conditions described above. As a result, CVS and other PBMs like it, are caught in the middle of a combined social, political, and economic mess. And while everyone seems to understand that the industry is on the cusp of dramatic change, no one quite seems to know what form that change will take.

What is looming in the minds of many is Amazon. Since mid 2017 the rumblings of Amazon looking to dip its toe into the pharmacy business have been growing, especially after its purchase of Whole Foods.


pharma supply chain



Just the fear of Amazon moving into this space has caused disruption. Some analysts have speculated that CVS’s purchase of Aetna could be a defensive move, meaning CVS wouldn’t be competing with Amazon solely through its retail side, where it has been taking hits.

CVS needs to find a way to cut costs and improve convenience for all its customers, regardless of their insurance status. It also needs to find a way to make itself a more indispensable part of the larger industry landscape, regardless of new entrants and new technological applications. That’s exactly what this deal was designed to do.

CVS Health, as a pharmacy benefit management company, now not only has the potential to directly impact the pricing of the supply chain, conferring savings directly to customers (rather than middleman insurers), but also to disrupt how and where care is delivered — opening the market up to a plethora of new possibilities.

Now, Aetna medical members can get walk-in care directly from CVS retail locations or MinuteClinics. And, all of this information from patient visits and needs can be easily integrated into records, providing better information to doctors and pharmacists to personalise care. In other words, this deal is — at its core — about streamlining the supply and distribution of healthcare in a way that meets shifting consumer expectations, provides a more end-to-end, customised, and data-driven service, and ultimately creates added value for customers.

As Dr. Michael Williams, an associate professor of surgery at the University of Virginia and director of its Centre for Health Policy noted, “I think there’s going to be greater convenience and ease of use for obtaining health services, because I think there’s going to be more and more CVS pharmacies, which are ubiquitous, that are a place and endpoint where you can access health care.”

This isn’t the first merger in the health industry that has focused on distribution, either. In 2015, United Health bought Catamaran, a pharmacy benefits firm for $12.8 billion. That deal was explicitly made to compete with Express Scripts and to negotiate better drug prices and carry forth savings to the customer.


What the insurance distribution business can learn from CVS

Insurance distributors today find themselves in much the same situation as CVS. The insurance industry as a whole has not enjoyed the same growth as other sectors of the economy over recent years. In fact, since 2012, average global P&C rates have fallen by some 5%. Less fruit in the insurance pie makes it even harder for distributors to get their fill.

Meanwhile, time honoured distribution philosophies are being torn asunder by eQuoting and direct-to customer value-added services. Times are tough and intermediaries in particular are being squeezed. The industry is in the throes of a dramatic transformation and distributors may well be the most vulnerable. How dramatic?


In the face of shrinking margins, rapid change, and the threat of disintermediation, many worry about what their market will look like in 5 years’ time and if they’ll even have a job. As a result, insurance distribution operations are exploring new strategies to improve synergies, create added value, carry over savings and shorten service times for their customers.

Times are changing. The old way of doing things is running up against new business evolution and long-term strategies. What makes the CVS-Aetna deal so fascinating is that it’s essentially a case study in how industry leaders are reinventing vital service intermediation. The integration of health food, retail pharmacy, walk-in clinics, and health insurance all adds another layer to consumers on top of what was already a valuable service.

The concept of a one-stop-shop is something that large and dilatory industries are going to need to take notice of. Shifting consumer preferences demand that the old way of operating is not going to be able to keep up with the current expectations of customers. Consumers want personalised service, speed, and convenience. They are willing to go outside of normal service providers and are happy to provide additional data to get more customised service. 


So what can the insurance distribution business learn from CVS?


Perhaps the biggest lesson is rather than wasting your energies resisting change, it is wiser to put change to work for you. The specter of disruption and the trends underlying disintermediation can be your business’ greatest assets if you’re willing to adapt, work within the laws of economic physics, and embrace customer-centricity.



The consumer and his/her omnichannel convenience needs to drive future-facing strategy. With this in mind, companies will need to work to better understand their customers and to tell apart their different customer types.



Once that’s done, companies can identify which customer type — which unique market segment — is most important to their business and how that relationship can be strengthened and sustained.



You may need to tweak or even somewhat redesign your product/service offering to better accommodate those clients best served by the unique combination of your available and potential resources, expertise, technology, and employees. 



In some cases, you’ll discern gaps in your offering that require you to invest in new technology or to recruit and train new employees to specialise in specific markets. You might even look at a merging with or acquiring another firm that will strengthen, complement, or supplement your offering and help you to meet the demands of tomorrow’s more sophisticated and demanding customers.


If that sounds like a tall order, it’s because it is. You’ll have to use some elbow grease and put in the leg work. But there are also ways to make the work a little less daunting and give yourself an edge. Leveraging digital platforms and big data innovations, smart businesses are creating added value by enabling highly efficient transactions that are both customised and scalable.

Of course, there are also lessons aplenty to be taken not just for your business on a granular level but on a wider economic level. Consumers will no longer tolerate a supply chain that sees their vital products and services changing too many hands with too little added value. Today’s customers expect service providers to go out of their way to not just meet their demands but to anticipate their needs. This is especially true when it comes to services delivered by supply side intermediaries.

This isn’t just the case for healthcare, it holds for all essential services. The insurance industry at large, and especially brokers and agents, besieged by the forces of disintermediation, can learn a lot from CVS.

When it comes to insurance intermediaries that means keeping a finger on the pulse of the demand side of the industry, identifying transformational market forces, and re-examining your business model to see how you can put those forces to work for you.

As demonstrated by CVS’s acquisition of Aetna, if you can streamline the delivery of your goods and services so that your presence is a benefit rather than a detriment to your customers, you’ll not just win the day but the morrow as well. The value proposition of an end-to-end, customised, and data-driven experience is not at all unique to healthcare. In fact, it should be adopted as the guiding mantra and policy-shaping battle cry for insurance agencies and brokerages the world over.

The best way to survive disruption is to be on the right side of it.

Final thoughts

CVS is a giant in its industry and it still had the humility and foresight to understand its predicament and prepare accordingly. It would have been much easier for the company to rest on its laurels and for the C-Suite to take solace in its strong earnings reports. It would have been easier and it would also have been a mistake. You cannot ensure future success on the basis of past actions alone. Whether you realise it or not, if you work as an insurance intermediary, disruption is coming for you.

As Eric Andersen, CEO of Aon Benfield, bluntly declared in 2015, “The traditional broker chain… could collapse... as reinsurers, carriers and their brokers all look to move more closely to the ultimate client.”

Whether through M&A, joint ventures, nichification, or a technology driven continuance strategy (or something else altogether), now’s the time to explore every possible avenue to improve your business’ market resilience. The underlying forces of change discussed above are sweeping through the insurance industry and compelling forward-thinking operations to act.

2017 clocked in with over $20 billion worth of M&A deals. What’s more, H2 saw a 50% increase from H1. That’s remarkable if you think about it.

At the same time, technological innovation is pushing forward at an equally rapid pace. Accenture reports that “Some 83 percent of insurance executives expect platform-based business models to become part of their growth strategy over the next three years.”

Either way, one thing remains clear: insurance distribution businesses will need to adapt to a fast changing environment to ensure that their value propositions remain viable in the face of uncertainty.


At the company level, this means having more support staff and specialists to provide not only quick and comprehensive but also innovative and customised solutions for problems that your customers might not yet even realise they have.

It’s here that smart technology can be the game changer.

First, it provides better integration and visibility across the entire organisational structure. Data points are collected and centralised on the account level through a number of input sources — including email correspondences, the client portal, broker/agent entered data, public records, social media, telemetry devices, BI insights, and more. This ensures that all relevant information is at the fingertips of the interested party — anywhere at any time. Information will no longer be siloed between departments and it will be shared automatically. After all, it’s often these extra customer insights that can make a difference.

For example, any number of data points can speak to a new policy need or an opportunity for upselling or cross-selling. If that information is kept with, say, the marketing department and not shared with agents, a huge potential opportunity could be missed.

Of course, this interconnected, streamlined system also needs to be monitored and managed in an intelligent, timely, appropriately granular, and end-to-end way. Not every approach or idea is going to work, so agents and brokers will need to understand where they are seeing a return on investment and what needs refinement. Risk taking will be a required part of the business moving forward, but that risk can be mitigated with smart tracking and analytics.

Today consumer preferences are shifting, and this will only continue in the future. Forward-minded insurance professionals know this and are working to build their businesses to dominate tomorrow’s industry landscape.


Companies need to be constantly thinking about how they can cater to a new generation of consumer, those who want one stop shopping and value the ease of buying products and services above all else.
The agencies that are smartly leveraging technology to develop ways to make their customer experiences more personalised and convenient are going to succeed over the long run.
In other words, the CVS-Aetna deal is — at its core — about streamlining the supply and distribution of healthcare in a way that meets shifting consumer expectations, provides a more end-to-end, customised, and data-driven service, and ultimately creates added value for customers.


Novidea is the company behind the leading end-to-end, data driven insurance platform, designed specifically for insurance distribution professionals and their customers.
By consolidating all front- and back-office data and workflows into a unified view, the platform provides real-time visibility and actionable intelligence into the entire customer journey.
The Novidea platform enables top-tier global brokerages, agencies, bancassurance and corporate insurance operations to optimise every customer interaction, expose opportunities for revenue and growth, and dramatically improve profitability and competitiveness. The company has offices in the UK and US, with R&D based in Israel.
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