Cigna Bets on Getting Bigger as Rising Costs Vex Health Business

Under pressure to tame ever-increasing health-care costs, the companies that help millions of Americans manage their medical care are wagering that they can be stronger and simpler by joining forces.

Cigna Corp.’s proposed $54 billion acquisition of Express Scripts Holding Co., announced on Thursday, is the latest sign that the medical supply chain — where multiple companies are responsible for different aspects of care — has become too cumbersome.

Health-care spending is inexorably rising, accounting for an estimated 18 percent of the U.S. economy last year. Critics such as billionaire Warren Buffett, who has called soaring health costs a “tapeworm” sapping the country’s strength, view the complexity of the system and its large number of middlemen as a culprit.

Insurers, drug-benefit managers, drug distributors, pharmacies, and large medical groups currently all get a cut of the profits from caring for patients. Bringing more of those businesses under one roof might help streamline some of those costs and improve care, at least in theory.

“We saw this as the beyond-a-shadow-of-a-doubt best strategic proposition,” said David Cordani, Chief Executive Officer of Cigna, on a conference call discussing the deal. The companies are focused on lowering costs and “removing complexity in the health-care system.”


Bulking Up

Executives offered few details on how merging would help their patients and clients while boosting their own profits. But the deal could help Cigna compete with UnitedHealth Group Inc., which has clinics, drug benefits, and insurance business, and CVS Health Corp., which agreed to buy Aetna Inc. for about $68 billion, linking its pharmacies and drug-benefit plans with the insurer’s coverage.

“This transaction is yet another proof of ongoing vertical integration of health-care providers and payors,” said Brian Tanquilut, an analyst with Jefferies Group.

Employers are increasingly restless over their high health-care bills. Inc. plans to team with Buffett’s Berkshire Hathaway Inc. and JPMorgan Chase & Co. on a new venture aimed at lowering costs and improving care for their employees. And large employers from Walmart Inc. to Blackstone Group LP are experimenting with ways to reduce their outlays on employee health care.

While a combined Cigna-Express Scripts would have substantial bargaining power over drug prices, it remains to be seen whether that muscle would reduce costs for the employers and patients who ultimately pay the bill.

The deal “doesn’t mean health-care costs are going to go down,” said Michael Rea, of Rx Savings Solutions, which has an app that helps patients find lower drug costs.


Margin of Safety

Pharmacy benefits managers have come under particular pressure in recent weeks from critics of the health sector’s inefficiencies. The harshest attacks have been aimed at a system of rebates that critics say obscure a drug’s true cost and often don’t benefit patients.

President Donald Trump’s Council of Economic Advisers, in a report last month, criticized the companies’ market power and the opacity of their drug-price contracts. On Wednesday, Food and Drug Administration Commissioner Scott Gottlieb called drug plans’ business a “rigged payment scheme.”

“The days of the standalone PBM are numbered and have been for some time,” policy analyst Spencer Perlman of Veda Partners LLC wrote. “The entire notion of the rebate as a value proposition that justified PBM’s fees has been exposed for what it is — a rent-seeking profit-enhancing gimmick that keeps drug prices high.”

Express Scripts is the largest of the remaining independent pharmacy-benefit managers. The company had previously touted the benefits of staying independent, though the quickening pace of health deals in recent weeks appears to have forced its hand.


‘Not Defensive’

On a conference call, executives said that the deal provided a particular opportunity to help manage spending for costly medicines for cancer and other complex diseases. Management of the use of those drugs has often been split between insurers and PBMs, and the merger could make their use more efficient.

Shares of Express Scripts gained 8.5 percent to $79.68 at 2:34 p.m. in New York, while shares of Cigna declined 11 percent to $172.29.

In an interview, Cigna CEO Cordani denied that the deal was designed to keep up with competitors such as Aetna who are merging with or already own pharmacy-benefit managers, or to balance a potential threat from Amazon and its partners.

“It is not a defensive move by any stretch of the imagination,” said Cordani.

The talks started after Express Scripts chose Cigna to provide benefits for many of its employees last fall, and Cordani and Express Scripts CEO Tim Wentworth had a followup dinner in late October. That led to talks of a merger, which accelerated rapidly this year, culminating in the deal today.

The agreement comes as Express Scripts is set to lose its biggest client. Last year, health insurer Anthem Inc. said it would set up its own pharmacy-benefits management unit, after earlier accusing Express Scripts of overcharging by billions of dollars. The loss of Anthem after 2019 has put pressure on Express Scripts to fill the void.

Earlier in 2017, Anthem’s planned takeover of Cigna was blocked on concerns it would undermine competition, ending an almost two-year battle to combine two of the biggest health insurers in the U.S.

Cigna agreed to pay $48.75 in cash and 0.2434 shares of stock of the combined company per Express Scripts share, the companies said in a statement. The terms represent a roughly 31 percent premium to Express Scripts’ closing price on Wednesday, according to the statement. Cigna will assume approximately $15 billion in Express Scripts debt, which the companies said will put the total value of the deal at $69.6 billion.


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