FINANCE

Analysis: CVS-Aetna Could Lead to Lower Heathcare Costs

The merging of CVS Health and insurance giant Aetna is the first, we believe, of many similar deals that ultimately point toward transformative changes in healthcare and optimally, lower costs.

Vertical integration for CVS/Aetna is a strategic move to get ahead with healthcare synchronization, the term used to describe the leveraging of all patient information — medical and pharmacy claims, wearable tech data, demographics, socioeconomic status, education, etc. — to determine the best care path for patients.

CVS/Aetna is in a good position to step into synchronization, given Aetna’s network and experience managing members and CVS’s nationwide brick and mortar presence with both pharmaceutical dispensing and minute clinics, its ability to carve drugs out of high-cost places of service like outpatient/physician office, and its home infusion business.

More Personalized Care
With better medical and pharmacy data, and more information on other variables impacting health status, CVS/Aetna may be able to provide more personalized care — that is, develop more personalized relationships with members — which can help with innovation in care delivery and may help reduce unnecessary care and its attendant costs.

To further reduce pharmacy costs – which typically range from 15 percent to up to 20% of a health plan’s cost structure – CVS/Aetna will likely be looking to drive down costs by developing efficiencies and improving medication adherence, among other strategies.

We expect to see similar deals to this merger, as some insurers will react by looking for opportunities to counter any perceived market changes. Just as the market reacted to the news of possible mega-mergers a year ago, some health plans will react to this merger as a defensive move.

If nothing else, this merger provides further impetus for the big health insurers to look at pharmacy, if they’re not already doing so. Integrating medical and pharmacy can help optimize medication prescription and distribution and better manage processes that were historically rendered by Pharmacy Benefit Managers (PBMs).

Health plans may also be able to provide more member touchpoints and opportunities for patient care. Aligning these areas within one organization can also result in enhanced data and brand recognition for the insurer, improved access for the patient, and a more personalized experience for the consumer.

Efforts to coordinate care and make it more easily accessible and convenient are increasing across various parties in the care continuum. Whether incenting physicians or broader hospital systems, there are a greater number of agreements that emphasize improved overall outcomes and quality for patients when determining reimbursement amounts from insurers to providers.

Beyond contracting relationships, partnerships have been formed via Accountable Care Organizations (ACOs). The CVS/Aetna deal is another example of these organizations working to find ways to better integrate care. The expectation that, when optimized, this integration will lead to better health outcomes, healthier individuals, and therefore lower overall healthcare costs.

Duane Harrington and Maulik Bhagat are respectively senior managing director and managing director in the healthcare practice of AArete, a global consultancy specializing in data-informed performance improvement ([email protected] and [email protected]).

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Home Depot to improve stores; sets $120 billion sales goal

BY Marianne Wilson

The nation’s largest home improvement retailer on Wednesday authorized a $15 billion share repurchase program and said it would accelerate investments in key areas of its business, including its stores.

Home Depot plans to invest in such areas as its stores, associates, supply chain and delivery capabilities. CNBC put the investment at $4.5 billion over the next three years, and said the chain would also build a new website for professionals.

“The retail landscape is changing at unprecedented rates and we plan to invest for the future to address the evolving needs of our customers,” said Craig Menear, chairman, CEO and president. “We will accelerate our investments, while continuing to focus on delivering the value our shareholders expect from The Home Depot.”

The company also set fiscal 2020 financial targets that include growing its annual sales from $114.7 billion to $119.8 billion, and a compounded annual sales growth rate from the end of fiscal 2017 ranging from 4.5% to 6%. It set annual capital spending at approximately 2.5% of sales.

Home Depot also reaffirmed its forecast for the remainder of fiscal 2017, saying it expects sales to increase approximately 6.3% for the year, with an approximate same-store increase of 6.5%.

Since 2002 and through the third quarter of fiscal 2017, the Atlanta-based home improvement giant has returned approximately $73 billion of cash to shareholders through repurchases, repurchasing approximately 1.3 billion shares, Home Depot said.

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Analysis: American Eagle still has work to do; Aerie strong

While today’s results from American Eagle Outfitters are mixed, they point to a company that is holding its own in a challenging market. There are, however, some negative numbers, such as the erosion on the bottom line, that signal the company has much more work to do before it can claim to be back to full health.

American Eagle stores posted a comparable sales increase of 1%. This reverses the declines of the last two quarters and is a step up on preceding periods when growth was present but anemic. As positive as this is, it is not a cause for unbridled celebration. The uplift was delivered against the backdrop of a stronger period for apparel overall. This raises a question as to how much is down to underlying natural demand, and how much is attributable to the improvements American Eagle has made over the past year.

In fairness, we believe that a mix of both delivered the number. Categories like denim are performing well for American Eagle, with new washes and styles helping to drive sales. From our customer data, there is evidence to suggest that those shoppers who visit to buy jeans are now buying more in other categories too – this is particularly true for men.

An increase in cross-category shopping is comforting and partly alleviates our concern that American Eagle was becoming overly reliant on denim. As much as this is currently helping results, it makes the company’s sales growth dependent upon denim remaining in fashion – something that it is unable to control or guarantee. By using denim as a springboard to promote other parts of its offer, we believe American Eagle is on the right track.

Along with a skew in category performance, American Eagle is also showing a disparity in channel results. The growth in stores is poor while growth online is much stronger. Given the interplay between shops and the website, it is arguably the overall numbers that matter. However, the higher costs associated with online fulfillment contributed to a margin decline this quarter. This was further exacerbated by heavy promotional activity, which was necessary to keep pace with the rest of the market. As a consequence, net income fell by 15.9% over the prior year.

Away from American Eagle, Aerie continues to be a reliable source of growth. Its robust comparable sales uplift of 19% this quarter was market-beating and underlines that it is still taking the share of other players. Usually, after such a long run of very high sales increases, we would have concerns about a softening as lapping comparatives become tougher. We don’t yet feel this way about Aerie.

In our view, Aerie has excellent growth potential from two sources. First, the customer base continues to grow as more shoppers discover and migrate over to the brand. Aerie’s positioning and stance remain aligned with consumer attitudes, and this is helping to enlarge its share of shoppers.

Second, the category extensions into products like soft knit tops and leggings are helping to increase average transaction values and are giving Aerie access to a more significant share of its shoppers’ overall spending.

Overall, AEO is in a reasonable position. We believe performance over the holiday quarter will be solid and will mark a good end to a respectable year.

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