Razor-thin margin has been forcing pharmacies to consolidate to improve their buying power for years. However, regulators put the kibosh on that strategy earlier this year, when they rejected Walgreens Boots Alliance's bid to buy Rite Aid lock, stock, and barrel.
Now, retail pharmacies like CVS Health are looking for other ways to increase their pricing power and solidify their market share. In CVS Health's case, it appears that strategy may include expanding more deeply into health insurance.
According to reports, CVS Health has offered more than $200 per share to acquire Aetna, a health insurer serving employers, individual purchasers, and Medicare and Medicaid recipients. CVS Health's and Aetna's trailing 12-month revenue figures are $181 billion and $62 billion, respectively, so if this combination were to happen it would create a healthcare behemoth.
Aetna previously saw its attempt to merge with Medicare Advantage insurer Humana blocked because it would have reduced competition in some markets. That creates a bit of uncertainty over whether regulators would OK a merger with CVS Health, because CVS Health and Aetna both sell Medicare drug plans.
If the deal passed muster with regulators, then it would still be expensive to CVS Health, and there'd be no guarantee of success for the combination. Meanwhile, Amazon.com (AMZN 3.15%) is rumored to be seriously considering entering the prescription drug market -- and it has the experience, money, and infrastructure necessary to reshape the market, regardless of whether CVS Health and Aetna combine their efforts.
Overall, CVS Health operates in a low-margin and highly competitive market. While there are opportunities to drive prescription volume from Aetna's plans to its stores, Amazon's potentially entering the market creates too many question marks for me to consider buying shares of CVS Health.