AET/CVS: Part D Overlap and Potential Divestiture Analysis
Fri 02/09/2018 12:33 PM
Event Driven Takeaways
CVS’s acquisition of Aetna will likely attract antitrust questions on both horizontal and vertical theories of harm. Specifically, regulators will likely focus on the horizontal overlap in the standalone Part D market. The post-merger market shares of CVS and Aetna would exceed 30% in half of the regional markets for standalone Medicare Part D plans, Event Driven has found.
Event Driven’s analysis of January 2018 enrollment data made available by the Centers for Medicare and Medicaid Services, or CMS, reveals significant overlaps at the regional and county levels for Part D, the prescription drug program for seniors.
Eight different national companies, including Aetna and CVS, offer stand-alone Part D plans in the US, according to Jack Hoadley, a specialist on health financing topics at Georgetown University’s Health Policy Institute. CVS SilverScript plans have the second-most members nationwide and Aetna is a more modest player with the fourth-most members. As of January 2018, there were approximately 25 million lives associated with standalone Part D plans. CVS controls roughly 6.1 million of these lives while AET has 1.5 million. Together, the two companies account for 30 percent of the standalone Part D market nationally.
Antitrust authorities will be examining each of the nation’s 34 individual drug plan regions for overlaps, and concentration can vary widely by region, Hoadley said.
According to a CMS spokesperson, the plan benefit package for a Part D sponsor must be offered in at least one entire region. Part D sponsors cannot pick and choose geographies within a region.
A recent MedPac report explains that plan sponsors compete on premiums to attract enrollees. Part D plan sponsors submit bids to CMS and the agency calculates a nationwide enrollment-weighted average among all bid submissions. If enrollees choose a plan that is costlier than average, they pay a higher premium calculated by the difference between the plan’s bid and the nationwide average. A second avenue of competition involves keeping plan premiums at or below regional low-income subsidy, or LIS, benchmarks. Part D’s bidding process determines the maximum premium amount Medicare will pay on behalf of LIS enrollees. This amount varies across the country’s 34 Part D regions.
This suggests that the antitrust review will likely identify discrete geographic markets defined by these regions.
Event Driven’s analysis of CMS data reveals that Aetna/CVS will command a market share greater than 30% in 17 of the 34 regions. If antitrust regulators set a threshold of 30% market share at the regional level, AET/CVS will have to divest 677,483 Part D lives, or 9% of their combined membership. If, on the other hand, the DOJ sets a higher threshold, fewer divestitures would be required. Figure 1 below presents a range of Part D lives that could constitute a final divestiture package.
Figure 1: Estimated Part D Divestitures (Regional Level Analysis)
Figure 2 below identifies regions where AET/CVS has more than 30% of standalone Part D lives enrolled in its plans.
Figure 2: Regions Where AET-CVS Combination Controls >30% of the Market
A similar analysis at the county level indicates that the combination could create potentially problematic market shares in many counties, and the companies could be asked to divest nearly 11% of their combined standalone Part D lives. For instance, assuming that antitrust regulators set a threshold of 30% market share at the county level, AET/CVS will have to divest 808,193 lives, or 10.7% of their combined membership (see Figure 3).
Figure 3: Estimated Part D Divestitures (County Level Analysis)
In addition, Event Driven also studied market concentration in the standalone Part D market at the county level by calculating the Herfindahl-Hirschman index (HHI) across 3,215 counties. Both the DOJ and the FTC often calculate the HHI, which is a measure of market concentration.
Based on the Horizontal Merger Guidelines, a merger is likely to raise significant competitive concerns if it both creates a highly concentrated market (HHI greater than 2500) and involves an increase of more than 200 in the HHI. Based on this definition, an AET-CVS combination would raise red flags in 514 counties.
In these 514 counties, the two companies together control roughly 564,217 standalone Part D lives, or 7% of the total combined membership. It is likely that the DOJ would require the combined companies to transfer some of these Part D lives to other market participants. Due to the fact that almost all of these counties have numerous other competitors, AET/CVS will likely not run into problems finding a credible third-party buyer. Other players offering standalone Part D include Express Scripts, WellCare and Kaiser, among others.
The industry is certainly no stranger to consolidation and CVS in fact built its Part D business largely through acquisitions. It assumed control of SilverScript as part of its 2007 merger with Caremark. CVS acquired Universal American’s Part D business for almost $1.3 billion in 2011 and added more Part D subscribers as part of its $12.9 billion deal with Omnicare in 2015. The deal with Universal American, the only one of these that was for Part D assets exclusively, received early termination of the initial 30-day HSR waiting period.
Although it will be easy for Aetna/CVS to identify potential buyers for Part D overlaps, any buyer must withstand DOJ scrutiny, cautioned a former agency staff member who specializes in healthcare transactions.
As a result, finding the right buyer may not be as simple as merely selecting among the other large Part D sponsors. “I don’t know if they are good candidates,” the former agency staff member said. “It depends on where they are located, and how large their business is, and whether they would be able to run the divested businesses well.”
Aetna and CVS received a second request from the DOJ on Feb. 1. The parties have said they expect the deal to close in the second half of this year.
--Shrey Verma, Ryan Lynch, and Nat Baker
- Aetna and CVS together control almost one-third of standalone Medicare Part D lives in the US. Antitrust scrutiny will focus on the 34 prescription drug regions defined by the Centers for Medicare and Medicaid Services. Event Driven analysis has found significant overlap in 17 of these regions.
- Regions with significant overlap include some of the most populous areas of the country, such as the northeast, mid-Atlantic, Texas, and California.
- There would be no shortage of potential buyers, should these assets need to be divested.
CVS’s acquisition of Aetna will likely attract antitrust questions on both horizontal and vertical theories of harm. Specifically, regulators will likely focus on the horizontal overlap in the standalone Part D market. The post-merger market shares of CVS and Aetna would exceed 30% in half of the regional markets for standalone Medicare Part D plans, Event Driven has found.
Event Driven’s analysis of January 2018 enrollment data made available by the Centers for Medicare and Medicaid Services, or CMS, reveals significant overlaps at the regional and county levels for Part D, the prescription drug program for seniors.
Eight different national companies, including Aetna and CVS, offer stand-alone Part D plans in the US, according to Jack Hoadley, a specialist on health financing topics at Georgetown University’s Health Policy Institute. CVS SilverScript plans have the second-most members nationwide and Aetna is a more modest player with the fourth-most members. As of January 2018, there were approximately 25 million lives associated with standalone Part D plans. CVS controls roughly 6.1 million of these lives while AET has 1.5 million. Together, the two companies account for 30 percent of the standalone Part D market nationally.
Antitrust authorities will be examining each of the nation’s 34 individual drug plan regions for overlaps, and concentration can vary widely by region, Hoadley said.
According to a CMS spokesperson, the plan benefit package for a Part D sponsor must be offered in at least one entire region. Part D sponsors cannot pick and choose geographies within a region.
A recent MedPac report explains that plan sponsors compete on premiums to attract enrollees. Part D plan sponsors submit bids to CMS and the agency calculates a nationwide enrollment-weighted average among all bid submissions. If enrollees choose a plan that is costlier than average, they pay a higher premium calculated by the difference between the plan’s bid and the nationwide average. A second avenue of competition involves keeping plan premiums at or below regional low-income subsidy, or LIS, benchmarks. Part D’s bidding process determines the maximum premium amount Medicare will pay on behalf of LIS enrollees. This amount varies across the country’s 34 Part D regions.
This suggests that the antitrust review will likely identify discrete geographic markets defined by these regions.
Event Driven’s analysis of CMS data reveals that Aetna/CVS will command a market share greater than 30% in 17 of the 34 regions. If antitrust regulators set a threshold of 30% market share at the regional level, AET/CVS will have to divest 677,483 Part D lives, or 9% of their combined membership. If, on the other hand, the DOJ sets a higher threshold, fewer divestitures would be required. Figure 1 below presents a range of Part D lives that could constitute a final divestiture package.
Figure 1: Estimated Part D Divestitures (Regional Level Analysis)
Source: Event Driven analysis of CMS’s January 2018 Part D Enrollment data
Figure 2 below identifies regions where AET/CVS has more than 30% of standalone Part D lives enrolled in its plans.
Figure 2: Regions Where AET-CVS Combination Controls >30% of the Market
Source: Event Driven’s analysis of CMS’s January 2018 Part D Enrollment data
A similar analysis at the county level indicates that the combination could create potentially problematic market shares in many counties, and the companies could be asked to divest nearly 11% of their combined standalone Part D lives. For instance, assuming that antitrust regulators set a threshold of 30% market share at the county level, AET/CVS will have to divest 808,193 lives, or 10.7% of their combined membership (see Figure 3).
Figure 3: Estimated Part D Divestitures (County Level Analysis)
Source: Event Driven’s analysis of CMS’s January 2018 Part D Enrollment data
In addition, Event Driven also studied market concentration in the standalone Part D market at the county level by calculating the Herfindahl-Hirschman index (HHI) across 3,215 counties. Both the DOJ and the FTC often calculate the HHI, which is a measure of market concentration.
Based on the Horizontal Merger Guidelines, a merger is likely to raise significant competitive concerns if it both creates a highly concentrated market (HHI greater than 2500) and involves an increase of more than 200 in the HHI. Based on this definition, an AET-CVS combination would raise red flags in 514 counties.
In these 514 counties, the two companies together control roughly 564,217 standalone Part D lives, or 7% of the total combined membership. It is likely that the DOJ would require the combined companies to transfer some of these Part D lives to other market participants. Due to the fact that almost all of these counties have numerous other competitors, AET/CVS will likely not run into problems finding a credible third-party buyer. Other players offering standalone Part D include Express Scripts, WellCare and Kaiser, among others.
The industry is certainly no stranger to consolidation and CVS in fact built its Part D business largely through acquisitions. It assumed control of SilverScript as part of its 2007 merger with Caremark. CVS acquired Universal American’s Part D business for almost $1.3 billion in 2011 and added more Part D subscribers as part of its $12.9 billion deal with Omnicare in 2015. The deal with Universal American, the only one of these that was for Part D assets exclusively, received early termination of the initial 30-day HSR waiting period.
Although it will be easy for Aetna/CVS to identify potential buyers for Part D overlaps, any buyer must withstand DOJ scrutiny, cautioned a former agency staff member who specializes in healthcare transactions.
As a result, finding the right buyer may not be as simple as merely selecting among the other large Part D sponsors. “I don’t know if they are good candidates,” the former agency staff member said. “It depends on where they are located, and how large their business is, and whether they would be able to run the divested businesses well.”
Aetna and CVS received a second request from the DOJ on Feb. 1. The parties have said they expect the deal to close in the second half of this year.
--Shrey Verma, Ryan Lynch, and Nat Baker
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