Exploring Human Potential

Disrupter in Chief – CVS, Aetna, or Amazon?

Posted on | October 30, 2017 | 3 Comments

Mike Magee

In 1964, a purveyor of general merchandise based in Rhode Island, coalesced 17 locations under one entity. They were focused on market data, inventory management, and economy of scale. Within five years, they were successful enough to have 40 locations, three with in-store pharmacies.

Within another decade, they had standardized their information, data, and business systems, and their annual sales had long exceeded $100 million. By 1985, they topped $1 billion. They now have 9,700 stores and in 2016 generated over $200 billion in revenue with 60% coming from pharmacy services. Their original name was Consumer Value Stores, but now everyone just calls them CVS, the seventh biggest corporation by revenue in the United States.

You might say they were the original disrupters in health care. And they’ve tried to keep their eye on the ball. For example, they’ve known that internet sales were a threat to their retail non-drug sales. Three years ago, in-store general purchases made up 52% of their revenue. Now it’s only 46% and continues to drift south. In response, they’ve looked at the lucrative U.S. pharmaceutical 4.5 billion prescriptions per year market worth $560 billion a year for every conceivable angle.

Some years back, CVS tip-toed into the provider space with their in-store Minute Clinics. That’s been a partial success. In 2007, they purchased Caremark, a pharmacy benefit manager, to capture supply chain management revenue, and that’s been good. They signed up insurer Aetna to a 12-year PBM contract in 2010. They’ve thought about more horizontal expansion – more stores – but the federal government rejected a bid by their arch rival Walgreen when it attempted to merge with Rite-Aid drugs, viewing it through an anti-trust lens. The feds did the same thing in blocking two different attempts by health insurers to merge last year.

For CVS, it’s been difficult to sit still and watch others go vertical. Take UnitedHealth Group, the insurance giant started by a physician, which now also owns its own PBM under the health services banner, Optum. They’re doing great with 3rd quarter earnings up 26%. Then there’s Anthem, the BC/BS insurer, that got in a nasty fight with their former ally, stand-alone PBM, ExpressScripts. Now Anthem is also starting its’ own PBM. Together Caremark, Optum and ExpressScripts control 80% of the PBM market.

Four months ago, health analyst Robert Flynn pointed CVS in the vertical integration direction, providing six reasons why he thought they ought to buy insurer Aetna with access to their 22 million customers. The reasons included that horizontal merger consolidation options were no longer feasible; competitors like United-OptumRx were gaining traction; the risk would be low since Aetna was already a Caremark customer; it would beat Express Scripts to the punch either as an insurance purchaser themselves or alternately being purchased by Walgreens; and the vertically oriented CVS-Caremark-Aetna goliath would be in a good position to do value-based contracts – like those advanced for Hepatitis-C cures.

So with this kind of forecasting, it shouldn’t have been big news last week when CVS and Aetna announced that negotiations for a CVS  $66 billion buy-out of Aetna was underway. Their combined valuation would exceed $240 billion. But strangely enough, the original health disrupter in chief was out-disrupted by the ultimate disrupter of all, Amazon.

The New York Times headline said it all – “CVS and Aetna Talks Take Place Under Amazon’s Shadow.”  What triggered this take-down was a new report in the St. Louis Post-Dispatch a day earlier that Amazon had won approval for wholesale pharmacy licenses in 12 states (NV,AZ,ND,LA,AL,NJ,MI,CT,ID,NH,OR,TN).


“There are a lot of differences between books and drugstores, but there are a lot of similarities,  too. Customers want selection, convenience, price and information.” Jeff Bezos, Amazon CEO


The stories trumpeted Amazon’s market cap of $524 billion, and their history of upending other sectors like cloud computing, logistics and groceries. Marketing professors like Scott Galloway of NYU turned to florid prose. His prediction: “You will see strange bedfellows. P&G and Unilever, Nike and Adidas are going to come to the realization that they are competitors, not enemies. Their real enemy is in Seattle. When German tanks rolled into Slovakia and Poland, the Russians, British and Americans found a way to get along. The tanks {Amazon} have rolled in.”

CVS CEO Larry Merlo didn’t seem phased. He said, “We’ve seen threats in the past, OK.” He’s presuming that health care is different, too complicated for Amazon. But complexity is the pay-dirt that could bring success out of failure. Consider this model transaction as it exists today:

Original Stream:

Step 1: Pharma Company sets a price of $100 as the list price for 30 day supply of XYZ pill.

Step 2: Pharma Company marks-up the wholesale price to $110 and sells to one of three giant national wholesalers (McKesson, Cardinal, AmerisourceBergen).

Step 3. Wholesaler bumps price to $120 and sells to pharmacies.

Step 4. Pharmacy marks the price up to $130.

Secondary Back-Stream:

Step 5. Insurer Pays PBM $140 but receives a $45 rebate from the PBM. (Net payment by insurer is $95.)

Step 6. That $45 payment to the insurer came from a $50 rebate from the Pharma company. PBM keeps $5 of the rebate for itself. (Pharma profit: $110 -$50 = $60)

Step 7. PBM pays $110 and patient co-pays $20 to the pharmacy. (Pharmacy keeps $10.)

Step 8. PBM nets $35 profit. (Difference between $140 from insurer, and sale to pharmacy/patient for $110, plus $5 from Pharma’s $50 rebate)

You think Amazon might be able to figure out how to skip a few of these steps – like the wholesaler and the retailer and the PBM? And that doesn’t even consider the possibility that Seattle and Washington, D.C. might discover each other along the way.


3 Responses to “Disrupter in Chief – CVS, Aetna, or Amazon?”

  1. Susan Pellerin
    October 31st, 2017 @ 11:03 am

    When Amazon ‘bought’ whole food I thought I can get my ‘whole foods fix’ anywhere in the world – I can live anywhere! Now I will able to get all my ‘drugs’ anywhere I want and with same day delivery – I won’t have to leave my house – Clothes, food, pharmaceuticals, shoes, books, movies, what’s next??????

  2. Mike Magee
    November 1st, 2017 @ 9:24 am

    Not certain where it all ends….but do believe that tech driven transparent service undermines complex opaque cabals of all sorts!

  3. Maegan Jones
    November 2nd, 2017 @ 7:56 pm

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    Your site helps people reach their full potential through taking charge of their health. That’s why we’ve selected you to participate and help spread the love to an even wider audience.

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    Maegan Jones | Content Coordinator
    Your most trusted ally in pursuit of health and well-being

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