The insurer’s $52 billion purchase of the pharmacy benefits manager is the latest in a series of deals that promise upheaval as stakeholders grapple with rising costs.
Stock prices for Express Scripts Holding Company, the pharmacy benefits manager (PBM) based in St. Louis, rose more than 15% when markets opened Thursday, after the company signed a deal with health insurance giant Cigna Corp., based in Bloomfield, Connecticut.
Cigna plans to buy Express Scripts for about $52 billion and take on $15 billion in the PBM’s debt. The deal is designed to give Cigna a competitive advantage—or at least a fighting chance—amid a series of big moves in the PBM market by heavy-hitters looking to rein in rising costs as the healthcare industry’s landscape keeps shifting.
Express Scripts, the biggest prescription drug benefits administrator in the country, is valued not only for its PBM capabilities but also for the number of consumers it serves and the wide range of ways it serves them, Cigna CEO David Cordani told The Wall Street Journal in an interview Thursday.
“It expands our service portfolio beyond that of a PBM,” Cordani said.
“Having the capabilities to serve an individual whether they are healthy, healthy at risk, chronic or acute is important.”
This deal comes after a similar vertical merger in which drugstore chain CVS Health Corp. agreed to buy insurer Aetna Inc. for $69 billion late last year, part of a widespread trend.
Some have reservations
“We should be skeptical of the wisdom of vertical integration,” said Craig Garthwaite, associate professor of strategy and director of the Health Enterprise Management Program at Northwestern University’s Kellogg School of Management, in a tweet Thursday.
“We also know that imperfectly competitive supplier markets and agency problems can be reasons for such strategic actions.”
Garthwaite and Fiona Scott Morton, a professor of economics at the Yale School of Management, wrote an article on the topic last fall, arguing that recent consolidation among PBMs and a lack of transparency drive prices higher.
“The answer to high prices isn’t broad price regulation, but restoring the intended level of competition to a market characterized by a dangerous combination of PBM consolidation and opaque pricing,” Garthwaite and Morton wrote.
“When only a few PBMs exist, it is all too easy for them to stop functioning as brokers that increase market efficiency, and start looking for win-win arrangements in which consumers are the ultimate losers,” they added.
Similarly, FDA Commissioner Scott Gottlieb argued during a speech Wednesday that the current structure of rebates and contracts, in the context of an uptick in consolidation, “has produced some misaligned incentives” for PBMs.
Cigna outlines strategy, rationale
During a call with investors Thursday morning, however, Cordani pushed back against the idea that Cigna’s Express Scripts acquisition would create value for shareholders at the expense of consumers.
Most of the cost-cutting efficiency improvements the two companies expect to find are “administrative synergies,” he said.
“Our working assumption and bias is that the medical- and pharmacy-related additional value creation here largely flow back to our customers and clients and, thus, further improving affordability,” Cordani said during the call.
“So we like the balance of value creation for customers, clients, high-performing healthcare professionals, and then, as a result, for our shareholders.”
The St. Louis Post-Dispatch reported that the companies anticipate those administrative efficiencies will save $600 million.
Express Scripts, which will continue to be headquartered in the St. Louis market after the merger, employed nearly 4,700 people in the area—and 26,600 globally—as of February, the Post-Dispatch reported, citing the company’s most recent annual filing.
Ana Gupte, an analyst with Leerink Partners, said Cigna’s Express Scripts deal could come as a surprise, since the insurer has said in the past that it’s satisfied with its PBM ties to United Health’s Optum.
"It is possible that the threat of an Amazon entry into the healthcare and possibly the drug supply chain landscape, with the latest news of the Amazon/Berkshire Hathaway/JPMorgan employer coalition has spurred Cigna and Express Scripts to tie the knot," Gupte told the Post-Dispatch.
Amid market upheaval
The deal also comes as Express Scripts prepares for the loss of its biggest client, insurer Anthem Inc., which moved to establish its own PBM unit after accusing Express Scripts of overcharging, as Bloomberg’s Peter Vercoe reported. Anthem had sought to take over Cigna, but it was blocked last year to preserve competition.
Express Scripts then agreed to buy benefits manager eviCore health care last year for $3.6 billion, which was widely regarded as an effort to compensate for the lost business from Anthem, as the Journal reported.
“Cigna has been trying to do a deal since their combination with Anthem was blocked last year," Brad Haller, a director who focuses on healthcare in West Monroe’s M&A practice in Chicago, said in a statement. This acquisition of Express Scripts is merely the latest manifestation of market players trying to build scale against one another under cost pressures from the Affordable Care Act.
"Ironically, in this deregulated environment, we are getting closer to a single payer system through M&A vs. through legislative action from the government," Haller added.
In a statement, Express Scripts President and CEO Tim Wentworth said combining his organization with Cigna will not only benefit consumers but reimagine the healthcare industry.
“Adding our company's leadership in pharmacy and medical benefit management, technology-powered clinical solutions, and specialized patient care model to Cigna’s track record of delivering value through innovation, we are positioned to transform healthcare,” Wentworth said. “We will continue to have a distinct focus at Express Scripts and eviCore on partnering with health plans, and together, build tailored solutions for health plans and their members.
“Importantly, this agreement is a testament to the work of our team and their resolute focus on providing the best care to patients, and the most value to clients.”
The deal, which has been approved by the boards of both Cigna and Express Scripts, is expected to close by the end of the year, pending approval from shareholders and regulators.
Editor's note: A previous version of this story misstated the value of Cigna's Express Scripts purchase. It's about $52 billion, excluding $15 billion in debt.
Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.