Cigna Corp. and Express Scripts' $67 billion merger takes a page from an old industry playbook that bigger is better, but experts are skeptical that it will fundamentally change an obscure sector of healthcare.
Insurer Cigna said early March 8 that it is buying the nation's No. 1 pharmacy benefit manager Express Scripts for $52 billion in cash and will assume $15 billion in Express Scripts' debt. The companies' top executives said the deal would make healthcare simpler, more personalized, and better coordinated, while also driving higher quality and affordability for consumers by offering a broad spectrum of products under one roof.
The proposed merger would allow Cigna to lower its costs by insourcing PBM services, and absorb the profits of the biggest stand-alone PBM at a time when its competitors are also pairing up with providers of pharmacy services. Aetna, for instance, could soon be a unit within CVS Health—which gets most of its revenue from its PBM services—if the deal is approved by regulators. And UnitedHealth Group's in-house PBM Optum Rx is a major driver of the No. 1 insurer's top line.
The merger allows Express Scripts to tap into a new pool of customers. The deal is also more likely to win a nod from regulators than if Cigna were to try to merge with another plan. Cigna's previous attempt to combine with rival Anthem was blocked by the federal government because it threatened to harm competition.
Together, Cigna and Express Scripts would boast $141.7 billion in revenue. The sheer bulk of the combined company in theory should allow it to negotiate better prices from drugmakers to lower costs. But several experts doubt the merger will drive savings for its customers, including health plans, employers and patients.
"It's just not going to happen," said Tom Borzilleri, former CEO of PBM ValoreRx who is now the CEO of Intelisys Health, a technology company that provides drug price transparency. "This is more a move to drive further profitability, but there isn't any anticipated trickle-down effect for customers."
A similar story played out when UnitedHealth's Optum unit bought PBM Catamaran, promising efficiencies and savings for customers, but those benefits never materialized, he said. Copays and deductibles have continued to climb.
The PBM industry is also unlikely to become more transparent, some said. PBMs are the middlemen that build formularies and negotiate drug rebates from drug manufacturers. While they pass a part of those rebates on to health plans and contracted employers, they also pocket a portion. Confidential contracts make it difficult to know just how much they keep.
"With all of these insurer-PBM mergers, none of them have shown to benefit the consumer," said Pramod John, CEO and founder of Vivio Health, a specialty pharmacy management firm. He added that Optum has some of the highest pricing and is resistant to sharing data. "Now there is less transparency because the lines between payer and provider are being blurred."
Express Scripts clients, particularly health plans who compete with Cigna, could be wary of doing business with a PBM owned by a competitor.
"Health plan clients may become a little bit uncomfortable with this," said Craig Oberg, a managing consultant at PBM consulting firm the Burchfield Group. "Do you want to be in a situation where your PBM partner is enhancing the profits of a competitor?"
Express Scripts will also have to convince clients that proprietary information won't find its way to Cigna. Express Scripts CEO Tim Wentworth said the company's existing relationships with health plans would not change and promised to maintain guardrails to protect health plans' data.
Several executives and board members of health plans have indicated that they are researching early termination provisions based on "a change in control," said Michael Rea, CEO of Rx Savings Solutions.
"The most common question we're hearing from health plans is, 'is our current partner our future competitor?'" he said.
Investors are skeptical of the deal as well. Cigna's stock price dropped 11.4% the day of the announcement. Many Cigna investors were expecting the insurer to use its capital to buy another health plan with a strong presence in Medicare Advantage or Medicaid. But Express Scripts' shares rose 8.6% in the wake of the news.
"Changing the ownership of a PBM doesn't change the fundamental business practices, so I'm not bullish about that doing anything particularly different," said Jason Borschow, CEO of the PBM Abarca Health.
Still, others noted some potential that the Cigna-Express Scripts tie-up could produce more coordinated medical and pharmacy benefits. Coverage for medical services and pharmaceuticals are often handled separately, with the insurer managing the medical side while pharmacy services are carved out for a PBM to administer.
Having a single company control both medical and pharmacy benefits for patients means "you're thinking more holistically about how spending on medicine can affect spending on healthcare services," said Craig Garthwaite, a health economist at Northwestern University. When interests are aligned, a PBM may choose to provide greater access to drugs that can lower medical spending in the long run. Without a competitive insurance market, those savings won't translate to lower premiums, however, Garthwaite said.
Coordinating benefits would also require changing physician behavior and updating old technology, said Eric Kinariwala, CEO of the online pharmacy Capsule. Even then, the costs savings aren't likely to trickle down to the consumer, he said.
"I don't know how the math on that works," Kinariwala said. "You just paid $67 billion for a company that has to earn money; if you reduce their profits you can't make a return unless you generate value elsewhere."
Simply put, "shareholders always eat first," said Bill Resnick, CEO of PBM EmpiRx Health.
Gurpreet Singh, health services sector leader at consultancy PricewaterhouseCoopers, said the combined company could use medical and pharmacy data to improve medication adherence.
"This removes some of the inefficiency between drug pricing and those negotiated deals," Singh said. "It could illuminate the black box of PBMs and allow for better transparency and better cost efficiency."
The Cigna-Express Scripts announcement is the latest in a string of mergers between nontraditional healthcare partners looking to disrupt the industry. CVS is buying health insurer Aetna for $69 billion; UnitedHealth Group's Optum recently moved to buy dialysis provider DaVita's medical group; and insurer Humana is buying part of the home healthcare business of Kindred Healthcare.
With consolidation rampant across the healthcare industry, the deal between Cigna and Express Scripts didn't shock observers. Cigna needed to build scale to keep up with competitors after its failed merger with Anthem, and Express Scripts' existence as an independent PBM was in jeopardy after losing its biggest client, Anthem.
Both companies are embroiled in separate litigation involving Anthem. Cigna sued Anthem in February 2017 for a $1.85 billion breakup fee plus $13 billion in damages resulting from the failed merger attempt, and Anthem countersued. The firms are slated to go to trial in 2019. Meanwhile, Express Scripts is dealing with a lawsuit brought by Anthem in early 2016 alleging the PBM didn't pass along billions in savings from negotiated drug prices. Anthem has since said it wouldn't renew its PBM contract with Express Scripts.
Rising drug costs and the desire to control them are the potential drivers of the combination. Retail prescription drug expenses accounted for about 12% of total U.S. healthcare spending in 2015, up from about 7% through the 1990s. While growth in retail prescription drug spending slowed in 2016, increasing 1.3% to $328.6 billion, that followed two years of strong growth in 2014 and 2015, 12.4% and 8.9%, respectively, according to the CMS.
Health plan sponsors, which pick up more than 80% of the cost of medication, are demanding transparency and will be watching Cigna and Express Scripts closely to see if they can deliver savings, said Raymond Brown, a partner in consultant firm Mercer's managed pharmacy group.
"They're going to get the question of: We know rebates are driving savings. How do we make sure the employer, or whoever the plan sponsor is, is benefiting from them?" Brown said. UnitedHealth earlier last week said it would pass drug rebates on to some employer-sponsored health plan members when they fill prescriptions starting next year.
While the allure of these combinations is debated, there may be opportunity for the remaining smaller independent PBMs to merge and capture market share, experts said.
PBMs like us are going to pick up the scraps, from companies that are fed up with Express Scripts," EmpiRx's Resnick said.