Thu, 01/10/2019

M&A activity is driving much of the change in healthcare delivery at a record pace. In the first half 2018, organizations made announcements about more than $2.5 trillion worth of deals[1].

While this is hardly unprecedented, a noticeable trend is that health insurers are riding the wave of vertical integration and acquiring or merging with pharmacy benefit managers (PBMs). Take, for example, the recently announced merger between Cigna and Express Scripts with a total deal value of $67 billion. That makes it the 11th largest merger of all time between two North American companies.[2] And if a U.S. District Court Judge had not thrown a wrench into the mega merger between CVS and Aetna, we would have concluded the year with another deal between two health giants worth $69 billion[3].

So what are the synergies driving health insurers and PBMs together?

Pharmacy benefit managers buy drugs from manufacturers, manage drug benefits for insurers and employers, and distribute drugs to patients. One of the main parts of their job is negotiating lower prices from the drug manufacturers and passing along the savings to insurers and patients – a job where they pocket twice the profit on any transaction. They receive rebates from pharmaceutical manufacturers and fees from insurers and employers, a bone of contention when considering if they are passing on these savings, or keeping the biggest shares for themselves. With accusations of these middlemen pocketing rebates and discounts, there is increasing pressure on PBMs for more transparency about business practices. Standalone PBMs are finding it hard to sustain their business in this atmosphere of suspicion between them and their insurance company business partners.

On the other side, insurers have a desire to keep costs down. With a large in-house PBM, an insurer could reduce administrative costs while benefiting from superior purchasing power and scale. The two have complementary data sets and by combining assets they have an incremental advantage over their competitors in owning and retaining timely and complete data. Payments from pharmaceutical manufacturers to PBMs now exceed $100 billion per year[4]; Aetna’s $61 billion revenue is only one-third of the $178 billion that CVS Health reported in revenue last year.[5]

The Good

With prescription drug spending on the rise, PBMs are becoming a highly desirable target for payers. Insurers buy drugs that are cost-effective and avoid lower-value drugs, thereby keeping premiums down and attracting a greater market share for their insurance products. Payers who have their own PBMs argue that they are better able to manage the entire patient, as they have access to more valuable health care and utilization data in real or near real time. They can increase availability of physicians at walk-in clinics such as CVS’ Minute Clinics and reduce the usage of urgent care or emergency room for non-emergency health issues.

The Bad

PBMs generate more revenue and have higher margins than the insurers, so it is absolutely possible that we might see insurers adjusting their strategies to pursue pharmacy-benefit-manager-type profits, not the other way around. Patients could be directed by their insurers toward drug treatments that generate the highest profit margins and the largest rebates rather than high-value care. For example, out-of-pocket expenses for patients would increase if Aetna were to favor CVS and discriminate against patients who elect to use other pharmacies.

The Ugly

And now for the ugly, the so called wonders of better data and better analysis might end up in the wrong hands. The insurer could now access data of someone who is not covered under its benefit plans simply by analyzing the data from its PBM and that could potentially lead to discriminative pricing or unfair advantage over its competitors. While healthcare experts are hoping that such mergers bring rational coordination in this fragmented healthcare system, consolidation in Payer and PBM markets could lead to consumer premium hikes and higher drug prices.

If you are a payer, and want more information on how to better consolidate and analyze your current data, please find out more on our website,, or download our fact sheet here.