In a letter to the U.S. Department of Justice, the American Antitrust Institute (AAI) called on the agency to block the proposed merger of retail pharmacy and PBM giant CVS and Big 5 health insurer Aetna. CVS-Aetna would pair up the largest retail pharmacy chain and one of the two largest PBMs with the third largest health insurer in the U.S. The proposed merger raises a number of questions for competition and consumers. The AAI letter focuses on the merger’s potential to enhance the incentive of CVS-Aetna to exclude rivals and facilitate anticompetitive coordination among health insurers served by PBM CVS-Caremark. CVS and Aetna already wield significant market power in the retail pharmacy, PBM, and health insurance markets. High concentration in these markets exacerbates competitive concerns. Market idiosyncrasies heighten the proposed merger’s potentially anticompetitive effects. These include the role of health insurers in paying for most prescriptions filled and of PBMs in managing the flow of prescription drugs to millions of Americans, and PBM markets that lack important transparency.
Together with the merger of Express Scripts-Cigna, CVS-Aetna would trigger a fundamental restructuring of the U.S. healthcare system. Stronger incentives to exclude rival PBMs and health insurers and to engage in anticompetitive coordination would harm competition and consumers at all levels. Assuming both mergers move forward, the three large integrated PBM-insurer systems (i.e., CVS-Aetna, Express Scripts-Cigna, and Optum Rx-United Healthcare) that would dominate the markets would have weak, if any, incentives to compete. This stands in stark contrast to the competition that is fostered by standalone rivals. Moreover, entry barriers would increase dramatically, scalable only by those players who could enter and compete effectively at two levels – PBM and health insurance. This would effectively lock out competition by standalone PBMs, insurers, and other market participants – competition that is badly needed to foster innovation, to protect the stability of the healthcare supply chain, and promote the welfare of the U.S. consumer.
Any of the anticompetitive effects discussed in this letter would be detrimental to consumers through potentially higher prices, lower quality, less choice, and less innovation in markets for prescription drugs and health insurance. In healthcare, these effects can make the difference between wellness or disease, and life or death. CVS-Aetna should face a high hurdle in explaining how any claimed efficiencies assuage the significant competitive concerns that pervade their merger. Such efficiencies would have to be achievable only through merger; demonstrated in post-merger operations; passed through to consumers in the form of lower prices; and sufficiently large to offset substantial potential competitive harms. This is a tall order – one that CVS-Aetna cannot fulfill. Moreover, there is little evidence that past vertical acquisitions by CVS, including its acquisition of Caremark, have resulted in significant benefits and have even harmed consumers and independent pharmacies. In light of all of this, the only effective remedy is for the government to move to block the proposed merger.