Last December, health services company Cigna acquired Express Scripts, the last major stand-alone pharmacy benefit manager (PBM).
The new organization will have size and purchasing power on its side, with a combined expected revenue of more than $140 billion.
There are widely varying opinions on the value of—and the reasons behind—consolidation in the healthcare space. Some say such mergers may become a necessity for pharmaceutical companies as they are increasingly scrutinized for some of their business practices, mainly the way in which prescription rebates are funneled through the system.
Some say market forces are requiring insurers to look at the industry and fit organizations like PBMs into their business model, especially considering the size and importance of the pharmaceutical business within the overall healthcare system—and the corresponding data these companies bring to the table.
“PBMs have really siloed the outpatient prescription drug benefit from the rest of the healthcare equation,” says Susan Winckler, president of Leavitt Partners Solutions. “It hasn’t integrated with claims data and the information of the traditional insurer. And as the pharmaceutical piece has continued to get more important, we have to question why we have separate systems and why they don’t communicate and get a patient’s full picture. Logic says we want that information together.”
The merging companies themselves would agree, saying combining will allow them to do what they couldn’t as stand-alone businesses: integrate medical and pharmaceutical data. This will enable them to better track medication adherence, cut costs and manage the whole person.
“Both Cigna and Express Scripts have robust capabilities that proactively monitor and drive outreach to improve medication adherence and prevent unnecessary complications/hospitalizations, which improves quality and affordability,” says Kim Richards, senior vice president for producer business development at Cigna. “Our combined company is now able to bring the strengths of our medical and PBM clinical programs and prevention together to further enhance these proactive efforts to ensure better health outcomes, leveraging our combined data.”
Richards says the combined entities will have three key focus areas. “First, to optimize the significant medical and pharmacy cost synergy opportunities, which will directly benefit our customers, patients and clients and help improve affordability. Second, to harness the breadth and depth of our combined data to better predict and identify conditions or behaviors, and improve connectivity between our customers, patients and healthcare providers. And third, to expand our reach to new geographies and broaden our solutions portfolio to better serve employers and their employees.”
Brian Henry, vice president of corporate communications at Express Scripts, says the merger of Cigna and Express Scripts holds the opportunity to “address what is challenging about healthcare today.”
In the largely episodic system, patients see a physician, receive a prescription and fill it elsewhere. It is rare within this system that anyone actually tracks patients to make sure they take the medication properly and achieve the desired outcomes from the treatment.
Ideally, Cigna and Express Scripts can begin to connect the dots between patients’ office visits, hospital stays, medications and other care. By joining the disparate systems, Henry says, the merger has the potential to lower costs, improve care and treat patients in a more holistic manner.
Pharmacy benefit managers, Winckler says, “are able to track, tablet by tablet, in a way that provides clarity and specificity that you don’t see in other areas. Before, it was hard for a PBM to really evaluate patients if all they had was the incredibly rich drug data. It was still only a portion of the picture of that patient’s experience and exposure.”
Henry says the merger gives the combined company a “360-degree view” that did not exist before. “We will have more data but also more insights into what it is telling us…about how best to care for patients,” he says. “Both companies have done this, but the promise is now we will get even better at it.”
He says this will be particularly helpful in proactively working with patients with chronic and complex medical conditions—for instance, working together to better manage a patient with diabetes. With combined data, they will know if the person is seeing a doctor to get regular blood glucose tests and whether he is keeping his glucose levels in a healthy zone. If not, the organization can direct the patient to a diabetes care pharmacist to manage the condition and prevent issues that can be caused when glucose levels are chronically high.
It’s also a cost saver, as medication adherence is a primary driver for reducing costs among patients with diabetes, says John Matthews, strategy leader for healthcare and life sciences at KPMG. As Henry says, pharmacy benefit managers can track fill rates and see if someone appears to be taking medication regularly. In the past, the PBMs did not have any reason to track these rates other than the increased income they receive when patients refill their prescriptions regularly.
“But now,” Matthews says, “if they are a combined entity and the PBM finds out John isn’t taking his meds, that information can get to the insurers, and they can communicate with a physician to do additional programming with him. The combined entity can internalize that value.”
The insurers have tended to use predictive analytics for this kind of risk stratification in the past, Matthews says. They can analyze patient data and understand if someone has a higher risk of having bad outcomes because of the patterns they see in the medical records. Now that they can combine that with pharmaceutical data, he says, it will help complete the picture for each patient.
Richards reinforces this point, noting that Cigna and Express Scripts are integrating medical, pharmacy, behavioral and external data where appropriate to gain insights that drive more accuracy in identifying non-adherence. And they will have the ability to share relevant, timely insights and recommendations with providers that work with Cigna in collaborative arrangements, Richards says.
The challenge for these initiatives, which admittedly look good on paper, is there still may not be enough data to fully understand the whole patient picture.
Pharmacy benefit managers have usage data, but they don’t have outcome information. They can’t say a patient is taking metformin for diabetes and responding to the treatment in one way or another. Insurance companies often don’t have clinical data that is in a patient’s electronic medical record. It’s the clinical data that will help insurers get closer to understanding whether metformin is helping keep patients’ glucose in a normal range or if they need more medication or other treatments. This is the information that could lead to better clinical interventions, Matthews says. Insurers that employ a large number of physicians may have a leg up on tying all the data together.
“If they can intervene clinically, they can understand more clearly what the value of procedures and medications would be,” Matthews says. “That’s the holy grail, but I think it will be hard to do. It’s interesting. Even United and Optum really haven’t gotten to the point where they are doing it effectively yet.”
Chris McGoldrick, senior vice president, broker and consultant relations at UnitedHealthcare Employer & Individual Group, offers a different view. “On the digital health front, our initiatives are accelerating,” McGoldrick says. “We completed beta testing of the individual health record physician platform and have built over five million active consumer health records. Simultaneously, our enhanced Rally consumer digital health platform now integrates digital engagement, coaching, telemedicine and incentives with quality and advanced cost transparency and estimating capabilities.”
As challenging as it may be to integrate all of the patients’ data and begin to use it effectively, consolidation in the market may be the most effective solution, Winckler, of Leavitt Partners Solutions, says. “It does seem like these mergers could facilitate it,” she says. “It may give them the capacity and energy they didn’t have as stand-alone organizations.”
Pressure on PBMs
While there’s a decent case to be made for the benefits of merging, some say it’s a response to market pressures. It’s no secret that healthcare costs in all sectors of the industry have been under scrutiny in recent years. Spending has increased steadily year over year, reaching $3.5 trillion in 2017—or nearly $11,000 per person. This accounts for nearly 18% of the nation’s total gross domestic product. Matthews says this gradual and persistent rise has placed pressure on all of the industry’s players to bring down costs wherever possible.
Some insurers have seen losses as employers increasingly move toward self-insurance and the individual market continues to act as a drain (though some sectors like Medicare Advantage make up for these and then some). KPMG’s Matthews says this reduced income has led insurers to seek out as much of the healthcare dollar as possible.
“They have declining profit tools, so the more they can aggregate of the business, the more they are going to sustain profitability in this world,” he says.
And the place to look for profits is pharmacy benefit managers. Though many report humble earnings of between 4% and 5% annually (including Express Scripts), analysts and experts think those numbers are deceiving. Investment firm Bernstein recently analyzed the numbers and estimated PBMs likely have closer to 85% gross profit—almost double that of drug distributors and nearly triple what insurers and pharmacists gross. Numbers like these led Scott Knoer, chief pharmacy officer at the Cleveland Clinic, to refer to PBMs as “programs bilking millions” in a recent op-ed.
To some degree, the profits of pharmacy benefit managers stem from “sophisticated and complex contract mechanisms,” Matthews says. “They use tiering, rebates and other elements that allow them to extract profitability from contracts between the end-users and the pharmaceutical companies,” he says. “But there is increasing pressure on their model as employers, payers and sometimes manufacturers become more disciplined about pricing.”
Regulators, too, have begun to question how PBMs generate their profits. The Trump administration recently announced it intends to analyze and eliminate protections that allow PBMs to negotiate and keep drug rebates. Instead, the administration hopes to transfer that revenue directly to consumers.
With PBMs under such intense scrutiny, mergers like the one with Express Scripts can enhance as well as hide the organization’s business practices, says Kevin Schulman, M.D., a professor of medicine and economics at Stanford University.
The PBM business practices—which Schulman calls, at best, questionable—inflate prices for consumers, distort the pharmaceutical market and are set up mainly to benefit the PBMs, he says. Anthem, which was close to merging with Express Scripts before Cigna did, sued the PBM for $15 billion in 2016, claiming it was overcharging Anthem $3 billion a year. Express Scripts denies the allegation. Anthem announced earlier this year that it would begin transitioning customers from Express Scripts to its new PBM, IngenioRx, this spring. The move was initially planned for Dec. 31 of this year.
Schulman says PBMs “are going to continue to get scrutiny, and what comes out of that we will have to wait and see.”
Pharmacy benefit managers also feel pressure from other market forces, such as Amazon, which acquired PillPack late last year. PillPack delivers medications to patients who are often being treated for one or more chronic conditions. The medications are presorted by dose and organized to be taken at the right time. The company helps ensure drugs are refilled and renewed properly to increase adherence. Amazon’s purchase of PillPack was widely viewed as a potential market disruptor, and after the purchase was announced, stocks of brick-and-mortar drugstore giants like CVS and Rite Aid plummeted by $11 billion in one day.
With a business model that is potentially eroding, Express Scripts followed the other major PBMs in the industry. In the early 2000s, UnitedHealth Group purchased a PBM now known as OptumRx, and last year CVS Health (Caremark PBM) acquired Aetna. These big-three PBMs hold about three quarters of the market share.
“There is an increasing appetite to say the world of healthcare is changing,” Winckler says. “They are asking how they are going to have to change their model, and collaboration would be good for everyone.”
No one really knows how things will shake out when the dust settles from this merger, but experts do have some thoughts.
Winckler stresses the importance of being mindful of the atypical consequences from such mergers. A pharmacist by trade, she is concerned for the small players still left in the industry. Her hope is that “vibrant competition” will persist among the three major PBMs and that there will continue to be engagement among all the drug stores.
“I know how the big players are able to compete,” she says. “But what about the hometown pharmacy in rural Iowa? What does it mean for them? We have to make sure we are still strengthening those that don’t exist at the macro level.”
In areas served by regional plans such as Blue Cross Blue Shield, Matthews says, those insurers aren’t going to be “super keen” on using PBMs that are owned by one of their insurance competitors.
Schulman says this type of merger may actually be more likely to reduce patients’ choice. CVS and UnitedHealthcare will, understandably, want to send their patients to providers and pharmacies within their own umbrella. The healthcare marketplace isn’t very “choiceful” to begin with, Matthews says, and he can’t see this merger necessarily expanding choices for consumers.
“If you put it all together, what we are sailing into is a world in which we have fewer entities and more strategic partnerships,” Matthews says. “They are looking to create lots of different ways that the consumer is engaged with them. They [CVS and Aetna] are trying to create a web so the consumer never has to leave the CVS/Aetna world. They can create value for themselves and possibly better manage the cost of care. But it is premised on keeping patients bound rather than expanding choice.”
Richards notes that, at least as far as Cigna is concerned, the Express Scripts deal is about more choice, not less. And she cites changing consumer preferences as part of the driving force. “In an environment where some are restricting access in order to narrowly drive affordability, Cigna sees an opportunity to further expand customer choice and to make it easier for people to access the health services they need, whether in a doctor’s office, an urgent care center, a retail setting or employer clinic—or, for more acute needs, at a hospital or outpatient service center,” Richards says. “In addition to these venues, customers increasingly choose to secure the healthcare services they need at home or through digital platforms…we see these expanded, personalized engagement and delivery channels as a tremendous opportunity.”
For example, Richards says, Cigna has more than 50,000 patients with internet-enabled blood glucose monitors who share data related to their blood sugars with their pharmacists every day. “When one of our dedicated pharmacists detects an out-of-range blood sugar level, they reach out to the patient immediately with an intervention tailored to that patient’s needs,” Richards says. “Over time, we’ve seen meaningfully improved outcomes, including 4% increase in adherence to oral medication, 23% drop in hyperglycemic episodes, 42% drop in extreme hyperglycemic episodes, and a 36% drop in extreme hypoglycemic episodes.”
If combinations of insurers and PBMs truly use their larger, data-driven view of the patient, the possibilities for successful, value-based payment arrangements are real. And there’s no better market for those than in the employer-based system, where everyone has a lot at stake. “Innovations driving the delivery system shift from volume to value began in employer-provided coverage arrangements,” Richards says. “Every new year, more and more employers are focused on better reimbursement of accessible, high-quality providers; consistent access to acute, chronic and preventive care; health-engagement and coaching programs; and incentives to encourage individuals to seek the highest value in their healthcare choices.”
OptumRx and UnitedHealth Group have also shown their combined efforts can make a difference, including in patient costs. OptumRx recently announced that point-of-sale consumer discounts on branded pharmaceuticals will be its fundamental approach to business. And, according to McGoldrick, “UnitedHealthcare is well under way implementing point-of-sale discounts at scale for the more than eight million consumers covered through its commercial risk business. At the counter, people are already saving about $130 per eligible script.”
The company also continues to invest in its provider business, which is called OptumCare. The network already serves millions of patients across approximately 80 health plans and payers through value-based care arrangements and an integrated approach to care. For example, one new outpatient program delivers integrated medical, surgical and radiation oncology, chemotherapy and immunotherapy, imaging, palliative care and 24-hour oncology urgent care. “This is one of the ways we are exploring value-based specialty models that uniquely align to our primary care and ambulatory capabilities to deliver better quality, lower costs and higher satisfaction,” McGoldrick says.
Cigna is also committed to value-based models and has more than 600 accountable care organizations, which are payment arrangements that incentivize providers to deliver care based on the health outcomes they achieve. “Recently,” Richards says, “we announced that we have exceeded our value-based care goal of having 50% of our payments to healthcare professionals made through alternative payment arrangements, resulting in $600 million in medical cost savings between 2013 and 2017.”
That being said, Matthews estimates the merger between Cigna and Express Scripts likely won’t do a lot to change benefit plan design for most employers, and Schulman says the deal could serve to expand the already nontransparent PBM market. PBMs may, he said, try to garner rebates on products they haven’t delved into before, like specialty pharmaceuticals and orphan drugs (medications that treat extremely rare conditions).
Today, a patient’s drug benefit determines how the patient receives outpatient medications. Inpatient and physician-administered drugs have been part of the medical benefit. PBMs had no exposure to the medications someone received in a hospital, and “most would say that is a great thing,” Schulman says. But with medical and pharmaceutical sides integrated, they may begin to merge interests.
“For the rebate model to expand, it will have to move into those markets, and that’s going to set up big conflicts with things like hospitals and patients,” he says. “At the end of the day, we are just trying to buy access to healthcare for our employees. And this is the only market where the role of intermediaries is growing, not shrinking.”
Schulman says this could be the year to start reading the fine print on drug and medical benefit contracts. “They need to look at where the restrictions in plans are in terms of how people get access to therapies and if that is something they are comfortable with,” he says. “Especially for small employers, getting multiple bids to see how they are structured is really important.”
Schulman also says it may be time to look at other possible models, like PillPack or the website GoodRX, which allows a patient to purchase medication at a deeply discounted price without using insurance. “There are alternatives, and there are transparent methods of buying pharmaceuticals out there,” he says.