CVS' offer to acquire Aetna moving from the rumor mill to reality illustrates how legacy companies in all industries -- including insurance -- are responding to the customer experience, logistics and analytics acumen of the world's third-largest retailer: Amazon.
After it was revealed in October that the online retailer was considering a move into prescription drugs, Bloomberg reported that legacy players feared Amazon using "its expansive online reach and its logistical muscle to threaten companies that ship and sell medicines to consumers and cut pricing deals with drug makers." This fear led CVS to look for a deal that would help it cut costs to compete -- which led it to Aetna's doorstep.
And the deal comes at a particularly interesting point in the health-insurance industry's history. It's possible that the Affordable Care Act's individual mandate will be repealed as Congress attempts to reconcile tax-reform bills. That will put more pressure on healthcare costs across the value chain, as healthy customers are given the option to exit the insurance pool.
When the deal was first being discussed, Alvin Concepcion of Citi told Bloomberg that the CVS-Aetna deal would be "both evolutionary and revolutionary given the dynamic healthcare environment and push toward consumerism coupled with a challenged retail backdrop and the need to combat a looming Amazon threat." The combined company could form a personal-health ecosystem that would prevent customers' eyes from wandering to cheaper options -- like Amazon. It could be stated that CVS is making an almost unprecedentedly bold move in response to the impact of one potential competitor. But "Amazonification" -- that is, the trend toward digital sales for products of all kinds driving down prices through scale -- has major implications for other sectors of insurance.
In fact, we've seen this dynamic in the industry before. When Google began making overtures to the U.S. auto insurance industry in 2015, legacy carriers began soul-searching to try and figure out how they could compete with the online giant's data and customer-experience prowess. As in that case, it's not just the volume of potential sales by the new entrant that frightens other players in the sector. It's also the ease of use and modern platform that digital giants have at their fingertips, as opposed to the legacy processes at established firms.
That push almost immediately preceded the insurtech wave that's washed over the industry since. Even as Google Compare shut down early last year, the amount of money flowing into the insurtech sector skyrocketed as insurers looked to leverage the impact of digital, powered by data, to create a tighter bond between them and their customers. Google Compare may not have stuck around too long, but carriers got the message: It's time to modernize not just IT systems, but the entire ecosystem around their products. Insurers began embarking on a journey to unlock the full value of all the customer and risk data they've acquired in order to keep customers.
Now, a similar flavor of disruption is coming to health insurance. The inefficiencies in traditional delivery methods for medical services -- especially prescriptions -- are being challenged. As the major facilitator of payments for those services, health insurers have to be willing participants in the evolution. Insurance is no longer going to be a silo looking out for its own interests -- the interests of all stakeholders are going to be more intertwined as prices are squeezed through digital innovations.
In fact, CVS has been rather aggressive over the past several years in trying to build a holistic experience around healthcare through its stores. in addition to its well-known clinics, CVS and another insurer, Cigna, partnered earlier this year on a program called Cigna Health Works, which aligned those clinics' services to specific Cigna member benefits. With access to data from all segments of the health value chain, the CVS-owned Aetna would have an unprecedented first-party view into policyholders' health habits and routines, allowing it to be more proactive in managing health risk. CVS has also can combine its loyalty card information, as well as a digital payment platform that also helps customers manage their health, with insurance data.
In the same way that Google upended the auto insurance industry not long ago, Amazon is poised to do the same to health insurance. Data is going to be a crucial component of this new order, and insurers, who have lots of it, are poised to be major players going forward by leveraging that strength.
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