Cigna to Acquire Express Scripts in $67 Billion Deal, Creating Integrated Health Services Powerhouse

VCBeat (WeChat: vcbeat) reported that on March 8 local time, U.S. health insurer Cigna and pharmacy benefit manager ESI announced they had signed an agreement under which Cigna will acquire ESI for a total consideration of approximately $67 billion. The transaction value includes ESI’s approximately $15 billion in debt. The deal will be structured as a combination of cash and stock, with ESI shareholders receiving $48.75 in cash per share plus 0.2434 shares of the combined company. The transaction has been approved by the boards of directors of both companies.

Cigna is one of the largest commercial insurers in the United States, providing healthcare and insurance services to individuals across the nation and globally. In the Phoenix metropolitan area, Cigna operates an HMO with satellite clinics known as the Cigna Medical Group.

Cigna's revenues for the three-year period from 2015 to 2017 were $37.88 billion, $39.67 billion, and $41.62 billion, respectively, with net incomes of $2.09 billion, $1.87 billion, and $2.24 billion, respectively.

ESI Group, fully known as Express Scripts, is the largest pharmacy benefit manager (PBM) in the United States. According to its 2016 annual report, it covered more than 95% of retail pharmacies nationwide, with annual revenue reaching $100.2 billion and net profit amounting to $3.4 billion.

In 2011, ESI made a $29.1 billion acquisition offer for Medco, which once served over 30 million insured individuals and was the second-largest pharmacy benefit manager (PBM) in the United States. After undergoing a six-month antitrust investigation by U.S. authorities, the transaction was officially approved in March of the following year. This deal positioned the newly formed ESI Group as the most influential PBM in the nation, covering more than 80 million insured individuals, processing 1.4 billion prescriptions annually, and pushing the group’s annual revenue beyond the $100 billion mark.

TransferCigna and ESIA comparison of the companies’ development histories and operational data reveals that ESI surpasses Cigna in both business scope and revenue, leading U.S. industry peers to describe the deal as “unexpected.”

As previously mentioned, Cigna’s core business is health insurance, while ESI’s core business is pharmacy benefit management (PBM). Following the merger, the two entities may generate synergies.

PBM, short for Pharmacy Benefit Management, is a specialized third-party healthcare service. Strictly speaking, PBM is a product of the U.S. healthcare security system. Unlike the universal health coverage systems in China and some European countries, where health insurance funds are centrally managed by the government, the U.S. healthcare model features employers purchasing insurance for their employees, with commercial insurers serving as the primary administrators.

In this context, insurance institutions have devised various strategies to control medical costs in order to reduce expenditures. Examples include Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), Point-of-Service plans (POS), and Accountable Care Organizations (ACOs).

Its primary operational model involves transitioning from fee-for-service to managed care with end-to-end monitoring, strictly controlling healthcare expenditures through health management, disease prevention, and diagnosis-related group (DRG) payment models, thereby saving costs for insurance institutions and employers.

The main business of PBM is as follows:

1. Medication Use Management.This section represents the core focus of Pharmacy Benefit Managers (PBMs). Their primary operational strategies include: first, collaborating with relevant research and medical institutions to develop a formulary (similar to social insurance or essential medicine lists), requiring affiliated healthcare providers to prioritize medications within this formulary for reimbursement eligibility; second, implementing prior authorization, whereby the use of new drugs or those not included in the formulary requires approval from both the PBM and the insurer to curb the utilization of high-cost medications; third, issuing drug interaction alerts, where prescriptions are uploaded after being written by physicians to screen for potential drug-drug interactions and adverse effects; and fourth, controlling overall prescription volumes to prevent excessive or oversized prescribing.

2. Intervention in Drug Access Methods.The structure of pharmaceutical distribution in the United States differs significantly from that in China. The primary distribution channels are outside hospitals, where drug prices are lower than those within hospital settings. Pharmacy Benefit Managers (PBMs) leverage this disparity by recommending that patients obtain medications through out-of-hospital retail pharmacies or mail-order services, thereby reducing drug costs.

3. Differentiated Payment Ratios.PBMs have designed different payment methods for various types of prescription scenarios. First, they establish different reimbursement rates for brand-name drugs and generic drugs, encouraging the use of generics and lower-cost alternatives. Second, they dynamically adjust insurance coverage ratios based on negotiations with pharmaceutical companies, with patients responsible for out-of-pocket costs exceeding these covered amounts. Third, they cap both the proportion and total amount of insurance payments within overall medication expenses, requiring patients to pay out of pocket for any costs beyond these limits.

4. Chronic Disease Management. Due toA significant proportion of individual members covered by PBMs are patients with chronic diseases; therefore, PBMs have designed long-term dynamic monitoring mechanisms for this population. Through sustained patient education, these mechanisms aim to improve medication adherence and reduce the risk of severe illnesses.

If PBMs and health insurance were integrated, the aforementioned processes could be better executed, helping employers and individual enrollees reduce healthcare costs.

The Cigna-ESI deal is not the only recent transaction in the U.S. market centered on pharmacy benefit management (PBM) and health insurance businesses. In December 2017, Anthem, another U.S. health insurance giant, was acquired by CVS Health, the nation’s largest pharmaceutical retailer, for $69 billion. The merger primarily focused on achieving synergies between commercial insurance and PBM operations.

A series of mega-mergers and acquisitions suggest that U.S. peers are “banding together for warmth.” The reason lies in the profound transformation underway in the U.S. healthcare security system, as uncertainty intensifies over whether the Affordable Care Act will be repealed.

The Affordable Care Act, implemented since 2010, primarily aims to increase health insurance coverage and control healthcare expenditures. Measures include providing insurance subsidies for low-income individuals, mandating employers to purchase insurance for employees, prohibiting insurers from denying coverage or charging higher premiums based on pre-existing conditions, and offering more comprehensive insurance plans covering services such as examinations, medications, and surgeries.

After six years of implementation, the Affordable Care Act has drawn considerable criticism, with its effectiveness in curbing the growth of healthcare expenditures being called into question. Data show that per capita healthcare spending in the United States rose from $8,402 in 2010 to $9,523 in 2014, a 13.3% increase. Additionally, there have been instances of misuse of health insurance subsidies intended for low-income individuals.

In this context, the United States is seeking to amend or repeal the Affordable Care Act, thereby subjecting the healthcare industry to pressure from policy adjustments. This is primarily manifested through government intervention in drug pricing, reforms in healthcare payment models, more aggressive practices by Pharmacy Benefit Managers (PBMs), and further compression of profit margins in pharmaceutical distribution and retail.

As a result, the U.S. pharmaceutical industry has undergone large-scale consolidation: for example, Walgreens merged with Alliance Boots and sought to acquire Rite Aid, the third-largest pharmacy retailer in the United States; CVS acquired Target’s retail pharmacy and minute-clinic businesses and recently merged with Aetna. Coupled with the merger of Cigna and Express Scripts (ESI), it is evident that the U.S. health insurance and pharmaceutical markets are under increasing pressure.

In the future, industry M&A and consolidation in the U.S. market, driven by insurance cost containment and pharmaceutical retail operations, is likely to continue.