CVS Health’s Move to Acquire Aetna Fits a Long-Term Growth Strategy

For a several years now, I have been fascinated by CVS and their increasing presence in the healthcare industry. Consumer Value Stores (later shortened to CVS and now CVS Health) was started in 1963 in Lowell, MA as a small drugstore which added pharmacy services five years later. Over the years they have grown to employ a quarter-million people and report a net yearly revenue in excess of $180 billion.

Years of Growth Through M&A

The growth of the retail and pharmacy divisions of CVS Health has been staggering, and CVS Health’s other moves in the healthcare industry have positioned it to be a disruptive force. Over the past ten years, they have been positioning themselves to become a vertically integrated healthcare provider. They saw the potential for expanding into basic healthcare services and purchased MinuteClinic in 2006, which competes with primary care offices and allows an operational synergy with their pharmacy to fill prescriptions arising from an office visit. They have also expanded their pharmacy services by purchasing pharmacy benefits manager Caremark, home health company Coram, nursing home drug distribution provider Omnicare, and Target’s retail pharmacy operations. These acquisitions have enabled CVS Health to leverage their buying power as a major nationwide pharmacy provider to obtain discounts on medications.

CVS’ Success is Fueled by Technology Too

New technology has been the backbone of CVS Health’s attempt to disrupt healthcare. Leveraging electronic health records, web portals, e-prescribing, and banking on the future expansion of telehealth service has helped CVS Health to establish and defend a competitive advantage. CVS Health has already proven itself a disruptive force in healthcare, threatening the survival of other pharmacies who lack their reach as well as other healthcare providers, and in 2017 they announced a merger that has the potential to alter the landscape of healthcare.

Proposed Merger with Aetna

CVS Health is currently working to buy health insurer Aetna for $68 billion. Ownership of a large health insurance company will allow CVS Health to compete in new ways, and their market presence in pharmacy and basic healthcare services will set them apart from others in the insurance industry. Notably, this move appears to also be motivated by an attempt to guard against the actions of another company known for disruption. Recently, Amazon has been looking to develop its own pharmacy benefit management program as a way of entering the pharmaceutical industry; CVS Health is well aware of the potential effects on their business (currently protected by the high barrier to entry for pharmacies) and is using the expansion into insurance to cement their place in the market.

CVS Health is a prime example of the use of technology and mergers and acquisitions to disrupt an industry. Once the Aetna merger is finalized, the resulting company will enjoy a degree of vertical integration which will be unique for such a large player in the industry.

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