The recent announcement that health insurance company Cigna agreed to buy Express Scripts, the largest pharmacy benefit manager in the United States, has sparked further discussion and debate around the increasing amount of consolidation taking place in the healthcare industry. After a series of other consolidations, including the CVS Health and Aetna merger; the Amazon, Berkshire Hathaway, and JP Morgan joint alliance; and the Walgreens purchase of over 1900 Rite Aid stores, this announcement only adds to the speculation around the future of the industry, especially as it relates to manufacturers.
What is the significance of the Cigna/Express Scripts deal?
To understand how this will impact manufacturers, we first need to consider the significance of this acquisition against the backdrop of others. The 3 largest pharmacy benefit managers (PBMs), Express Scripts, CVS Health, and OptumRx, control 74% of the market. Now all 3 of those PBMs will be joined with some of the largest insurers: Express Scripts with Cigna, CVS Health with Aetna, and OptumRx with UnitedHealthcare.
By combining a PBM and an insurer, the same one entity is taking part in the complex supply chain that determines how prescription drugs are paid for. Traditionally, a PBM would be responsible for negotiating with the pharmacy over reimbursement, as well as the manufacturer for rebates. Now, the same entity will contract with manufacturers to receive discounts, negotiate rates with pharmacies, set premiums for consumers, and implement utilization management policies. In the past, some PBMs did not pass back all of the rebates to the insurer––now the PBM is the insurer.
The increase in consolidation may be due in part to apprehensions around Amazon entering the healthcare space. After witnessing the impact that Amazon had on traditional retailers like Sears, JCPenney, and Target, among others, Amazon’s entry into the healthcare space, coupled with its sheer power and extensive reach to consumers, may have healthcare stakeholders looking for a competitive edge.
What does this mean for manufacturers?
There are many implications that manufacturers should be aware of as they navigate the ever evolving and increasingly consolidated healthcare industry. Let’s take a look at a few.
- Increased payer leverage: These types of mergers will result in payers having more negotiating leverage. In turn, they will be able to demand more.
- Closed system: Some health plans will end up controlling all healthcare delivery from start to finish. They employ the physician, they own the hospital, and they dictate which drug is used.
- Importance of the value proposition: While very unique breakthrough drugs may still be able to command good terms, any new drugs deemed “me-too” products or drugs with only incremental benefit might face some significant challenges.
- Distribution and integration: Manufacturers may want to consider implementing novel methods of distribution, as well as vertically integrating into healthcare delivery, to overcome some of the challenges ahead.
- Power of data: Insurers that own PBMs will have more access to data, which they can use to design strategies to cut costs. In turn, they will be better equipped to track experience for value-based payment models and risk-based contracts.
The Cigna and Express Scripts deal demonstrates a continued shift towards further consolidation, and we can expect this type of consolidation to continue to disrupt the healthcare industry. Manufacturers will need to identify new strategies and approaches to effectively navigate this power shift and communicate with these new, more powerful players.
- Managed Markets Communications @ Syneos Health Communications