Reading the “Blurred Lines” of the Cigna/Express Scripts Merger

The Wall Street Journal reported last night (Cigna Nears Deal to Buy Express Scripts) that Cigna is in final talks to acquire Pharmacy Benefit Manager (PBM) Express Scripts (ESRX) for a whopping $67 billion. ESRX was the last truly independent major PBM, and the deal signals the end of an era…and ushers in a new one, further blurring the lines between insurers, providers, and their primary vendor. The combined entity will reach over 250 million people and will have a ripple effect on many of their competitors.

For years, Cigna has viewed its pharmacy business as central to driving a better member experience and clinical outcomes and an opportunity for Cigna to partner with physicians on value-based contracting (VBC). Cigna has already made some big VBC strides in the specialty pharmacy space. Cigna CEO Cordani’s view is that the leading gap in care is in drug benefits: the wrong drug, the wrong dose, or the wrong duration. Owning the “means of production” in drug benefits management is central to his strategy, much as it is for the pending CVS/Aetna deal. And owning its PBM allows Cigna and ESRX to be much more aggressive on their Medicare Part D Prescription Drug Plan (PDP) bids.

A Cigna/ESRX merger will actually impact UnitedHealth most. OptumRx provides PBM services to Cigna at the moment. That relationship will likely end as early as 2020. Cigna represents about 140 million scripts annually, almost $7.5 billion in revenues and around $400 million in earnings for OptumRx. Ouch.

The deal could be a net positive for CVS/Aetna: one of their biggest competitors is going in-house to another insurer and will be distracted by a long and complex integration that will allow CVS to grab market share. CVS/Aetna have a six-month head start. CVS has an agreement with Cigna for MinuteClinic and its pharmacies, which could be in jeopardy in the years to come.

We see a modest impact of the deal on Anthem, Humana, WellCare, Centene, and Molina. Anthem is in the process of terminating its relationship with ESRX and moving its PBM in-house, with drug procurement through CVS/Aetna. Humana may see some impact in its PDP business line, which has served as a massive feeder for its Medicare Advantage business, and will likely see some big stock volatility in the days ahead.

I’d watch the Medicaid plans carefully. This transaction will force WellCare, Centene, and Molina to think hard on their own strategies. I’d expect one or more of them to try to acquire a smaller independent PBM like MedImpact and/or to merge with a behavioral health care company like Magellan.

Like CVS/Aetna, we expect this deal will see less antitrust complications than 2017’s mega-mergers between large national insurers. However, Cigna/ESRX will likely slow both transactions. The Department of Justice (DOJ) is already reviewing CVS/Aetna, and they expected their deal to close in late 2018. We think DOJ is likely to review both deals on parallel tracks, resulting in slower consideration for both. In the end, we expect both to be approved in Q4 2018/Q1 2019.

There is tremendous potential upside to vertical integration between a PBM and a major insurer. There are also big risks. While Cigna’s leadership is very strong and Cordani is expected to run the new entity, a deal like this is rife with unforeseen integration challenges that will put his team and his board to the test. Cigna is a major client of ours and our owners at Convey Health Solutions, and we wish them the best of luck in completing the transaction.




Gorman Health Group’s summary and analysis of the 2019 Advance Notice and Draft Call Letter for Medicare Advantage and Part D is now available. Download now

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