October 18, 2018

Opening Statement of DFS Superintendent Maria T. Vullo for the DFS Hearing Regarding the Application by CVS Health Corporation and CVS Pharmacy, Inc. to acquire Aetna Health Insurance Company of New York

Opening Statement: CVS-Aetna Public Hearing

Good morning. I am Maria Vullo, the New York State Superintendent of Financial Services. I am joined today by Laura Evangelista, Executive Deputy Superintendent for Insurance, and Troy Oechsner, Deputy Superintendent for Health Insurance.

Pursuant to New York Insurance Law Section 1506, we are holding this public hearing to consider the application by CVS Health Corporation and CVS Pharmacy, Inc. to acquire Aetna Health Insurance Company of New York, a subsidiary of Aetna Inc. This transaction has received a significant amount of attention – for good reason. As proposed by the parties, the transaction has potential benefits. But it also presents potential risks, to markets, consumers and the people of the State of New York, who in my role as Superintendent, I am duty-bound to protect where I can.

It is important to note that NYDFS has specific approval authority with regard to this transaction as to the proposed acquisition by CVS of Aetna Health Insurance Company of New York, one of Aetna Inc’s subsidiaries.  NYDFS also acts in an advisory capacity to the Commissioner of Health with regard to approval of the acquisition of control of two New York Managed Care Organizations, Aetna Health Inc. (HMO) and Aetna Better Health Inc. (Managed Long Term Care Plan).  In addition, Aetna has three Connecticut domestic insurers that hold DFS licenses to transact insurance business in the State of New York, including Aetna Life Insurance Company, and this hearing is also to consider the potential impact of the proposed transaction on those New York licensees and – most importantly – the impact on Aetna’s New York policyholders.

Just yesterday, the Connecticut Insurance Department, which held its public hearing on October 4, approved the change of control application for Aetna Life.  Because the Connecticut company sells a very substantial number of insurance policies in New York, prior to the public hearing in Connecticut, I sent a letter to the Connecticut Insurance Department outlining some of DFS’s significant concerns with regard to this proposed transaction.  I did so because Connecticut domiciled insurance companies write a significant number of health insurance policies to New Yorkers, and Connecticut is the state where CVS’s change of control applications with regard to those Aetna companies were filed and subject to review.

The U.S. Department of Justice approved the CVS/Aetna transaction last week, subject to a consent decree requiring the divestiture, by Aetna, of its Medicare Part D prescription drugs coverage.  While that decision addressed  horizontal aspects of this transaction from the insurance perspective – specifically the proposed combination of CVS and Aetna’s Part D businesses – unfortunately the Justice Department has taken a very myopic view and failed to address the substantial impacts that this vertical integration would have on consumers across the country.

There is no question that this transaction, were it to proceed, would have a significant impact on New York.  As New York’s insurance commissioner, my jurisdiction primarily lies in the health insurance aspects of this transaction – and the impacts there are significant.  In 2017, Aetna Life’s direct insurance business written in New York was approximately $3 billion in premiums, which amount exceeds the direct premium writings of any other state or territory.  These premium writings in New York constituted 10.7% of the company’s total direct accident and health insurance premium writings, and represented approximately 33% of the overall accident and health insurance market share in New York.  This makes New York a very significant market for Aetna.

Although the Connecticut Insurance Department has now addressed CVS’s applications for change of control regarding the Connecticut domiciled Aetna companies, those Aetna companies that sell insurance in New York hold DFS licenses.  Under New York’s Insurance Law, the New York licenses of the Aetna companies (and the CVS insurers in the Part D market) licensed in New York but domiciled in Connecticut, and all such companies licensed in New York but domiciled in another State, are subject to annual renewal by DFS.  Specifically, section 1106(b)(2) of the New York Insurance Law states, and I quote, “the superintendent shall issue a renewal license to any foreign or alien insurer if satisfied, by such proof as (s)he may require, that such an insurer is not delinquent with respect to any requirement imposed by this chapter and that its continuance in business in this state will not be hazardous or prejudicial to the best interests of the people of this state.”  Accordingly, consideration of the renewal of the New York licenses for the foreign insurers impacted by this transaction will be addressed as part of our review of this proposed transaction, applying this statutory standard.

In addition, CVS, the proposed acquirer, operates as a retail pharmacy and, through Caremark, as a pharmacy benefit manager, or PBM.  These facts enhance the proposed transaction’s substantial impact on New York’s health care market – a matter that, troublingly, the Department of Justice did not consider.  This transaction presents potential benefits – as the parties have argued.  But it also presents potential risks – including the risk of further concentration and market dominance in the retail pharmacy market – to the potential detriment of small businesses, including independent pharmacies, across New York State.

CVS Pharmacy is not a DFS regulated entity – but it is one of the applicants in the proposed transaction we are considering today.  Nor is Caremark a direct DFS regulated entity.  However, as a PBM, Caremark contracts with numerous health insurance companies that insure millions of New Yorkers, not just Aetna, and so DFS is carefully looking at this transaction through the lens of all of the health insurers in New York.  DFS has previously expressed substantial concerns about the role of PBMs in the high cost of pharmaceuticals, as well as the non-transparent nature of PBMs, which this proposed transaction now brings very much to the forefront of consideration.  Two years ago, DFS proposed legislation for the licensing and direct supervision of all PBMs in New York State by DFS.  Unfortunately, the State Legislature did not pass that law.  Several states have passed PBM licensing legislation -- including Kentucky which recently took action against CVS Caremark.  DFS will continue to advocate for legislation for the licensing of PBMs by DFS.  In the meantime, DFS and will continue to use its supervisory authority over health insurers to obtain much needed information from PBMs, despite their opposition to transparency and regulation.  This background also informs the Department’s review of this transaction today.

Turning specifically to the application for change of control that is before NYDFS, Section 1506(b) of the New York Insurance Law provides that I, as the Superintendent, shall disapprove an acquisition if I determine that such action is reasonably necessary to protect the interests of the People of this State.  Under New York law, the factors I am to consider in making this determination include the financial condition of the acquiring person and the insurer, the source of the funds or assets for the acquisition, whether the acquisition is likely to be hazardous or prejudicial to the insurers, policyholders or shareholders, and whether the effect of the acquisition may be substantially to lessen competition in any line of commerce in insurance or tend to create a monopoly therein.  In short, the statute provides very broad authority, and my responsibility is to consider the impact on the people of New York State, and to ensure that, were this transaction to proceed, adequate oversight will be obtained so that promises being made by the companies today are kept – in terms of the reduction of costs to consumers and the betterment of health care services to New Yorkers.

The Department has spent a substantial amount of time reviewing this transaction, and has had numerous meetings with the applicants during which we have asked many questions and requested further information.  The purpose of this public hearing is to provide the public with the opportunity to comment on this proposed acquisition so that the Department has public input on the potential implications of the transaction for New York State, whether positive or negative, as well as the impact on the availability, affordability, and quality of health insurance in New York.  In our notice of this hearing, we invited written comments and oral testimony.  To date, we have received a good number of written comments and ten witnesses have asked to testify (in addition to the parties).

Everyone who has requested to be heard will be heard today.  They will present their testimony.  I may ask questions.  Based on those present here today, it appears we will have the opportunity to hear from the parties themselves, from consumers, from providers, from provider groups, and from members of the legislature.  So, we have a full audience of people wishing to be heard.  I assure you that we will consider all comments, written and oral.
As described in the hearing notice, CVS and Aetna, who are the parties proposing this transaction, each will have 10 minutes to describe the transaction, exclusive of questions, followed by any other individuals or groups, each of whom will have 5 minutes for their comments.  If needed, after members of the public testify, I may ask CVS and/or Aetna to answer additional questions.  We will not close the hearing record today.  We will follow up with the companies as needed to request additional information.  And, as stated in the hearing notice, the public will have five business days after today to submit any additional written comments – as information gathered at this hearing might cause members of the public to provide additional information.

Before we go to the oral testimony today, I wanted to set forth a few issues that the Department has been considering in evaluating this transaction:

  • First: The Transaction’s Impact on Premiums.  CVS claims that this transaction would result in operational synergies and that the combined company would achieve substantial cost savings.  CVS also claims efficiency gains from its “minute-clinics” in CVS pharmacies, where consumers can stop in without an appointment to see a nurse or physician’s assistant.  As of today, it remains unclear whether, how or when these cost savings would result in lower premiums or other actual savings to New York consumers.  It is imperative that any claims of cost savings be specified by the companies from the perspective of the New York consumer, including the numerous Aetna policyholders, and that guardrails are placed to ensure that the promises of today – in order to obtain governmental approval – are actually realized. 
  • Second: The Transaction’s Impact on Pharmaceutical Costs. Pharmaceutical costs are the single largest driver of premium increases today.  As I mentioned, CVS owns a very large Pharmacy Benefit Manager (PBM),CVS Caremark.  We have great concerns that PBMs are just another cog in the wheel for profit-making – to consumers’ detriment.  Today, the top three PBMs control 70% of the business in this highly opaque industry.  CVS Caremark is one of the three PBMs with this dominant market power, and this merger, if approved, would further cement its position by removing Aetna as a potential competing client as well as a possible competitor in the PBM market.  The consolidation of existing PBMs with insurers would make it increasingly difficult for new, independent companies to enter the PBM market.

    It also is worth stressing that PBMs lack full transparency and are not directly regulated in New York at the present time.  As I said, DFS proposed a bill two years ago to gain full transparency, through the licensing of PBMs, which we will continue to pursue before the State Legislature.   Regardless, were this transaction to proceed, DFS would have the right to full transparency of CVS Caremark through our licensed insurers in the Aetna group, and DFS would thereby have examination authority over the CVS entities through New York’s existing holding company statutes.

    Further, this transaction raises significant market competition concerns with respect to pharmaceuticals, because CVS Caremark as a PBM would have the power – and the financial incentive – to offer Aetna larger rebates or other significant discounts to draw policyholders away from other insurers, resulting in an even larger market share.  As a result, small and regionally-based carriers, without an affiliated PBM, may be disadvantaged, thereby harming New York’s market and New York consumers.  We are told that this will not happen; DFS must have the ability to ensure that this in fact will be the case were this transaction to proceed.

  • Relatedly, We Are Concerned from a Competitive Standpoint That Aetna May Create Incentives to use CVS Services, Leading to Drug Price Increases.  Through this merger, we are concerned that Aetna may create cost-sharing structures, network designs, or other incentives for its insureds to utilize CVS services over those of CVS’s competitors, creating greater concentration in the retail pharmacy business, and harming independent pharmacies.  This would not only increase CVS’s market share in the retail pharmacy industry, but the reduction in competition could result in the loss of small businesses and higher drug prices passed on to consumers, including New York policyholders of other insurance companies regulated by DFS.
  • Third: The Department has Data Privacy Concerns.  CVS Caremark currently has access to drug claims data, patients’ electronic medical records, and other member information from insurers that utilize its PBM services and that presently compete with Aetna.  We must ensure that this transaction will not compromise consumers’ data and that consumer data is not shared within the post-acquisition entities for the purpose of increasing CVS’s and Aetna’s market share and profits.  CVS must commit to strong safeguards to protect and prevent the sharing of consumers’ data, both within the organization and outside of it.  In addition, the privacy of the data must be amply protected from third parties and hackers.  New York has been a leader in cybersecurity and we must ensure that CVS, the entire enterprise, complies under New York’s  cybersecurity regulation.  This transaction would create an even larger corporate organization in the health care space.  This means that a tremendous amount of sensitive consumer data would be under the control of this very large corporate enterprise.  A data breach would have devastating consequences for consumers.  We do not want another Equifax or Anthem breach, so commitments in this area are crucial.  Regulatory oversight of any commitment to data privacy and protection is essential to fully protect both consumers and competitors. 
  • Fourth: Financial Questions. The proposed transaction involves a considerable amount of debt – over $40 billion – that CVS would be assuming to finance this transaction.  The Department has already expressed its concern that this increased debt may create pressure on Aetna to raise premiums or take other actions that negatively impact consumers.  We understand that CVS has committed that the ultimate parent company CVS Health – and only that company – will bear the responsibility for the transaction debt, and that it will use CVS Health’s revenues from other business operations as well as what otherwise would be dividends and share repurchases to pay down the debt.  In our view, there must be a clear, enforceable commitment that New Yorkers will not pay a penny to finance this acquisition, in insurance premiums or otherwise.  Also, the considerable pressure to repay debt may cause the resulting company to repay its substantial debt obligation before investing in other pro-consumer measures, including infrastructure improvements that would be beneficial to consumers and/or provide relief to premiums for consumers.  We must make sure the promises being made here will be kept.
  • Fifth: Community Support.  As we all know, CVS has a substantial retail operation that is present in many communities across New York State.  One of the stated objectives of this proposed transaction is that these retail stores will be utilized to further the company’s expansion into the health care market.  CVS claims that this transaction will benefit consumers because of the geographic availability of CVS stores in communities that can provide better access to certain health care services.  At DFS, we are very focused on ensuring that financial services companies are serving and investing in all of New York’s communities across the State.  I am very interested in hearing how CVS intends to implement its business plan across New York State, in a manner that serves New York’s communities fairly and equitably, including those communities most in need of access to affordable health care services.
  • Finally: Aetna’s Reach.  As mentioned, Aetna insures millions of New Yorkers.  As part of this proposal, Aetna must commit to maintaining Aetna’s  products, services networks (without DFS’s approval) and that this transaction’s proposed savings are actually felt by New Yorkers, including in premium reductions.  I have already expressed my concerns that Aetna has not participated in the individual market on the New York Exchange.  If the transaction proponents are really serious about their claim to protect New Yorkers in communities across the State, then they will support the Affordable Care Act markets in New York, assist New Yorkers who are uninsured and underinsured, and provide health care service to everyone, not just the rich.

These are just some of the topics that I wanted to raise at the start of this hearing.  These topics have been raised previously in my letter to the Connecticut Insurance Department and in meetings with CVS and Aetna.  By no means does this summary indicate, one way or the other, how the Department will decide the applications that are before us.  I have made no decision and will not do so until my dedicated staff and I hear all of the testimony, both oral and written.

This is a very significant transaction and there are some very strong views on all sides.  As I see it, the proponents of the transaction argue that the transaction will benefit the public in reduced costs and better health care access – goals that we strongly support.  On the other side, however, there are significant risks in this transaction.  Large corporate for-profit conglomerates do not have a good history of serving the public above their shareholders.  And, here, we have independent pharmacists, medical providers, the uninsured, consumers suffering from too high pharmaceutical costs, who may suffer from this transaction.  While we want to believe the benefits being advocated, it is important that companies are held to account for the advocacy that we are hearing in favor of this transaction – to ensure that it is not just puffery to get the transaction approved.  Regulators, including DFS, must have oversight going forward.

We will continue to accept written submissions within five business days after this hearing.  Anyone who wishes to submit a written statement should do so at the email address or mailing address (email is preferred) on the Department’s website regarding this hearing.  The record will be closed on October 25, 2018, after which the matter will be fully submitted for the Department’s determination.