1. Some great reporting on the CVS-Aetna merger by the Capitol Forum. Documents the aggressive 'squeeze and buy' strategy by CVS to drive independent pharmacies out of business.
2. Here's how it works. CVS has 10,000 drug stores. There are 22,000 competing independents. But CVS is not just a drug store chain. It also has a subsidiary known as a pharmacy benefits manager (PBM) which sets reimbursement rates for all pharmacies. Conflict of interest much?
3. So recently, five weeks before CVS announced the Aetna deal, CVS through its Caremark PBM subsidiary tells independent pharmacies that their reimbursement rates for key medicines is going to go down by a lot. This just kills their revenue.
4. "The cuts were both sudden and steep: one pharmacy went from earning $41.63 for selling Metronidazole—an antibiotic used to treat bacterial infections—to losing $72.27 per sale of the treatment." Other examples too, the point is less revenue for competitors to CVS stores.
5. Then immediately after the cuts by CVS's PBM subsidiary, "CVS faxed and e-mailed these same pharmacies solicitation letters asking if they were interested in selling their businesses to the chain."
6. In one solicitation letter, CVS head of acquisitions wrote that as a pharmacist himself he knows “what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment.”
7. This is known as 'squeeze and buy.' Use control of one part of the supply chain to squeeze competitors in another part of the industry. Then buy them out at a reduced cost.
8. When confronted with it by independent pharmacists in front of Maryland state regulators, CVS lobbyists said the reimbursement cuts were simply the result of a 'computer glitch'.
9. Given that CVS already has control of the health care industry through its stores and PBM, adding another leverage point - a giant health insurance company - seems ludicrous.
10. Instead of being able to buy Aetna, CVS should have to divest its PBM (and probably its 1000 urgent care center). Otherwise the health conglomerate acts like a crime boss. Now, here's why antitrust lawyers wouldn't see it that way.
11. Antitrust laws are designed to protect the commercial and thus political liberty of Americans through decentralizing power. But modern libertarian/statist views don't see power. They see econometric models predicting efficiency.
12. CVS's ownership of multiple assets in the same industry supply chain is known as 'vertical integration'. The theory of Chicago School is that it would be irrational for CVS to do this to independent pharmacies. After all, CVS is now selling less to independents. Irrational.
13. Vertical integration, like CVS-Aetna, AT&T-Time Warner, Google-Youtube, Disney-Fox-Hulu, Amazon-AWS, etc, is understood as generally efficient. Aka a good thing. Their models, by airbrushing power out of their assumptions, simply do not account for obvious abuses.
14. What CVS through Caremark is doing is theft. The company is stealing the property of independent pharmacists, and suppressing their income and wages. This is exactly what the Sherman Act was designed to address. Restraints of trade and monopolization.
15. It's especially outrageous that this is really coming to light because of CVS's attempt to get even bigger. The Trump DOJ is suing over AT&T-TW, a vertical merger. That's a big deal and a good first step. We'll see how they approach CVS-Aetna. State regulators can also act.
