By Anna Wilde Mathews and Joseph Walker
Cigna Corp.'s $54 billion deal for Express Scripts Holding Co.
is the latest sign that health care's biggest players believe they
can no longer go it alone, and they must branch into other
businesses to forge integrated products aimed at curbing costs.
The acquisition sets up the combined company, which would bring
together Cigna's insurance assets with Express Scripts'
pharmacy-benefit management, to better compete with peers such as
UnitedHealth Group Inc. and CVS Health Corp. that already moved
toward vertical combination, analysts said.
Cigna and Express Scripts, which together had revenue adding up
to around $142 billion last year, could achieve greater scale and a
deeper role in managing drug spending, which is seen as
increasingly central to the work of managed-care companies.
But the combination also faces significant risks, including
potential customer losses in Express Scripts' business. Rising drug
costs have also created business and political pressure on insurers
and pharmacy-benefit managers, which help select which drugs are
covered for patients and negotiate discounts with drugmakers.
Cigna and Express Scripts said their deal would bring down costs
and enable them to offer smoothly integrated services, improving
customers' experience and health. "We are committed to lowering
health-care costs, improving quality of care, driving better
clinical outcomes and removing complexity in the health-care
system," said Cigna Chief Executive David M. Cordani, who would be
chief executive and president of the combined company.
Vicky Gregg, a former health-insurance CEO now a partner in a
health-focused private-equity firm, said the Cigna deal, following
CVS's planned $70 billion acquisition of Aetna Inc., cements the
emerging model of companies that bring together health and pharmacy
benefits. Insurers increasingly feel "it's a part of the supply
chain that they're going to have to be able to integrate and manage
and own," she said.
The second-biggest U.S. insurer, Anthem Inc., announced last
year it would create its own PBM, supported by CVS, pulling its
business from Express Scripts.
The newest proposed giant would combine a PBM with different
assets than rivals'. Cigna's insurance core is largely focused on
employers, with a growing overseas business.
If the new deal goes through, the merged operation will lack
UnitedHealth's growing stable of doctors and surgery centers, which
give the parent company a hand in shaping patient care. CVS and
Aetna have talked up how their huge network of stores can be the
basis for managing chronic conditions and offering services at
lower cost.
Cigna is smaller than major competitors, with revenue of $41.6
billion last year, and it remains locked in litigation with Anthem
after a merger deal between them foundered over antitrust concerns.
Express Scripts is struggling with the loss of Anthem, its biggest
client, with which it too is enmeshed in a lawsuit.
Investors initially reacted coolly to the deal, pushing Cigna's
shares down 11% Thursday. Analysts said the response reflected
skepticism about Express Scripts and the PBM business generally.
Cigna also has a limited footprint in the faster-growing government
businesses of Medicare and Medicaid, and had been seen as potential
suitor for Humana Inc., a Medicare-focused insurer.
"Cigna needed to do this," to compete with integrated rivals and
achieve greater scale, said Matthew Borsch, an analyst with BMO
Capital Markets. But, he said, "people were hoping Cigna would buy
something that would transform its business mix and bring faster
growth, as opposed to a business that's viewed as under pressure,
under scrutiny and to some degree in decline."
Cigna and Express Scripts said they expected to generate strong
growth, with revenue increases of 6% to 8% a year. Mr. Cordani said
the new company would create a business-services unit that would
offer behavioral-health products, among other lines.
In an interview Thursday, Express Scripts CEO Tim Wentworth said
the deal with Cigna is driven by similarities, including large
employer client bases, that make the companies stronger together.
"This is, I believe, a visionary deal, not a reactionary deal," Mr.
Wentworth said.
Facing off against CVS and UnitedHealth's OptumRx PBM, Express
Scripts long argued that its independence was an asset, enabling it
to win the business of insurers that didn't want to hand data to a
direct competitor. Now, Express Scripts may risk losing business
with insurers as well as employers, industry experts said.
But the integrated business model that Express Scripts shunned
has already allowed UnitedHealth and CVS to undercut Express on
price to win market share, says Ross Muken, a health-care analyst
at Evercore ISI. From 2013 to 2017, Express Scripts' revenue fell
3.9% from $104.1 million in 2013 to $100.1 million last year; the
number of prescriptions claims processed by the company fell 5.2%
over the same period.
The combined Cigna-Express Scripts will also have to fend off
growing scrutiny on the pharmaceutical supply chain, including
signals from the Trump administration. This week, the head of the
Food and Drug Administration, Scott Gottlieb, warned that "market
concentration may prevent optimal competition" in the
pharmaceuticals market.
There are similar concerns among PBM clients, said Jim Winkler,
a senior vice president at consulting firm Aon PLC. Frustrated
employers may feel that combining the insurer with the PBM "doesn't
move us closer to transparency, it makes it harder," he said.
From an antitrust perspective, Cigna and Express Scripts may get
a particularly close look because their deal comes on the heels of
the CVS announcement, ensuring that the two will likely be reviewed
in tandem, said Tim Greaney, a professor at University of
California Hastings College of the Law. Judges blocked two previous
giant managed-care mergers that were also reviewed in lockstep,
between Anthem and Cigna and between Aetna and Humana.
The new deals, which bring together companies with limited
direct overlap, are expected to face fewer barriers, Mr. Greaney
said.
Write to Anna Wilde Mathews at anna.mathews@wsj.com and Joseph
Walker at joseph.walker@wsj.com
(END) Dow Jones Newswires
March 08, 2018 18:39 ET (23:39 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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