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.
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