Where You Stand Sometimes Depends On Where You Sit

Today two news stories with strongly different levels of significance happened which prompted in me very distinct sets of responses.  In order to illustrate what I mean by this, I would like to talk about the less serious one first.  For some time the Pontiac Silverdome, the longtime former home of the Detroit Lions, has been left abandoned for its replacement, Ford Field.  An attempt made to implode the ruins of this stadium were unsuccessful.  I was of two minds in thinking about this and in its symbolic meaning.  I tend to have a fondness for old buildings, having enjoyed my experiences visiting even the ancient and decrepit ruined stadiums of the Greco-Roman past during my travels to cities in the Middle East like Colosse, Pergamum, Ephesus, and Gerasa.  It is somewhat distressing for me to see buildings only a few decades old viewed as being unworthy of use and preservation, even if they are concrete hulks designed for nothing more sacred than bringing some religious devotees together to honor their tribal gods and local sports deities [1].  Be that as it may, my thoughts on the matter were that either Detroit is so incompetent that they cannot even implode a building correctly, much less anything else, or that the resilience of the stadium and its refusal to go quietly was emblematic of the tenacity of the long-suffering people of the Detroit area.  You view either or both as the case, depending on whether you are a pessimist or an optimist or some combination of the two, respectively.

The other story I wish to comment on today will take longer to explain, although my feelings about it are also mixed.  It was announced today that the board of directors for Aetna, a health insurance company I have some experience with, accepted a mixed cash & stock deal worth almost $70 billion from pharmacy giant CVS.  In reading about this particular story the nearly uniform response I read, and one of my own thoughts about it, was a sense of puzzlement that CVS had the amount of money it took to buy out Aetna.  The fact that the company either has a good enough financial position to leverage such a deal despite its own aggressive building and pricing programs or has enough cash from selling prescriptions and other items to engage in that sort of buyout suggests that they have not been passing along enough of their savings for buying in bulk to their customers.  There is, of course, an open question as to whether the deal will even be accepted, as there will be the usual reviews in order to determine its antitrust implications.

From the point of view of both CVS and Aetna, the deal makes some kind of sense.  The deal amounts to a vertical integration within the health industry that allows CVS to control in-house a wide variety of functions, ranging from an insurance carrier to a one-stop primary care sort of clinic to a pharmacy to an organization that bargains with government agencies over drug reimbursements.  The move certainly is likely to lead to some sort of imitations by competing companies, as its fellow competitors will be faced with an arms race to acquire their own insurance carriers in house.  Walgreens, for example, might be on the prowl to buy out Humana, or UnitedHealth might look to purchase Rite-Aid as a captive pharmacy for its own insurance plans, to give some potential outcomes of this.  Some companies, of course, are already engaging in this sort of business model, like the way that Kaiser Permanente owns hospitals and clinics in-house that go along with its own insurance plans.  Whether or not all of this is a good thing strongly depends on the behavior of the company itself.  If CVS’ actions spark similar buyouts on the part of competitors in recognition of the threat that vertical integration has to their own viability as businesses, it is possible this could end up being a net draw/slight loss to consumers who would have to pay somewhat higher prices in order for those companies to pay off their debts incurred in order to engage in the buyouts, but without a monopoly threatening the general well-being of consumers.

There are, of course, worse scenarios out there and there are many people who think about our dysfunctional health care system that are inclined to believe the worst.  For one, it should be noted that the move by CVS suggests that it views the real profit center of health care not in economies of scale for retail sales, but rather in seeking to use economies of scale as a way of squeezing more money out of taxpayer funded entitlement programs like Medicare and Medicaid, money which will ultimately come out of customers as employees and taxpayers rather than customers as customers themselves.  Of course, if other competitors are unable to compete with the new behemoth, assuming the buyout deal is approved, then the reduction of competition could allow CVS to use its increased leverage to squeeze customers on the one hand and taxpayers on the other hand, leaving such customers losers twice over.  This does not seem to be an unrealistic fear, as there has not been very many changes that are beneficial to customers and taxpayers in the health industry for some time, Medicare Part D perhaps excepted.

It is perhaps unsurprising that both horizontal and vertical integration are both in play in our health care industry, as the combination of rising costs and the paralyzing fear of uncertainty have led to a great deal of moves that have not been in the benefit of ordinary people, no matter what spinning and political grandstanding has been done.  We are in the sorry state that we can neither trust business to behave in an ethical fashion in the absence of regulation nor can we trust on the efficacy of government regulation in bringing any benefit to the general public as a whole.  In the absence of trust in institutions like companies and government agencies, one can only wait to see which of the more or less neutral to negative outcomes ends up happening, and how other companies will respond to this threat to their own bottom line and their ability to compete with one-stop health related stores.  One can be assured that they will not remain idle, even if what ends up happening is not likely to be greeted with a great deal of enthusiasm.

[1] See, for example:


About nathanalbright

I'm a person with diverse interests who loves to read. If you want to know something about me, just ask.
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One Response to Where You Stand Sometimes Depends On Where You Sit

  1. Pingback: A Hidden Cost Of Regulation | Edge Induced Cohesion

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