CVS Health is making the case for its merger with Aetna to two very different audiences this week.
As its legal team geared up for the first day of a hearing on the merits of the deal Tuesday, CVS held its annual investor day and issued a long-term strategic plan to “accelerate growth” ahead of the day’s proceedings, aimed at skittish investors concerned about its recent financial performance post-merger.
CVS warned that it would see lower revenues as a result of the deal, though its first-quarter numbers did slightly beat expectations.
“Our businesses remain strong and we have ambitious yet achievable plans for accelerating their growth prospects,” CVS CEO Larry Merlo said (PDF). “Additionally, this growth is enhanced by our combination with Aetna and the transformational initiatives we are bringing to market.”
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In the plan, CVS reaffirmed its 2019 financial projections, estimating between $251 billion and $254 billion in consolidated revenues and $15 billion to $15.2 billion in adjusted operating income for the year.
Benjamin Isgur, leader of PwC’s Health Research Institute, told FierceHealthcare that PwC research indicates healthcare executives find the process of integration following a large deal taxing, and part of that challenge comes from executives wanting to see immediate results.
In a recent survey of executives, 58% said the integration process was harder than they expected, Isgur said. "You’re not going to necessarily see all of the fruits of this labor any time in the next quarter or year,” he said. “Some of this will take several years.”
CVS projects the Aetna deal will produce $300 million to $350 million in synergies this year and an additional $800 million in synergies for 2020.
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Meanwhile, CVS was defending the deal on a second front: District of Columbia District Court. Judge Robert Leon has been conducting a Tunney Act review of the merger’s approval by the Department of Justice (DOJ), and beginning Tuesday he heard testimony from its opponents—a rare move.
Under the Tunney Act, a federal judge can take a second look at a DOJ antitrust decision to determine whether it was in the public interest. Leon's review follows his concern that the deal was fast-tracked, and he did not receive adequate explanation on why he should approve it. Leon said it felt as though the DOJ and CVS were treating him as a "rubber stamp" for the merger.
The American Medical Association (AMA), one of the most prominent voices of opposition, said in a statement that while CVS-Aetna is framed as a vertical merger, meaning it includes two distinct stops on the supply chain, the two do compete in some markets, making it take on elements of a horizontal merger.
“The AMA has long called for heightened scrutiny before proposed mergers take effect and markets are robbed of the intense competition that has benefited patients,” said Barbara McAneny, AMA's president.
“The dynamic discussion during CVS-Aetna settlement hearing should prompt a renewed dialogue among regulators, policymakers, lawmakers and other about the need for a better, more open and competitive marketplace to benefit patients and the physicians who care for them,” she said.
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CVS will also call three rebuttal witnesses of its own to defend the deal as part of the hearings. Leon rejected a request from the DOJ to allow it to cross-examine both sets of witnesses.
Though the level of scrutiny for this merger is high, that’s not uncommon for deals in the payer space, Isgur said. Regulators have a framework they can use to determine consolidation that works from a high baseline for insurers, as there are relatively few to begin with in comparison to providers.
Big hospital deals may get less of a look, he said, because even in highly consolidated markets there is still notable competition. This is far less true in the payer space.
“Looking at how regulators look at consolidation of the market, there is some relativity,” Isgur said.
Leon has allowed CVS and Aetna to begin integration as he conducts the review, though some parts of the business remain separate for now. Aetna has sold its Medicare Part D business to WellCare, as the DOJ mandated in its approval.
It’s unclear for now what would happen if Leon chose to overturn the deal. Both the DOJ and CVS have continued to argue that the merger is, indeed, in the public interest.