The health care industry’s game of musical chairs just got more intense and more expensive.
Cigna Inc. on Thursday announced a $54 billion purchase (nearly $70 billion including assumed debt) of pharmacy benefit management giant Express Scripts Holding Co. Inc. The deal follows pharmacy/PBM hybrid CVS Health Inc.’s $67 billion purchase of Cigna rival Aetna Inc. and UnitedHealth Group Inc.’s years-long investments in its own PBM and providers.
This leaves two of Cigna’s insurance rivals without a suitable chair as the music slows down.
The deal should be a relief for both Cigna and Express Scripts shareholders. Cigna is the second smallest of the big five insurers. Buying Express Scripts can help it compete with larger and more diversified rivals. It’s focused on providing services for self-insured employers — a segment of the market that is likely under the most threat from the Bezos/Buffett/Dimon health care venture.
The deal addresses many problems for Express Scripts. The PBM will lose its largest client, Anthem Inc., in 2020, creating a massive hole that would have been impossible to fill. The PBM business has come under fire in recent years for its role in rising drug prices. And Express Scripts’ unique size, standalone status and high margins made it a juicy target for criticism. As part of a larger health care entity, Express Scripts won’t face as much pressure to squeeze profit from every drug claim and will likely be more insulated from public scorn.
Adding Express Scripts’ scale will likely make Cigna’s insurance business more competitive — helping it lower costs for clients and offer a wider suite of services — while diversifying its revenue.
While the deal is by no means cheap, it compares favorably with CVS’s Aetna purchase. Cigna is assuming a hefty $15 billion of Express Scripts debt, but will still carry far less debt than its rival. There is a larger equity component in this deal; Express Scripts shareholders will own 36% of the business. In comparison, Aetna shareholders will own 22% of the new-look CVS.
The two remaining big insurers that don’t have a big PBM partner — Anthem and Humana — are left in the lurch.
Express Scripts was arguably their biggest and best-fitting opportunity for vertical consolidation. They could try to merge, but that would be risky, given the recent regulatory history of large insurance deals. Adding a smaller insurer would have limited impact, leaving them at a competitive disadvantage to diversified peers.
Humana has a PBM and Anthem is starting one, but it will be a long time before they’re competitive with larger rivals. And there aren’t any truly needle-moving acquisition targets available.
PBMs are a natural fit with insurers — they both design health care plans for clients with an aim of lowering costs. And combining the two businesses can clearly succeed, as evidenced by UnitedHealth’s ever-growing size and sales. Other parts of the health care supply chain — including drug wholesalers — are a more awkward and untested fit.
Both firms may smile winsomely at pharmacy giant Walgreens Boots Alliance Inc. in hope of attracting an offer. But it is likely too large a mouthful for either firm to acquire and lacks a PBM presence.
Investing aggressively in health care providers is an option to diversify and offer cost savings and better service for enrollees. It’s another part of UnitedHealth’s strategy worth copying. But it will likely have to be done piecemeal and over time, given how comparatively fragmented providers are in the U.S.
It’s a tougher environment with fewer options; Anthem and Humana will have to get creative.
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Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.