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CVS is remaking itself with $69 billion purchase of Aetna

CVS stores may soon “morph into new, reinvented health destinations,” an analyst says.Justin Sullivan/Getty Images/File

It’s time to stop calling CVS a drugstore chain.

The Rhode Island company said Sunday it has agreed to buy the insurance giant Aetna Inc. for about $69 billion, a deal intended to create a type of one-stop health care provider capable of serving both consumers and employers — part of a bid to better withstand seismic shifts in the industry.

CVS has two clear goals in making the largest purchase in its 54-year history, analysts said. The first is to accelerate the transformation of its 9,700 retail stores into health care supermarkets with wellness clinics for preventive care, vision and hearing services, telemedicine connections with doctors, and on-site nurse practitioners to assist with chronic conditions. The second is to fortify its business of managing pharmacy benefits, which oversees drug plans for employers and insurers, against a widely expected incursion by Amazon.com Inc.


The combination would also allow CVS and Aetna to make a more serious run at the insurer UnitedHealth Group, which has more than three times the revenues and customers of Aetna. United has a number of subsidiaries, including its own pharmacy-benefits manager, and one of its subsidiaries is in the process of acquiring a doctors group in Central Massachusetts, Reliant Medical.

“CVS is saying we can take on major health care providers,” said Ken Kaufman, managing director of Kaufman Hall, which consults to the health care industry. “They don’t consider themselves a drugstore.”

With $177 billion in annual revenue, CVS is already among the biggest players in retail pharmacy and describes itself as the “front door to health care.” It runs 1,100 walk-in clinics. But the majority of its revenue comes from its Caremark drug-benefits arm.

The acquisition is primarily “defensive, not offensive,” according to analyst Ana Gupte of Leerink Partners, a health care investment bank. It hinges on CVS’s plan to make its stores more focused on clinic services, but “the adoption of this care delivery model by American consumers is unproven,” she wrote in a recent report.


Optum Care, the drug-benefits management arm of UnitedHealthcare, “is well on its way and aligned with the existing model for access of care delivery by the US consumer.”

With revenue last year of about $63.2 billion, Aetna was the third-largest health insurer in the United States, with about 22 million members. In its 164-year history, the Hartford-based company has served primarily as a health plan for employers, but increasingly it has begun working more closely with the government and now administers Medicare plans in several states.

Aetna would operate as a stand-alone business within CVS and would be led by members of its current management.

“With the analytics of Aetna and CVS Health’s human touch, we will create a health care platform built around individuals,” CVS’s chief executive, Larry J. Merlo, said in a statement.

Across the health care spectrum, companies are scrambling to adjust to uncertainty wrought by the drive by federal and state governments and insurers to contain the growth in medical spending. The latest curveball: Republican efforts to eliminate the mandate that all Americans carry health insurance.

To compete, CVS is likely to attempt to leverage the copious records Aetna has on its customers’ health needs and their spending to better serve insurers and offer incentives to promote health, said Kate Senzamici, a Kantar Retail analyst.

The company knows that its customers are frustrated with the health care system — CVS has released a survey tracking negative sentiments among its shoppers — and it wants to position itself as a consumer-friendly alternative to traditional health care providers, Senzamici said, while making the pitch that it would cut costs.


“One of the big benefits of consumer companies getting into health care is that they already know how to provide a service, [and] how to engage consumers,” Senzamici said, “which is something that is generally lacking with traditional health care companies — insurance providers or otherwise.”

CVS may also begin offering lower-priced drugs and insurance and could create its own health insurance exchange, said Kantar analyst Brian Owens.

The merger may also enable the company to rethink its physical footprint. CVS has already announced plans to reallocate 80 percent of its square footage to health and beauty products, Owens said, and bringing in an insurance component could help the stores “morph into new, reinvented health destinations.”

Owens envisions CVS stores that will feel more like the high-touch retail destinations Ulta Beauty and Sephora, where customers can engage with clerks to learn more about health care concerns. But at CVS, the focus might be more on managing your heart rate or weight rather than mastering the right eyeliner technique. The success of those beauty companies comes from the degree of service that shoppers feel they are getting, and they tend to spend more as a result.

So if the company can merge its customer data with health insurance information while still complying with the Health Insurance Portability and Privacy Act, that could drive both customer loyalty and revenues, Owens said — ultimately getting the company closer to the goal of having a one-stop shop for all preventative health care needs.


“It could allow them to leverage the store as a marketing platform and potentially influence behaviors in a bigger way,” he said.

CVS is looking to stay ahead of Amazon, which has made a series of moves toward entering the pharmacy industry, including several high-profile executive hires. Amazon recently acquired licenses to operate pharmacies in 12 states, and its Web services division is reportedly planning to announce a partnership with an electronic health records company, Cerner, to analyze clinical data and predict available treatments.

In this latest move, Amazon’s assumed goal is to help health care providers better access cloud computing tools while also meeting the security standards outlined in HIPPA.

Earlier this year, Aetna had planned to buy another large insurer, Humana Inc., for $34 billion, but that deal fell apart amid regulatory opposition. An attempted merger between insurers Anthem and Cigna was also blocked by the government this year.

Shareholders of Hartford-based Aetna would  receive $207 a share — $145 in cash and the rest in CVS Health Corp. stock, the companies said, or 29 percent more than the insurer’s stock price in October, when reports of its talks with CVS first emerged.

The buyout does face significant challenges, not least among them rethinking CVS’s retail strategy. That may include hiring more-specialized and well-paid staff. There would also be significant costs for redesigning stores.


The deal also faces regulatory scrutiny from the Justice Department, which has taken a more aggressive approach to other large mergers this year. 

Should the deal go through, it’s not clear how soon customers would feel an impact, said Kaufman, who credited the company with having an innovative streak. “I don’t think they would have done this acquisition if they didn’t have a lot in mind,” he said.

Priyanka Dayal McCluskey contributed to this report. Janelle Nanos can be reached at janelle.nanos@globe.com.