In an effort to keep up with an evolving healthcare system, Cigna eyes vertical merger with PBM Express Scripts.In another sign of a rapidly changing healthcare industry, health insurer Cigna has agreed to acquire leading pharmacy benefit manager Express Scripts for $52 billion. With Cigna set to assume $15 billion of Express Scripts’ debt, the deal has a total value of $67 billion.
If the deal secures all shareholder and regulatory approvals by the end of the year, the combined company would unite one of the nation’s largest health insurance companies with about 16 million insureds with a pharmacy benefit manager (PBM) that oversees the drug plans of 80 million Americans. Express Scripts will operate under the Cigna name, with each of its shareholders receiving $48.75 in cash and 0.2434 shares of the merged company for each Express Scripts share. The deal’s per-share price of $96.03 represents a 31% premium over Express Scripts’s stock price on the day before the proposed merger was announced.
“Current Marketplace Not Sustainable”
The proposed merger reflects recent attempts by other major players in the healthcare industry to provide cheaper and better coordinated care at every stage of treatment, from insurance and prescription drugs to prevention and actual delivery of medical services. Vertical integrations of separate types of healthcare providers like Cigna and Express Scripts as well as the proposed merger of CVS and Aetna could help providers accomplish that goal.
Cigna CEO David Cordani confirmed as much when he cited the ongoing evolution of the healthcare marketplace as a factor in the merger. “Our view is that the current marketplace is not sustainable," he told CNBC. “The market demands more affordability, the market demands more personalization, the market demands more value…”
“It’s about keeping people healthy and improving clinical quality for when people consume care and as a result, helping employers have healthy, productive, present employees and therefore healthier businesses.”
Health insurers like Cigna may also be trying to battle competition from new entrants in the healthcare marketplace like Amazon, which has been expanding into the industry. Insurers may be further confronting the prospect of losing the lucrative employer market altogether after major companies Berkshire Hathaway, Amazon, and JPMorgan Chase & Co. recently announced a plan to band together to form their own employee healthcare program.
PBMs Face Challenges
PBMs, which negotiate with drug companies on behalf of insurers and providers, also face some challenges in the marketplace, since several insurers have decided to cut out the middleman by forming or acquiring their own pharmacy benefit management arm. OptumRx, for example, is owned by UnitedHealth Group.
Express Scripts finds itself in the same position after its largest customer, Anthem, announced its intention to establish its own PBM and end its contract with the company in 2019, cutting $17 billion from the Express Scripts’ annual revenues. To replace the lost revenue, Express Scripts agreed last year to purchase private medical-benefits manager eviCore health care for $3.6 billion, according to the Wall Street Journal. CEO Tim Wentworth had said in November that the company was open to a sale.
PBMs have also weathered criticism from officials of the Trump administration, who claim that their partners and patients don’t benefit from reduced drug prices. In a recent speech, Food and Drug Administration Commissioner Dr. Scott Gottlieb criticized the PBM model, saying that the negotiated discounts “may not always be passed along to employers or consumers.”
Federal regulators may also question the merger on the basis that it eliminates one of the few remaining independent PBMs. Currently, the three largest PBMs oversee 85% of the market.