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.
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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.