Cigna CEO David Cordani doesn't view his company as merely a health insurer. The Bloomfield, Conn.-based company, he said, is in the business of delivering "health services." A prime example: collaborating with physicians around some 500 accountable care organizations and patient-centered medical homes. Cigna's proposed $54 billion acquisition of pharmacy benefit manager Express Scripts falls right in line with that philosophy, he said, arguing that the combined entity will be able to deliver on the promise of better care coordination and lower costs. Federal regulators are reviewing the deal. Cordani spoke with the Modern Healthcare editorial team. The following is an edited transcript.
Modern Healthcare: You point to the Express Scripts acquisition as a way to drive down prices, but we haven't seen that play out in other large mergers. What makes you think that this deal will have an impact?
David Cordani: First, we have to look at it structurally. Today, 85% of all of our clients or employer relationships in the U.S. are transparent, self-funded relationships. We're unique in that. The other 15% is broken up into shared returns and traditional guaranteed costs.
Typically, an insurer has a large guaranteed-cost block of business, where if costs go down, the insurer benefits. Our book of business is the exact opposite. So if we just round it and put the shared returns in with the self-funded, 90% of all our clients have full transparency and pass-through. We're incentivized to deliver the value for them. We're aligned with them, and we actually operate that way.
Also, in the post-Affordable Care Act environment, with the medical-loss ratio threshold put in place, only 10% of our portfolio is actually guaranteed cost. If the medical costs are below a certain level, they have to structurally be credited back.
Lastly, when we announced the transaction, we made it clear to our investors that the preponderance of all the medical and pharmacy costs savings float to our clients and customers. We didn't promise it back to our shareholders because we're guided to be able to provide it back to our customers and clients.
MH: Why even go down this path when it's expected that change is coming to the pharmacy benefit management world?
Cordani: We think change is present in all aspects of the business, whether it's PBMs, the medical side, the behavioral side, rebates or value-based contracts. We embrace change.
We're guided by transparency and alignment, so we don't seek to preserve the past. When we start with those basic tenets—change and transparency—alignment needs to transpire.
Today, with Express Scripts, about half of their clients have full pass- through rebate models. The other half don't. The client chooses that. So there are different ways a client can finance their purchase. There's choice.
We own and operate our own captive PBM as well. We only sell it on integrative basis. We give choice back to clients. In most cases, the employer chooses to have a large portion of the rebates fall back to them, and they use that large portion of the rebates to lower the overall premium and/or deductibles and/or co-pay levels. That's how the mechanism works today.
There's plenty that are full pass-through rebates. There are other ways that employers pay for their services. Express Scripts has the same part of the equation. We believe that this too will change. We're excited to be a force for change around that.
We're excited to drive even further alignment, both with the client, but, importantly, back with the pharmaceutical manufacturer because we've been very public that we see this as an opportunity to dramatically accelerate the number of and breadth of value-based contracts with the pharmaceutical manufacturers that offer rewards based on clinical outcomes, not just consumption of the medication.
MH: After your earnings calls, there's been some question about debt restructuring and whether that means Cigna is positioning itself for more M&A activity. Is that a focus?
Cordani: The Express Scripts deal is a bit unique in that it is such a large transaction. Oftentimes, when one of this size happens, a company has to largely focus on nothing but the financing of it for a pretty prolonged period of time after closure.
The lowered capital intensity of our business allows us to pay down the debt levels back to within our strategic leverage ratio within 18 to 24 months. That's really quick.
During that time frame, we still leave capital available to fund our innovation portfolio because change needs to continue to be driven.
We weren't signaling that we were going to transact again. We were actually signaling what we think is a really important strategic advantage: Significant financial and strategic flexibility in what is indisputably a rapidly changing environment, as opposed to being involved in a transaction where you're, I'll call it, a little more cash-strapped, strategically strapped and structurally strapped in a changing environment.
MH: You've said that Cigna is moving beyond the traditional realm of an insurer into a more holistic company. If you're already starting down this path, why would you need to consolidate further?
Cordani: The good news is we didn't have to. We had choices. And we think that in a well-run company, you position yourself to have options.
We came forth with a pretty bold statement. We target to deliver a medical cost trend at a Consumer Price Index-level by 2021. We don't think the status quo is acceptable.
Pharmaceutical costs have rapidly grown to between 20% and 25% of the overall cost equation. Not that long ago it was 10%. Two-thirds of that is specialty pharma. Half of the specialty pharma is not managed in the PBM relationship. It's embedded in the medical part of the equation.
Having the relationships that we have through 500 (accountable care) collaboratives—and the specialty pharmacy that Express Scripts has—will lead to better integration and coordination for the patient, whether it's at home, at the physician's office, in an infusion suite, or in a facility.
