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PBM Sale Highlights Dilemma for Health Plans

Les Masterson, for HealthLeaders Media, April 14, 2009

In a move that will rocket Express Scripts to the upper reaches of the pharmacy benefit management stratosphere, the company announced it will buy WellPoint's PBM for $4.68 billion.

The deal, which is expected to close in the second quarter of 2009, includes a combination of cash and up to $1.4 billion in stock. The deal also features a 10-year contract for Express Scripts to provide pharmacy benefit management services to WellPoint, which is the nation's largest health insurer by enrollment.

WellPoint's PBM, which is called NextRx, is the nation's fourth largest PBM by number of annual prescriptions managed, trailing Medco Health Solutions, CVS Caremark, and Express Scripts. It managed 268 million prescriptions in 2008 compared to Express Scripts' 506 million prescriptions.

Combining the third and fourth largest PBMs will result in Express Scripts as the number two PBM, slightly behind Medco. The purchase comes two years after retail pharmacy chain CVS purchased Caremark.

George Paz, chairman and CEO of Express Scripts, said in a prepared statement that the new larger PBM will promote trend management tools, such as generics, home delivery, and specialty pharmacy. Angela F. Braly, president and CEO of WellPoint, said in a prepared statement that the sale will allow members to enjoy integrated health benefits, deliver significant value to shareholders, and create health cost savings.

Healthcare experts are not surprised by WellPoint's decision to sell its PBM. Many analysts predicted that large insurers like WellPoint, Aetna, and UnitedHealth, could sell their PBM businesses as a way to refocus their offerings in this difficult economy. Joe Paduda, principal of Health Strategy Associates in Madison, CT, says the health insurance/PBM world is "consolidating horizontally," meaning within each segment the large companies are getting bigger. He says there are two takeaways from NextRx's sale.

"First, health plans are looking to focus on their core business," says Paduda. "PBM is growing increasingly specialized and complex; health plans are focusing on readying themselves for whatever form health reform takes. The economy's impact is also being felt by health plans. Thus they are looking to sell non-core assets to raise cash. Second, the PBM market is well into maturity. Mature markets consolidate and that is precisely what we are seeing."

Health insurers face a dilemma. Do they outsource PBM and disease management services and return to core business strategies, such as plan administration, claims payment, and member outreach? Or do they keep these services in-house and have more control over member information and a steady revenue stream from PBM business?

On the one hand, standalone PBMs can negotiate lower drug prices because of their size and have been more successful in lowering costs through mail order business.

However, insurers with in-house PBMs say they can track members through immediate pharmacy claims data. This is especially helpful in the area of disease management. Having up-to-date claims information allows an insurer to reach a member for health coaching if its PBM sees prescriptions that would lead them to believe the person needed immediate outreach, such as prescriptions for chronic disease-related drugs.

George Van Antwerp, vice president, solutions strategy, at Silverlink Communications, Inc., in Burlington, MA, says health plans can benefit from having their own PBMs if they use them properly.

"I think that it's beneficial to plans to own their own PBM if they can integrate data and create a better member experience; make the tradeoff between increased pharmacy spend and lower medical loss ratio; and manage to get most of the economies of scale in terms of operations and negotiation. That has proven hard to do within health plans, and therefore, there will be short-term interest in capitalizing on the valuation of the PBM business," says Van Antwerp.

With three large PBMs left after the pending purchase, Van Antwerp says the trio will "race to the bottom in terms of negotiating scale leverage." Van Antwerp predicts the remaining PBMs will ultimately try to differentiate themselves by offering healthcare management through member engagement, greater transparency, and a renewed focus on health outcomes.

Paduda says the PBM market has become increasingly tough. He suggests the market will ultimately feature a couple of giants and a number of smaller specialty PBMs—many of which will look to get acquired. "PBMs can only grow by taking business from each other or via acquisition so PBMs can expect continued price pressure," he says.


Les Masterson is an editor for HealthLeaders Media.

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