Invariably, you’ve questioned the fit of two or more things in countless situations — when working on a puzzle, trying on jeans, assembling furniture, writing lines of code, crafting an argument, picking a partner. While an initial assessment may suggest a good fit, a later and more careful assessment may conclude a poor fit. The same is true when organizations integrate. There is no shortage of corporate mergers and acquisitions that have fallen far short of expectations (e.g., Daimler-Benz–Chrysler, AOL–Time Warner, Sprint–Nextel). CVS Health’s acquisition of Aetna and Cigna’s acquisition of Express Scripts beg the question whether these payer–PBM integrations will be a good fit.
The potential benefits
Corporate integrations, in general, offer several potential upside benefits. A larger organization likely has greater purchasing power and may be able to lower costs. And integrated companies can share resources and activities that lower costs and/or increase revenues. Horizontal integrations — such as the Centene–Fidelis Care acquisition — offer the potential for savings based on economies of both scale and scope. Vertical integrations — such as Humana’s purchase of Kindred Healthcare and Anthem’s purchase of Aspire Health — provide greater diversification of offerings and spread risk across products and services.
Vertical integrations between payers and PBMs, in particular, may yield valuable insights. Integrating medical and pharmacy benefit data can yield a more complete and timely picture of care, allowing the organization to manage care better and potentially improve outcomes and lower costs. Integrated data also enhance the analytics and reporting capabilities that may be required for value-based contracts. UnitedHealthcare (the payer) and OptumRx (its PBM, which itself acquired Catamaran back in 2015) have leveraged these insights for years — and this may partially explain why UnitedHealthcare is the largest payer.
The potential costs
While champions of mergers and acquisitions often focus on potential upside benefits and value creation, downside costs and value destruction are also possible. The up-front costs directly associated with any merger and acquisition, such as legal and accounting fees, are inescapable. The Justice Department blocked the horizontal integrations of Aetna–Humana and Anthem–Cigna after concluding the deals would reduce competition and lead to higher prices. The time and money spent on these blocked acquisitions represent a loss for all parties involved.
Implementation requires a lot of blood, sweat, and tears. Economies are not realized instantly — there is typically a delay, and the amount of time can be significant. Systems integration is typically not seamless — there are often bugs to work out and errors to correct. Human resources may not blend easily — there may be differences in compensation, benefits, titles, and roles that need to be harmonized and training costs to be incurred. Some top talent may leave over culture clashes and bruised egos, and there may be dysfunctional turf wars and resistance to change to work through. Customer service can also suffer during implementation (e.g., slower response times, fewer “extras”) when staff and processes change and resources are diverted.
The potential risks
Express Scripts and CVS Caremark provide valued services to payers, and time will tell whether payers will continue to view these PBMs owned by parent organizations with subsidiary payer divisions as partners or competitors. Some payers may question whether these PBMs are providing them with the same level of services, insights, and costs as they do their sister payer divisions Cigna and Aetna —that is, whether the playing field is level or whether Express Scripts and CVS Caremark are giving their sister divisions an advantage. A perceived imbalance could lead to some customer defection.
Even worse, some payers may perceive that sharing medical benefits information with Express Scripts and CVS Caremark could, in essence, be giving Cigna and Aetna competitive intelligence. A perceived lack of a firewall between the co-owned payers and PBMs could also lead to some customer defection. The risk of losing business is not simply theoretical; concern about firewalls has been expressed as a reason why some payers have chosen not to work with OptumRx — and may partially explain why OptumRx’s market share, while substantial, lags behind that of Express Scripts and CVS Caremark.
For some payers, working with a PBM affiliated with a competitor may be, well, an acquired taste — pun intended. Other payers may migrate to other smaller PBMs, and demand for other options could be the catalyst for new entrants (e.g., Amazon). It is somewhat ironic that the perceived threat of new entrants may be a driver of these integrations among the current giants, but such integrations may only increase the likelihood and hasten these threats and increase their potential severity.
Survival of the fittest
So, what do you get when you cross a payer and a PBM? That sounds like an opening line for a joke, but the size of the organizations involved in the recent wave of integrations makes this a serious question. An extension of Darwin’s evolutionary theory would predict that the success of the newly integrated payer–PBM entities depend on how well they adapt to their environment. Interestingly, their size largely shapes the environment in which they and other organizations will compete. These giants and their environment will fit together, or not, or kind of/sort of.
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