With Cigna–Express Scripts, last PBM domino falls

The last pharmacy benefit management giant waiting for a potential suitor is off the board now that Cigna and Express Scripts plan a $67 billion merger.

For Express Scripts, the last of the large independent PBMs, a merger with Cigna makes sense. Express Scripts was in a bind. After an ugly divorce, Express Scripts lost its biggest customer, Anthem, which is forming its own PBM with help from CVS Health. Anthem accounted for 19.5 million of Express Scripts’ 39.5 million pharmacy lives (Decision Resources Groups statistics). In December, CVS Health and Aetna announced plans to merge, leaving Express Scripts as the last standalone PBM and Cigna as the last large insurer without a separate PBM unit.

Without the merger, Express Scripts’ bargaining power on rebates and pricing would diminish. While there is a still a place for smaller PBMs, the giants had become an endangered species and a frequent target in the debate over drug pricing.

While Express Scripts does not have a built-in retail component like CVS Health, the deal poses advantages for the two partners. It had long been believed that Express Scripts would have trouble surviving independently, and merging with Cigna will provide quick stability.

Cigna’s large base of self-insured employers could see Express Scripts as the new choice for a PBM. Cigna already operates its own PBM, but Express Scripts could alter that business. Cigna had not been as strong a competitor for pharmacy lives. Express would immediately make Cigna a more formidable player in the standalone Part D market, where Express Scripts had nearly 2.8 million lives as of July 2017 and Cigna has just 800,000 (DRG statistics). Cigna has always lagged behind its top competitors in standalone Part D enrollment, and this merger remedies that.

This move will boost the buying power of Cigna and Express Scripts. Cigna’s large book of self-insured employers could be more likely to give Express Scripts a look as their PBM once the companies merge and their bargaining power increases.

Cigna will no longer need to contract with OptumRx for its claims processing and retail network contracting.

A benefit for the entire industry could be that with all the large PBMs merging with insurers, there’s no obvious large partner remaining for Amazon. In another twist, Express Scripts is the PBM for both Berkshire Hathaway and Amazon, the latter of which Express Scripts CEO Timothy Wentworth acknowledged but did not elaborate upon (Express Scripts Q4 2017 conference call, accessed March 8, 2018). Depending on how the Amazon-Chase-Berkshire Hathaway health initiative proceeds, those companies might not have a need for a large PBM in the future. The loss of an employer as large as Amazon could have dealt another blow to Express Scripts.

Ultimately, mergers such as CVS–Aetna and Cigna–Express Scripts continue to realign the healthcare system. They also signal that despite UnitedHealth Group outpacing its rivals by establishing its PBM unit first, competition among national insurers will only fiercen.

Follow Bill Melville @BillMelvilleDRG