DOJ Approves Merger Between Cigna and Express Scripts, Paving the Way for Increased Vertical Integration Between Payers and PBMs

On September 17, 2018, the U.S. Department of Justice (“DOJ”) approved the $52 billion vertical merger between health insurer Cigna Corp. (“Cigna”) and pharmacy benefit manager (“PBM”) Express Scripts.

The Cigna-Express Scripts merger is just one in a string of recent health insurer/PBM acquisitions. For more on these transactions, click here.

As the largest unaffiliated PBM in the country, many industry experts believed it was only a matter of time before Express Scripts became an acquisition target for a health insurer. In their joint announcement, Cigna and Express Scripts stated that the companies’ merger would expand consumer choice by providing medical, behavioral and specialty pharmacy services across a wide array of retail and online distribution channels; increase patient-provider alignment through increased care coordination; and personalize health care for consumers by leveraging data and predictive analytics.

The Cigna-Express Scripts merger comes on the heels of another vertical merger between Time Warner and AT&T. Vertical mergers involve companies at different points in the supply chain that do not directly compete for customers. The federal antitrust enforcers – the Federal Trade Commission (“FTC”) and the DOJ – have been unsuccessful in challenging vertical mergers for decades. After the DOJ challenged the Time Warner/AT&T vertical deal, in June 2018, a federal judge upheld the merger finding no competitive harm. Similarly, here, following a six-month investigation, U.S. Assistant Attorney General Makan Delrahim concluded that the deal is “unlikely to result in harm to competition or consumers.”

The DOJ’s approval of the Cigna-Express Scripts merger follows 16 states’ approval of the transaction with 9 states still outstanding before the deal can be closed. The parties contend that the DOJ approved the transaction without conditions, despite potential overlap between Express Scripts’ operations and Cigna’s in-house PBM business. The DOJ cited the presence of two other large PBMs and several smaller ones in the market. Additionally, the DOJ stated that competition from other vertically integrated companies and PBMs would prevent the parties from raising prices on consumers post-merger.

Practical Takeaways

The DOJ’s approval of the Cigna-Express Scripts transaction creates a number of lessons for health care providers to consider:

Following the Cigna-Express Scripts approval and the expected approval of the merger between Aetna and CVS Health, the three largest PBMs will all be tied to health plans (this includes UnitedHealth and its own PBM, OptumRx, which interestingly serves as Cigna’s current PBM provider). Theoretically, by combining both the medical and pharmaceutical benefit under one umbrella, the combined entities will be able to achieve greater costs savings than may have been possible under separate entities.
Cigna executives have stated that Express Scripts’ experience managing costly specialty drugs was a driving force behind the merger. This fact underscores the growth of the specialty drug market and payers’ desire to contain costs in this area. Given that many of the nation’s largest specialty pharmacies are now owned or co-owned by PBMs, independent specialty pharmacy providers should be mindful of these affiliations when contracting with PBMs.
Providers should be aware of any potential business impacts of the Cigna/Express Scripts merger on their existing payer and PBM contracts. These include pricing leverage, network access and forced or unforced patient steerage concerns. To the extent possible, providers should review their payer and PBM agreements to determine what, if any, assignment and termination rights they may have. Providers may also want to take steps to lock in favorable rates negotiated with payers or PBMs involved in these acquisitions.
Given the DOJ’s approval of the Cigna-Express Scripts merger and the DOJ’s loss in the Time Warner/AT&T court challenge, providers may consider more actively focusing on their own opportunities for vertical consolidation and integration by exploring opportunities such as forming PBM functions and establishing and growing new clinical and care coordination operations including retail clinics, mail order and specialty pharmacy operations and care coordination/medication therapy management services.

If you have any questions or would like additional information about this topic, please contact one of the following Hall Render attorneys: