Cigna unveiled plans this week to acquire pharmacy benefits manager Express Scripts, accelerating the trend toward healthcare supply-chain consolidation. In announcing the deal, the companies said that one of their goals was to lower the cost of prescription medicines. Most benefits experts demurred, however, saying that the merger was unlikely to bring employers and employees any relief from sky-high drug prices.
The proposed $52 billion deal closely follows CVS’ agreement to buy Aetna for $77 billion, announced last December. Both pacts are but the latest moves to shakeup a healthcare sector already roiled by spiraling costs, large-scale combinations and employer-led efforts to reduce waste and simplify coverage.
The turmoil is occurring amid widespread dissatisfaction among businesses and individuals over soaring prices that diverge wildly from provider to provider and often defy efforts to engage in comparison shopping. Central to this is the outcry over high drug prices, which has intensified in recent years. The U.S. spent nearly $325 billion on prescription drugs in 2015 and that is expected to have climbed 11% to more than $360 billion in 2017. Meanwhile, says Adam Fein, president of pharmacy economics consultancy Pembroke Consulting, the percentage of employer-sponsored health plans with pharmacy benefit deductibles has doubled, from 23% in 2012 to 46% in 2015.
The Cigna deal would combine one of the country’s largest insurers with the pharmacy benefit manager responsible for the drug plans of more than 80 million Americans. Although pitched by the companies and some industry observers as a “more coordinated approach” to healthcare that has the potential to lower pharmacy costs and medical expenses overall, many others are questioning this premise.
Not the least of these is Food and Drug Administration commissioner Scott Gottlieb, who one day prior to the Cigna-Express Scripts announcement warned of a “backlash” against the high-cost of prescription drugs and the lack of transparency that accompanies their pricing.
Terming arrangements like the one proposed by Cigna and Express Scripts as “Kabuki drug-pricing constructs that obscure profit-taking across the supply chain,” Gottlieb said excessive market concentration among market players has resulted in an opaque system that works better for the drug makers and suppliers than for their customers.
Keeping prices high
One reason is the incentive for pharmacy benefit managers like Express Scripts to keep their costs high. Health plans rely on PBMs to negotiate drug prices on their behalf, but these companies can profit when those prices stay elevated. Last year, that drove health insurer Anthem to declare that it would set up its own PBM unit, after it accused Express Scripts of overcharging it by billions of dollars.
Cigna and Express Scripts were not available to comment.
“Ninety percent of a PBM’s profits are made on the drugs and medications that they’re reimbursed for by the insurance carriers,” explains Thomas Borzilleri, CEO of healthcare analytics provider Intelisys Health and the founder and former CEO of Valore’ Rx, a pharmacy benefit management company. The trend in the market, he says, is for the carriers to bring the PBM function in-house to reduce their costs, but that does not translate into reduced premiums for employers and employees. “There won’t be a trickle down,” he warns. “Any savings will go to their shareholders in the form of increased earnings.”
The Cigna acquisition “has nothing to do with pharmacy costs for employers or health plan sponsors,” agrees David Henka, President and CEO of RxTE Health, a pharmacy benefits provider that works with employers, plan sponsors and PBMs. “This has everything to do with consolidating administrative efficiencies to make more money for the PBMs and health plans of the world.”
Taylor Lindsey, partner and owner of Employee Benefits Consultants of Richlands, Virginia, refers to the integration as “Just another trick; another way to hide profits. When you think about the MLR, you got to find another way to create more revenue.”
The Affordable Care Act established a medical loss ratio—or MLR—that requires insurers to pay out 80 to 85 cents of every premium dollar in coverage reimbursements. By buying a PBM, a carrier can provide fully-insured employers with prescription drugs and use that portion of their premium dollars as required by the MLR to pay for them. But since they now own the PBM, they are in effect paying themselves and keeping those revenues on their balance sheet.
“When I look at this business model,” notes Bob Gearhart, Jr., a partner at health insurance broker DCW Group in Boardman, Ohio, “it’s designed to keep profits under one company. It is not designed to reduce costs for the employer.
“I think it's pretty simple in what they are trying to do,” he continues. “They are trying to pay themselves and not pay that money out to someone else. That is not revolutionary, we have seen that before.”
But Gearhart does see something much more radical on the horizon. He says the recent declaration by Amazon, Berkshire Hathaway and JP Morgan Chase that they will join forces to self-insure and manage their own healthcare network could alter the industry’s business model.
“I see them as a unicorn in all these discussions,” Gearhart says. “What they are doing has the potential to upend the entire industry. I don’t think Cigna buying Express Scripts will make waves in the industry.”
Additional reporting by Phil Albinus.
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