After several months of turbulent negotiations, New York state regulators have approved the acquisition of the health insurer Aetna by the retail pharmacy chain CVS Health.
New York was one of only two states that had not yet approved the merger between CVS and Aetna as of Monday, when New Jersey became the last. There were 28 states in total that the companies submitted applications to earlier this year.
The New York approval was contingent with a promise from the companies to absorb the cost of the merger without passing it on to consumers and to pay the state $40 million for health care-related activities.
The move came after Maria Vullo, the superintendent of the state Department of Financial Services, suggested recently that her agency could choose to block the deal over concerns that CVS would pass on the cost of the merger to policyholders and customers.
Those concerns appear to be assuaged under the deal announced early Monday. The agreement came with more than a dozen strings attached to facilitate the merger, which the U.S. Department of Justice initially approved in October. The DOJ gave its approval on the condition that Aetna divest its Medicare Part D prescription drug plan businesses for individuals.
Vullo said that, after a public hearing on the acquisition held by the agency in October, CVS and Aetna came to the table to address the concerns of several groups about the effects of such a merger.
“DFS listened to the concerns of the public and has obtained significant commitments from CVS and Aetna to address those concerns, ensuring that the companies hold to their promises of reduced costs and improved health care for New Yorkers, not pass on the costs of this acquisition to New Yorkers, enhance data privacy, and not act in an anti-competitive manner going forward,” Vullo said in a statement.
CVS hired attorneys Harold Iselin and Tricia Asaro from Greenberg Traurig to negotiate the terms of the approval. A spokeswoman for CVS did not immediately respond to a request for comment.
The conditions of the merger are extensive. Many of them are focused on protecting consumers from the cost of the merger, which CVS borrowed $40 billion earlier this year to fund.
A fraction of that—$40 million—will be paid to New York state over three years to support health insurance education and enrollment activities. That money will also be used to support the state’s health care transformation activities, including the New York State Health Care Transformation Fund, a reserve created by lawmakers earlier this year to account for cuts in federal funding for health care activities.
The costs of the merger, according to the state, also are not allowed to be passed on to any domestic or foreign Aetna New York insurer; nor can they be used to seek higher insurance rates from DFS. Premiums and cost-sharing owed by policyholders also cannot increase as a result of the merger.
“CVS Health has represented to the Department that it—and only it—will bear the responsibility for the debt used to finance the transaction 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,” the approval decision from DFS said.
Many of the current services and products offered to Aetna policyholders also have to be maintained for at least three years after the merger. Provider networks for insured products must have access to nonchain New York pharmacies for three years, and any current products throughout the Aetna New York service area also have to be maintained during that time.
Aetna will be required to make at least one new product available to the small and large group markets in New York within two years of the approval through an existing insurer. CVS also promised to roll out any health care measures equitably in New York, including in communities currently underserved.
CVS also will not be allowed to offer any preferential pricing to any Aetna-affiliated health insurer licensed in New York, according to the approval decision. Allowing otherwise may have created an unfair advantage for Aetna over other insurers, the decision said.
“CVS Caremark, as a [Pharmacy Benefit Manager], would have the power to offer Aetna Inc. companies larger rebates or reduced fees than offered to other insurers,” the decision said. “This would give Aetna Inc. an artificial competitive advantage that would draw policyholders away from other insurers and create an even larger market share for the enterprise.”
That will be avoided by including a provision in the agreement prohibiting that kind of preferential pricing, DFS said.
The approval also comes with oversight by the state of the acquisition. CVS will be required to produce annual reports for the next three years on its progress during the merger and its agreement with the state. Dividends also cannot be paid by Aetna without approval from DFS over the next three years.
The company will also have to ramp up its efforts toward cybersecurity, a main priority for DFS in recent years. CVS will have to hire a third party to perform an audit on whether Aetna employees have accessed confidential information in violation of firewall policies. That’s after witnesses at the agency’s public hearing on the merger expressed concerns about data being shared between CVS and Aetna.
The state will have significant oversight into the merger and the operations of CVS and Aetna over the next several years, but the decision also mentioned legislation that would give DFS greater power to regulate pharmacy benefit managers. The bill would require PBMs, like CVS Caremark, to be licensed and supervised by the agency. Vullo mentioned the legislation at the agency’s hearing on the merger in October.
“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,” Vullo said. “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.”
The bill was initially included in Gov. Andrew Cuomo’s budget proposal last year, but didn’t make the cut before lawmakers approved the spending plan in the spring.