In December 2017, CVS Health entered an agreement to buy Aetna for roughly $69 billion. The announcement made the business world sit up and take notice. Not only is this acquisition the largest health insurance deal currently on record, but it will also likely to change the face of the health insurance industry.
A Little Context
CVS Health Corporation is a retail pharmacy and health care company. It began in 1967 as a health and beauty store and then added the pharmacy component a few years later. 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.
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. Today, Aetna is a managed health care company that focuses primarily on health insurance plans and services. Currently, Aetna has approximately 23 million medical members and 14 million dental members.
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. This merger with Aetna is looking to take things a step further. It moves to put the care aspect of health care forward.
Between a Rock and a Hard Place
Insurers have discovered that consumers today are more interested in having the ability to easily get preventative healthcare in the form of check ups and the monitoring of minor issues. Part of this is due to the changing landscape of health insurance, if your health should deteriorate to the point that medical intervention is deemed necessary, it’s not nearly as accessible or cost-friendly as it used to be.
This fact looms in the back of the minds of a whole generation of people who think it wiser to stay healthy rather than get healthy. With that market change, legislative uncertainty, and a newfound popular resentment for vital service profiteering, the sands are quickly shifting under the fixtures of the modern healthcare landscape.
While that goes equally for providers and insurers, the distributors that bridge the gap between them are especially vulnerable. That's because distributors are, by definition, intermediaries; a fact that to some casts them as unnecessary middlemen.
When people are already struggling to pay for vital services and feel taken advantage of, a middleman is the last person you want to be. The truth is, it's totally understandable for people to wonder how many people ought to be getting a payday off their medication or worse still, hospitalization. It's this sentiment that gives fuel to the fire of disintermediation.
At the tail end of a very long and complex supply chain, CVS is far from immune to these market forces. 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.
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.
In light of its acquisition of Aetna, CVS will own more of the supply chain, be able to negotiate lower drug prices from the manufacturers, and carry those savings on to its customers. 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.
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, 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 the information from CVS health services can then be easily integrated into records, providing better information to doctors and pharmacists to personalize care.
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 center, and perhaps a nutritionist, and some sort of care manager?”
In other words, the 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, customized, and data-driven service, and ultimately creates added value for customers.
Lessons for Insurance Distributors
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 honored 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 throws of a dramatic transformation and distributors may well be the most vulnerable.
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.
So what can the insurance distribution business learn from CVS?
Lesson 1: Even If You Can Swim Upstream, You Probably Shouldn't
Perhaps the biggest lesson is rather than wasting your energies resisting change, it's 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.
Lesson 2: Comprehensive Customer Convenience Is Key
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 personalized service, speed, and convenience.
Whether through M&A, joint ventures, nichification, data monetization, or a technology driven continuance strategy (or something else altogether), now’s the time to explore every possible avenue to improve your business's value add and strengthen its market resilience.
To survive, your business will need to deliver a more customer-centric and more end-to-end experience. At the company level, this means having more support staff and specialists to provide not only quick and comprehensive but also innovative and customized solutions for problems that your customers might not yet even realize they have.
It’s here that smart technology is often the game changer. Good technology delivers superior integration and visibility across the entire organizational structure. Data points are collected and centralized 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.
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, future-forward strategy, a finger on the pulse of the industry, and an eye on your data.