Economists: Vertical mergers often pay off, but there should be more rigorous scrutiny 

Close-up of handshake between person in suit and person in business shirt.
The merger between CVS Health and Aetna could pay off, but ensuring deals like this are effectively vetted is key, they said. (Getty Images/FS-Stock)

The merger between CVS Health and Aetna—which is under scrutiny by a federal judge—could pay off through integration on several fronts, according to economics experts.

But ensuring deals like this are effectively vetted is key, they said. 

At a Senate hearing on Wednesday, Fiona Scott Morton, Ph.D., an economics professor at Yale School of Management testified the union of pharmacy benefit management services and a health plan could yield notable efficiencies. 

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Spending on physician-administered medications is growing rapidly, she said, so aligning medical coverage with prescription drug coverage could more effectively manage those costs. 

“Combining the pharma and medical benefit together will allow us to get a handle on those costs,” Morton said. 

RELATED: CVS plans to turn 1,500 stores into HealthHUBs 

Craig Garthwaite, Ph.D., director of healthcare at the Kellogg School of Management at Northwestern University, said that deals like CVS-Aetna also better position the integrated organizations to handle the rise of costly specialty drugs. 

Managing pharmaceutical and medical benefits would cover a broader range of these drugs, he said, as some are physician-administered, falling under the insurance plan, and others are purchased by patients at a pharmacy, and thus managed by a PBM. 

Merging with Aetna also aligns payment incentives for CVS to really move forward with its retail clinics, Garthwaite said.  

However, though these vertical deals can be beneficial, they’re often not scrutinized all that closely, Morton said. For one, tradition holds that all vertical deals are inherently OK, compared to horizontal mergers that can reduce competition, she said. 

RELATED: Healthcare’s vertical mergers kick-started a massive industry shift in 2018. Will it pay off? 

That is not overall the case, Morton said, though many, if not most, vertical mergers are ultimately beneficial. Even if deals are ultimately approved in the majority of cases, because healthcare makes up such a larger portion of the economy it’s crucial for all mergers to be scrutinized effectively. 

Federal antitrust regulators need more clear guidance on how to suss out the vertical deals that should get a closer look, the panelists said. 

Morton warned, though, that even if these guidelines are clarified and expanded—the Federal Trade Commission and Department of Justice simply don’t have the resources to keep up with the pace of consolidation. FTC officials have echoed those comments, saying that healthcare’s appetite for mergers outpaces its resources to review such deals. 

This could require as much as quadrupling the size of the agencies to keep up, Morton said. 

“You want to look at everything,” she said, and lots and lots of it will be fine.” 

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