(Bloomberg) — Being the middleman standing between drugmakers and insurance companies is getting to be more uncomfortable.
Health insurance giant Anthem Inc. moved to sever ties with pharmacy-benefits manager Express Scripts Holding Co. last week, opting instead to build its own such business in collaboration with CVS Health Corp. as it looks to contain its spiraling drug costs.
The pharmacy-benefits management business has been under widening scrutiny. Lawmakers, consumers and insurers, among others, have complained that pharmacy-benefits managers, or PBMs, use opaque deals and rebates to pad their profits. Several states have tried to enhance transparency around the business despite an aggressive industry pushback.
On top of that, some formidable potential competitors, including Amazon.com Inc., have been reported to be considering getting into managing drug plans. With Anthem’s move, companies like Express Scripts that concentrate on drug benefits will be facing muscular, more-diversified rivals.
“Is the pendulum swinging away from a third-party relationship to an integrated model? Yes,” says George Hill, an analyst at RBC Capital Markets who rates CVS stock outperform and Express Scripts neutral. “It now just makes sense for companies to have an in-house PBM.”
Still, Express Scripts indicated it is likely to continue to go it alone. And David Dross, practice leader of managed pharmacy practice at Mercer Health & Benefits, a consultancy, says the era of the freestanding pharmacy-benefits manager is far from over.
“There’s still going to be a lot of value in terms of what they bring to the table,” says Dross.
Insurers that run their own benefit managers say linking information on clients’ health and doctors’ visits with data on the drugs they take is beneficial.
Integration, insurers say, can help patients get the care they need — whether it’s a person with asthma getting an inhaler, or someone with high cholesterol refilling their statins regularly. Insurers also say moves by PBMs to lower drug costs can sometimes boost other types of health spending. Anthem says that making sure customers receive their drugs and refill them can lower medical spending overall.
“Our customers are demanding a more holistic solution to better manage their total health outcomes,” Anthem Chief Executive Officer Joe Swedish says in an interview. “We will offer an improved, coordinated member care approach.”
Anthem is linking with CVS to create a pharmacy-benefits firm called IngenioRx, beginning in 2020. CVS will manage claims processing and handle and deliver drugs, but Anthem will take on much of the medical work, such as deciding which drugs to cover and under what terms, as well as making sure patients take them appropriately.
Anthem and Express Scripts have been locked in a legal fight over drug costs, with Anthem saying the PBM has been overcharging it for drugs by about $3 billion. Anthem said the deal unveiled Wednesday will save at least $4 billion a year on drug costs once it goes into full effect in 2021. About 20 percent of the expected savings will benefit shareholders, with the rest passed on to clients.
Express Scripts is still well-positioned to compete as a stand-alone firm, says a company spokesman. He says the Anthem-CVS tie-up emphasizes the importance of Express Scripts’ independence.
“We are very confident of the value of having an independent PBM in the marketplace,” he says. “Our ability to manage the supply chain, to drive down the cost of medicines, doesn’t change. We’re still well positioned to do that.”
The break with Anthem had been widely expected by investors. Express Scripts shares had pulled back sharply in recent months, falling 17 percent since the start of the year, and Eric Coldwell, an analyst at Robert W. Baird & Co., says the end of the uncertainty over the relationship likely came as a relief for some.
Express Scripts says it’s bulking up in ways that make sense for clients by expanding its offerings. The company agreed earlier this month to acquire a company that approves or blocks coverage for scans and other costly medical tests.
Anthem’s move comes amid increasing concentration in healthcare. Aetna Inc. has a similar pharmacy-benefits deal with CVS. The third-largest pharmacy-benefits manager, OptumRx, is owned by UnitedHealth Group Inc., the biggest U.S. health insurer. UnitedHealth also owns primary-care clinics and doctor groups and agreed to acquire outpatient surgery centers this year.
Drug costs have become a major pain point in the effort to lower health-care spending. Employers and Anthem think they can flush waste out of the system, said Michael Rea, CEO of Rx Savings Solutions, which advises employers on how to reduce drug costs. He said Anthem thinks it can do a better job for its members.
“Anthem’s keenly aware of what the pharmacy experience means to the overall member experience,” he says. “It’s the most repeated transaction in healthcare.”
The consolidation among different health-care players could make it that much tougher for any outsiders to enter the business.
Speculation has been building over Amazon.com’s plans to get into the business of selling prescription drugs. Analysts who follow the drug business worry that the internet giant could have the same effects that it’s had on traditional retailers, stealing their customers, pushing down prices and clobbering profits.
The Internet giant has long had an interest in the field and CNBC reported that the company will make a decision about online drug sales before Thanksgiving.
Tom Borzilleri, a former PBM executive who launched InteliSys Health LLC, a technology startup that provides drug-price transparency, says that Amazon.com could end up wrestling a lot of the same challenges that longtime industry players face.
“If they acquire Express Scripts, they have to change the entire business model in order to compete,” he says. “They’ve got to create a new mousetrap.”
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