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$67-billion Cigna bid, if permitted, would pull in the last large independent PBM
Oh, sure, the practice of “pharmacy benefit management” isn’t going away anytime soon, if ever: large purchasers of drugs will want to pool their demand, to the extent legally permissible, to extract price concessions from pharma manufacturers. That’s basic economics. But the concept that one company—an insurer or employer health plan—should hire another company—a PBM—to perform this activity in such a manner as to drive pharma commercialization practices, and to create “misaligned incentives” (as FDA Commissioner Scott Gottlieb recently attested) has put the PBM business in an increasingly untenable position.
The proposed Cigna acquisition, at $52 billion (plus $15 billion in assumed debt)—a 31% premium over ESI’s March 7 closing price—is to be completed, if federal antitrust reviews go smoothly, at the end of this year. Cigna estimates that $600 million in synergies can be obtained (mostly from “administrative efficiencies”); and that the earnings per share of the resulting entity will be double that of the individual companies’ by 2021. David Cordani, current Cigna CEO, will be president and CEO of the combined company; Tim Wentworth, Express Scripts CEO, will be president of the Express Scripts subsidiary (the way this is phrased implies that both companies will retain their corporate brands; the companies say that both the Cigna HQ in Bloomfield, CT, and the ESI HQ in St. Louis will be retained.)
For the pharma industry, the companies didn’t say much; a slide presentation at the time of the announcement indicates that the merger will improve the value proposition for pharma by moving the companies from “finance purchase of most drugs” to “support therapy innovation and value-based outcomes through real world insights.” Anyone up for bigger drug exclusion lists?
The companies’ joint statement aims to square the circle by offering greater service personalization, and greater consumer choice, by combining two giant leaders in each of their categories; ESI is also clear that it will continue to provide PBM services to other health plans. The Federal Trade Commission will have a lot to say about these matters. What is intriguing is to integrate information on the cost and outcomes of healthcare service with information on drug regimens, the better to manage preventive care and chronic care. ESI was moving in this direction already with the $3.7-billion acquisition of EviCore, a medical benefit management company, which just closed in December. Payers, and pharma marketers, have struggled to figure out how to control costs and revenues between drugs reimbursed as a medical benefit versus a pharmacy benefit; the Cigna-ESI consolidation will provide a better handle on this.
Stepping back, the Cigna-ESI deal represents something of a milestone in the history of the PBM business; ESI is the last of the leading PBMs to retain its independence from other healthcare entities. The OptumRx PBM is a unit of insurer and healthcare provider UnitedHealth; Caremark has been a unit of CVS Health since 2007, and CVS Health is currently working through the acquisition of insurer Aetna. (ESI, OptumRx and Caremark are estimated to manage the care of 80% of the US PBM market, although there are dozens of smaller PBMs.) Major insurers like Anthem are building their own PBMs.
From the insurer perspective, 2017 was the rocky year where major consolidations were attempted (Aetna-Humana and Athem-Cigna), only to be blocked by antitrust concerns. The otherworldly conflict between the Trump Administration, which is doing as much as it can to undercut the Affordable Care Act---which is a reorganization of health insurance as much as anything else—even after Congress voted down its abolition, has harmed insurers’ ability to plan and function.
Much of the business press brings up Amazon, and its purported entry into pharmacy and drug distribution, as the boogeyman that everyone is adjusting to; but Amazon might rightly look at all that is going on and decide to stay away from this scrum for the time being. The overarching worry by all the publicly traded organizations in healthcare service is how to maintain profitability in the face of stingier government support of healthcare, rising drug and medical costs, and disruptive technological drivers.