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Express Scripts buys PBM from WellPoint


INDIANAPOLIS--Express Scripts Inc.'s purchase of WellPoint Inc.'s NextRx could further fuel competition in the pharmacy benefit management market, benefit experts and market analysts say.

Last week's acquisition will make the St. Louis-based PBM the nation's largest, giving it more clout in its ongoing competition with rivals CVS Caremark Corp., the current No. 1, and Medco Health Solutions Inc., currently the nation's second-largest PBM, based on covered lives.

At the same time, consolidation at the top of the market should spur smaller and midsize PBMs to develop new business models to differentiate themselves.

The end result may be that employers will have more choice when selecting pharmacy benefit services, benefits experts say.

The move also signals that health insurers are starting to divest noncore business operations to focus on their primary mission of managing medical care, analysts say.

Last week, Express Scripts said it intends to buy Indianapolis-based WellPoint's NextRx PBM for $4.68 billion with cash and $1.4 billion in Express Scripts common stock. The deal includes a 10-year contract for Express Scripts to provide PBM services to members of WellPoint, which will retain control of medical policy, formulary and integrated disease management.

Sean Brandle, vp and national pharmacy practice leader at Segal Co. in New York, said the sale of WellPoint's PBM business to Express Scripts "will drive (price) competition a little more. Express Scripts is bigger now and should have more negotiating power and leverage with pharmaceutical makers."

"It's the law of large numbers," said Sarah Rosen, managing senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc. "The more members you have, the more leverage there is in negotiating with drug companies."

After the merger, the combined Express Scripts-NextRx PBM will control prescriptions for more than 117 million covered lives, compared with CVS Caremark's 82 million and Medco's 60 million. NextRx currently has approximately 35 million members, according to the Scottsdale, Ariz.-based Pharmacy Benefit Management Institute, a PBM industry trade group.

Since the merger will give Express Scripts the biggest market share, competing PBMs will be forced to differentiate themselves by offering employers a variety of business models, said David Dross, Houston-based national practice leader of Mercer L.L.C.'s managed pharmacy practice.

In fact, "there's already more strategic differentiation between PBMs than there has been in recent memory," he said.

"Today there are so many different PBMs that have different strategies and emphasis in different areas that employers really do have a great deal of choice," said Dana Felthouse, president of the PBMI. She estimated there are between 70 and 90 PBMs operating in the United States.

For example, since Caremark is owned by CVS, that PBM has encouraged filling prescriptions at retail. By contrast, mail-order focused Medco offers "therapeutic resource centers" that provide a specialty distribution channel and pharmacist counseling to plan members with certain chronic conditions.

Meanwhile, Wal-Mart Stores Inc. is stirring up the prescription drug procurement market by offering to sell employers drugs at cost, plus a small administrative fee. This model, which Peoria, Ill.-based Caterpillar Inc. recently began using, should spur greater transparency among PBMs to share with employers how much they pay for wholesale drugs, benefit consultants say.

"In the last year or so, we've been seeing some competitive response on the part of retailers" because much of their pharmacy "business was being siphoned away by mail order," Mr. Dross said.

For the past few years, some PBM market analysts have advocated that insurers with in-house PBMs sell them and use the funds to bolster their core operations, said Steve Zaharuk, vp and senior credit officer at Moody's Investors Services Inc. in New York.

"We might see some more (PBM divestitures by insurers) because of this one," Mr. Zaharuk said. "As the competition gets more fierce, some companies may decide not to do this business anymore."

In a report last week responding to WellPoint's sale of NextRx, Citi Investment Research encouraged other insurers to do the same, providing possible purchase prices for PBMs owned by three major insurers: Aetna Inc., CIGNA Corp. and UnitedHealth Group Inc. Citi valued UnitedHealth's PBM at $5.2 billion, Aetna's at $2.2 billion and CIGNA's at $1.3 billion. Aetna, CIGNA and UnitedHealth declined to comment on the NextRx deal.

Citi's April bulletin also pointed out that its September 2008 survey of 170 self-insured employers showed that 71% preferred using PBMs not owned by health plans.

But Laurel Pickering, executive director of the New York Business Group on Health, a New York employer coalition, expressed concern that insurers could lose the ability to integrate pharmaceutical data with medical data.

"I know they say they can get PBM prescription data from the PBMs and marry it to the medical data. But I still think the plan loses some control over the ability to integrate. If you look at what employers are doing with value-based benefit design, medication is a critical component. I'm not optimistic they will be able to be as effective when the information comes from a third party," Ms. Pickering said.

"The argument for years of these in-house PBMs for insurers has been that they can do things like that, but I really have not seen any concrete proof of that model showing any more value than the carve-out PBM model," Mr. Brandle said. "I think they'll still be able to get the data. The good thing about drug data is there's a standardized national format. Timing may be an issue, but it is possible to get the data daily and integrate it into their systems."