CVS Health and the largest pharmaceutical company in the U.S., Aetna, have recently made a $69 billion merger. Steven Pearlstein, of The Washington Post, identifies this as a "vertical merger." This is when two companies with different, but related markets, conjoin as one. Vertical mergers are supposed to be good for the market with the hope new competition will form.

Anti-Competitive Move

However, the Herald-Tribune explains vertical mergers "can be anti-competitive if either of the firms is a dominant player in its market and its market aren't all that competitive. And this is almost certainly the case in terms of CVS, Aetna, and the health-care sector."

This deal will not push for competition, which is not necessarily a bad thing, but it is not necessarily a good thing. The health care market is dominated by three to four companies that know better than to compete too much. However, according to the Herald-Tribune, "too much consolidation... is only one reason the health-care sector is imperfectly competitive."

Why? Shopping for medical services is not like shopping for a house. Consumers cannot hunt around for the best deal. This is because insurance typically pays for medical services, which makes consumers "indifferent" to prices. Sometimes, it is impossible to find out the prices of medical services because they are negotiated by insurance companies on a need to need basis.

Here's How it Prices Are Negotiated By Insurance Companies

  • There is a posted price for a medical service.
  • From the posted price, your healthcare provider will negotiate a discounted price.
  • From the discounted price, you pay a co-pay or deductible. (This is not taking into consideration if you have gone out of network.)

Due to the difficulty of determining prices, price competition is not something consumers can benefit from when it comes to health services. A group known as pharmacy benefit managers (PBMs) work as intercessors in the prescription drug market. PBMs are hired by insurance companies to get the best prices from drug manufacturers for their products.

PBMs control 80% of the prescription drug market. Caremark is one of these PBM companies, and they are owned by CVS, which is currently merging with their larget customer: Aetna.

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