As the last major pharmacy benefits manager works toward closing a merger with Cigna Corp., health insurers will need to look beyond the drug space to grow.
The industry has seen two massive deals announced in four months, with Cigna's $67 billion pending acquisition of Express Scripts Holding Co. following another blockbuster transaction in CVS Health Corp.'s $69.51 billion deal to purchase Aetna Inc., announced in December 2017.
After the attempted health insurance megamergers terminated in 2017, managed care M&A strategies have shifted toward conglomerates that join insurance and other healthcare sectors. The pending Cigna and CVS acquisitions would effectively end the stand-alone PBM model, forcing insurers to look to other outpatient healthcare services companies for transformative deals.
Pharmacy benefit managers, or PBMs, are middlemen-like companies that negotiate drug prices among manufacturers, pharmacies and insurers that cover drug benefits. Because of the enormous influence PBMs have over drug pricing, they have been consolidating for years; most recently, Express Scripts struck a deal to acquire the PBM myMatrixx.
Insurers have viewed acquiring PBMs as an easy way to cut costs and boost revenues, tracking with an overall industry trend toward what is known as value-based healthcare, or care that tries to prevent patients from needing expensive hospital visits.


The largest U.S. health insurer, UnitedHealth Group Inc., purchased the PBM Catamaran Corp. for $13 billion in 2015 through its healthcare delivery subsidiary Optum. With that acquisition, Optum developed its own PBM, called OptumRx, which has become the third-largest PBM in the U.S. by revenue, helping propel UnitedHealth to record profits year after year.
The top two PBMs, Express Scripts and CVS' Caremark, are now being merged with large insurers in a race to compete with UnitedHealth's behemoth position in the market.
"The barn doors are closing and [Unitedhealth] is riding the horses out of the barn, and the others are trying to follow them," BMO Capital Markets equity analyst Matthew Borsch said in an interview. "The horizontal mergers were blocked, so the question is: Can they follow United's lead with respect to acquiring their own PBMs?"
Cigna saw Aetna's deal with CVS, UnitedHealth's growth and Anthem Inc.'s strategy of developing its own PBM in-house, and moved quickly to bid for Express Scripts so it could remain competitive, Borsch said.
Anthem currently has a servicing contract with Express Scripts that the insurer declined to renew in 2017 in order to save $3 billion it said it was overpaying to Express Scripts. As a result, Anthem decided to start up its own PBM, IngenioRx, to expand into the lucrative space.
Anthem's decision to build its own PBM rather than buying one outright is also a viable strategy, Borsch said. Anthem is "already big in its own right," and executives at the company believe by developing IngenioRx, the company can effectively compete with the rest of the field.

The same year UnitedHealth bought Catamaran, the other four members of the "big five" group of managed care companies gambled on merging with one another to build even larger insurers. Aetna pursued Humana Inc., while Cigna and Anthem struck what eventually became a contentious agreement to merge. Antitrust regulators ultimately blocked both deals, and the insurers have since targeted billion-dollar deals elsewhere in healthcare services.
In December 2017, for example, Humana announced a $4.17 billion bid for hospital and clinics company Kindred Healthcare Inc., while UnitedHealth announced a deal to purchase dialysis provider DaVita Medical Holdings LLC for $4.9 billion.
Yet some investors were surprised Cigna bid for Express Scripts rather than Humana, a giant in the lucrative Medicare Advantage business line, RBC Capital Markets equity analyst Frank Morgan said in an interview. In the past, Cigna executives have expressed the desire to purchase a private Medicare-focused company.
"But once you get over it, it actually makes sense," Morgan said. "It was unlikely that Cigna would buy Humana because of the failed horizontal mergers."
The CVS and Cigna deals are now before the Department of Justice and Federal Trade Commission to consider. It is unclear whether the deals will raise antitrust concerns similar to those of the failed insurance mergers. Regulators have issued a second request for information in the CVS-Aetna transaction, while on Capitol Hill, members of Congress raised no red flags during a hearing.
RBC's Morgan noted that Catamaran was approved by regulators without problems. But that deal was far smaller and during a less contentious time, he added.
When asked if the deals would limit competition in the market, Department of Health and Human Services Secretary Alex Azar told reporters the same day the Cigna-Express Scripts deal was announced that he wanted "market forces" to "do what they're going to do," undeterred from regulations that would spur or curb competition.
