Urge to Merge Turns Vertical in Health-Care Industry: Q&A

(Bloomberg) -- Big mergers in U.S. health care have rotated on their axis, with the nation’s biggest insurers and the companies that preside over customers’ access to high-priced drugs eyeing one another after deals to combine insurers were struck down.

Cigna Corp. has agreed to acquire drug benefits manager Express Scripts Holding Co. in a deal valued at $67 billion, including $54 billion in cash and stock. That follows an offer by CVS Health Corp. -- a company created by the merger of a drugstore chain with a pharmacy benefit manager -- to buy insurer Aetna Inc.

Q: Why are health insurers and pharmacy benefit managers getting together?

A: Since regulators rejected two megadeals -- Anthem Inc.’s bid for Cigna Corp. and Aetna Inc.’s for Humana Inc. -- insurers have been prospecting for acquisitions that can be digested with relative comfort while offering the chance to eliminate costs. Having the earlier deal canceled left Cigna looking for something to do with its cash. Now, companies in the insurance and drug benefits management industry are looking at each other and seeing a fit. Late last year, CVS Health unveiled a $67.5 billion deal for insurer Aetna that the companies said would save $750 million in costs and bring consumers better, more efficient care.

Q: What do pharmacy benefit managers do and how do they work with insurers?

A: PBMs like Express Scripts and CVS Health carve out drug benefits for insurers and employers, negotiating prices with drugmakers and sometimes delivering treatments directly to patients. The companies require drugmakers to pay rebates -- the amounts of which are kept secret -- in order to gain access to lists of covered products, and try to steer patients toward lower-priced drug choices such as generics by requiring co-pays on pricier options. As a result, they say, consumers and insurers pay lower costs.

Q: Is there ever friction between PBMs and insurers?

A: Anthem said in late 2016 that Express Scripts had been overcharging for drugs by billions of dollars, and that it would set up its own PBM rather than continue dealing with the company. Anthem was Express Scripts’ biggest client, and Express Scripts CEO Tim Wentworth said last year that he would be open to a deal with a health insurer or with Internet giant Amazon.com Inc.

Q: How will antitrust enforcers respond to a combination of Cigna and Express Scripts?

A: While regulators have mainly focused on mergers between direct competitors in the past, there’s been increasing attention on companies that operate along the same chains of production or distribution. A recent Justice Department lawsuit to block a vertical merger in the communications industry may indicate roadblocks to such deals in health care. And separately, some members of Congress have questioned how PBMs do business, asking them to disclose their secret discounts.

To contact the reporter on this story: John Lauerman in London at jlauerman@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III

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