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  November 3, 2017

Fragmented Health System Paves Way for CVS-Aetna Merger

In what is being called the biggest merger in the history of the health insurance industry, CVS is making a $66 billion bid to buy Aetna. We discuss the merger's potential consequences with author and professor Bill Black
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William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. Black was a central figure in exposing Congressional corruption during the Savings and Loan Crisis.


AARON MATÉ: It's The Real News. I'm Aaron Maté. In what is being called the biggest merger in the history of the health insurance industry, CVS is reportedly making a $66 billion bid to buy Aetna. CVS operates pharmacies all over the country, while Aetna sells health insurance policies. Now, the cost of both pharmaceutical drugs and health insurance plans are already sky high, so could a merger of these two giants make those prices even higher?

Joining me is Bill Black, associate professor of economics and law at the University of Missouri, Kansas City. Welcome, Bill. So, your thoughts on this potential merger.

BILL BLACK: So, the merger, as you said, mostly relates to cost. It's not a merger of the insurance firms. It's a case of a health insurer being taken over by a very large drugstore chain. The drugstore chain has three times the reported capital as Aetna has, for example.

And the reason they're using for this merger has to do with those sky high costs. Those sky high costs are largely because we have this fragmented private insurance system, and that creates all kinds of potential for misuse and fraud, and therefore, you have to have all kinds of controls, and those are very expensive.

And one of the leaders in those controls, when it comes to drugs, which are a big part of the health insurance cost, is CVS, so the idea of the merger is you take CVS, that has this expertise in pharmacy benefit management, as the jargon is called. You put it together directly with Aetna, and they ought to be able to harmonize their systems such that they get real cost savings. That part, most people agree with.

Whether they're then presenting it to the public as, "Well look, if we get these big cost savings, that's got to be good for you, the consumer." Well, of course, not necessarily so. Will they actually pass through those cost savings to the consumer? People are split. If you're hired by the company, of course you say yes. A number of the independent health economists are very skeptical that it'll get passed on to the consumers, as opposed to it'll be passed on to the shareholders, and of course the senior officers of the new, combined entity. They'll do well. There's no particular reason to have any assurance that we, the public, will do any better from the merger.

AARON MATÉ: Well, what are the grounds for that skepticism?

BILL BLACK: Well, because why would they pass on the savings, right? It's far better from their standpoint, either if you think the money is going to go to the shareholders, or the additional profits are going to go to the shareholders, or to the officers, or some combination, to keep it from them, why would they want to give it to the public? They would only do that, goes normal economic logic, if they are under competitive pressure, or if they believe that they could greatly expand their market share, by lowering prices to the consumers.

And this is the kind of field where it isn't historically driven that much by price, and it's not very competitive, so that's why a number of the healthcare experts in economics are skeptical that it'll be passed on to the people.

AARON MATÉ: Bill, you know-

BILL BLACK: It shouldn't, actually-

AARON MATÉ: Bill, if they have that incentive, perhaps now, to keep costs low, that doesn't mean necessarily that they'll have it in the future, right? Because even if they can keep costs low now, that might help them drive their competitors out of business, which will give them more of a market share, which then in the future means they can jack the prices up again.

BILL BLACK: Well, that's always a risk further down the road, not so much from this merger, but what we've seen, of course, through all economic life over the last 45 years, is that we've really taken our foot and squashed the anti-trust authorities, so mergers that never would have been approved even 20 years ago are now routinely approved, and of course, you're right. That can mean that the resultant monopolists can use that very substantial market power to harm people.

That is part of the story in healthcare, but it's less a story of market power and more a story of really perverse incentives, once you create fragmented private insurance systems, and that's why people talk about alternatives, Medicare for all, single payer, public health services, that elsewhere in the developed world, almost everybody uses one of those alternatives, and they produce roughly the same healthcare outcomes, often better healthcare outcomes, at roughly half the price of the US system, and we're talking about astonishing, hundreds and hundreds of billions of dollars, of savings, so that would be a real competitive advantage to American industry, but we seem to be locked into this insane model, and people are treated as weirdly radical, if they want to do what almost everybody else in the developed world does, some variant of a rational system.

AARON MATÉ: Imagine that. Let me ask you, Bill, what accounts for CVS being so big and powerful? I mean, their revenue is something like $177 billion, and also, is it fair to draw a parallel here, to Amazon's recent purchase of Whole Foods, and their attempt to widen their hold over everything, basically?

BILL BLACK: You have to stretch a bit to make that metaphor. I mean, people should be concerned about Amazon, because Amazon is everything, and therefore, when it buys into a major grocery retailer, like Whole Foods, that really can be a very different model going forward, that's going to push more and more businesses out of business. Why? Why the drug chain's so big.

Well, the first answer is the one we've been discussing. Medicine's so big, healthcare costs are so big, and the thing that often drives it is prescription drug costs, and that's a whole nother story of patents, and extraordinary abuses, and pushing things that shouldn't be used, in part, but also just good advances, right? We now have a number of drugs that really can extend your life, and they were expensive to develop. They're not necessarily expensive to produce. Okay, so then we got lots of folks going to drugstores for the drugs, is the first reason they're big.

The second reason they're big is because they were actually probably better managers than a number of their competitors. Things like this cost system are real, and produce some real savings, but of course, the third reason they're big is also the one we've been discussing, and that is we no longer have effective anti-trust laws, and there have been a series of cases in the pharmaceutical area, about abusive and monopolistic practices and such, but what rue seeing is they're getting bigger, and with this kind of merger, you are correct that it's going to help them get bigger, even bigger than they are now, and even more profitable than they now are, and neither of those things is necessarily particularly good for the public, either now, or if you look forward in time, to what the pharmaceutical industry is likely to look like 20 years from now.

AARON MATÉ: Bill, finally, Aetna was in the news last year, when it tried to purchase the health insurance company, Humana, and when that was going through, they threatened the government to leave the federal health insurance exchanges if the merger wasn't approved. The merger was not approved, and Aetna has dropped out. I believe they're going to be dropping out of all the exchanges by 2018. Do you see the threat of a similar attempt here, to force the government to approve the merger, and if so, what could these companies do, as a comparable threat, like dropping out of the exchanges?

BILL BLACK: Okay, so that's a wonderful example of what anti-trust law used to take into consideration. It used to take into consideration not just the pure economics, but power, and it's very clear that the people that created the anti-trust laws were worried about that kind of power, and abuse of power, that if you simply allow these entities to get so big, so economically powerful they can translate that into political power, through threats, through contributions, right? They have both sides of it. They entice you and they threaten you, sometimes at exactly the same time.

And yes, that was a despicable abuse of power, but what was particularly important is they were so willing to make it public, that they were abusing their power, that they were going to translate their economic power into political power, right? They were just blatant about that, and that tells you how bad anti-trust enforcement has become, and it tells you how politicized it's become, where Republicans simply do not believe in enforcing the anti-trust laws at all, and a big branch of the Democratic Party, the so-called New Democrats, have been also eviscerating anti-trust enforcement when they're in power, as well, and the combination has been horrible for the United States, and yes, you can look for many more of those political threats, particularly under the Trump regime, where after all, the president likes those kinds of threats.

AARON MATÉ: We'll leave it there. Bill Black, Associate Professor of Economics and Law at the University of Missouri, Kansas City. Thanks very much.

BILL BLACK: Thank you.

AARON MATÉ: And thank you for joining us on The Real News.


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