How Will Health Industry Mergers Affect Employer Drug Plans?

A big insurer’s acquisition of a big PBM could alter drug prices for better or worse

By Stephen Miller, CEBS Mar 13, 2018
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Following the announcement of three big mergers in the health care industry, will drug prices go up or down?

  1. One of the nation's largest health insurers, Cigna, will acquire Express Scripts, one of the nation's largest pharmacy benefit managers (PBMs) at a price tag of $52 billion.

  2. Aetna, another of the biggest insurers, is being acquired by PBM giant CVS for $42 billion.

  3. And Amazon is getting into health care (one of the few business lines it hadn't yet touched) by partnering with Berkshire Hathaway and JPMorgan Chase & Co.

These acquisitions and partnerships could lessen competition and drive up prescription drug prices, some warned—or could lead to greater efficiencies that lower drug costs for employers and consumers, as the corporate titans contend. It might even do both, in different ways, industry observers said.

Consolidation's Promises and Perils

"Insurers are increasingly turning to vertical integration in an attempt to manage and control costs," said David Fortosis, Chicago-based senior vice president of health strategy for consultancy Aon. "In addition to the Cigna/Express Scripts announcement, we're seeing this trend with the CVS/Aetna agreement, with United Healthcare/Optum buying physicians and surgery centers, and with Anthem working to create its own PBM."

"This type of vertical integration makes business sense because of the opportunity to manage the total cost of care across medical and pharmacy" services, said Tracy Watts, the U.S. leader for health care reform at Mercer, an HR consultancy, and a senior partner in the firm's Washington, D.C., office.

The proof of concept will be in the bottom line for the consumer and employer-sponsored plans, she noted. "Historically, large employers have carved pharmacy benefits out of the medical plan and gone directly to a PBM for more-favorable pricing and a greater share of rebates than the [health insurance] carriers were usually willing to share. The big question is whether the alliances between the medical plans and PBMs bring greater cost-efficiencies, or whether they limit competition, choice and employers' leverage in the market."

"A large percentage of employers prefer to carve out their prescription drug plan as opposed to integrating it with their medical insurer," believing that doing so gives them greater sway when contracting with providers, Fortosis concurred. "There are employers that tend to be wary of insurers accumulating more leverage—in the past, that formula hasn't always worked to the advantage of consumers and employers."

That said, "if Cigna and Express Scripts can deliver simplification, cost-efficiencies and more coordinated care, then those would certainly be positives," Fortosis noted.

Watts gave an example of how integrations could be good for consumers. "When pharmacy is carved out of the medical plan, there is little insurance company oversight for medications prescribed and administered by physicians versus the PBM," she explained. With regard to high-cost specialty medications, for instance, "we often find opportunities to provide these drugs at a lower cost and at a site of care that might be better for the patient," such as a physician's office or a pharmacy clinic, rather than a hospital outpatient facility. "A more-integrated approach could benefit patients and have a favorable impact on cost. But it will be up to employers to ensure there is accountability and transparency."

[SHRM members-only toolkit: Managing Health Care Costs]

Less Bargaining Power

"The Cigna deal may result in reduced competition, higher prescription pricing and less price transparency," warned Kim Buckey, vice president of client services at Birmingham, Ala.-based DirectPath, an employee engagement and health care compliance firm. For instance, "if my medical coverage is through United Healthcare and my prescription drug coverage is still through Express Scripts, then Express Scripts may not be willing to pass along its lowest drug prices to United Healthcare customers."

Noting other health care consolidations already completed or underway, Buckey said, "I think this means fewer options for employers. With each insurer now paired with a pharmacy benefit manager, it will be a challenge to unbundle medical and prescriptions to get the best deal."

Others see limited effects on employer plans in the near term. "This deal is not going to have an immediate impact on employers or health benefit professionals in terms of the cost of health services," predicted David Henka, president and CEO of Sacramento, Calif.-based RxTE Health, a PBM that was spun off from the Safeway grocery store chain. Ultimately, however, "they will have fewer vendor choices in the future in terms of obtaining services and will have less flexibility in those services as they are consolidated into packages. It will be much more regimented in the future, with fewer choices for customers."

Henka said that by using cost-controlling strategies such as reference-based pricing, employers could lower their drug spending with or without PBM involvement.

Federal Approval Needed

A merger or acquisition announcement is not the same as a done deal, however. "The CVS/Aetna and Cigna/Express Scripts acquisitions are going to raise questions within the relevant government agencies," Buckey noted. "Given that Express Scripts was the last large independent PBM, the government may not look favorably on either deal."

Related SHRM Articles:

A Prescription for Soaring Drug Costs, The SHRM Blog, March 2018

How HR Can Help Control Prescription Drug Costs, HR Magazine, May 2017

Care Management Vital in Tackling Specialty Pharmacy Costs, SHRM Online Benefits, February 2017

Negotiating Price Transparency with PBMs Pays Off, SHRM Online Benefits, January 2017

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