Express Scripts Next Move … Amazon?…Walmart? — John G. Baresky
With Anthem leaving in 2019 and a new year coming up fast, what can Express Scripts do for itself and investors?
Anthem says, “Goodbye”…
The pharmacy benefit management (PBM), health insurance, Blue Cross Blue Shield and investment communities are awash in chatter and speculation upon hearing the news Anthem does not plan to be a client of Express Scripts effective 2019. Anthem is a Blue Cross Blue Shield Association (BCBSA) affiliate operating plans in 14 states and is the largest for-profit managed care entity of the Blue Cross Blue Shield Association. While Express Scripts is the nation’s largest independent PBM; the loss of Anthem is significant and leaving many to wonder what Express Scripts plans are moving forward to fill such an enormous gap in sales revenue.
A Formidable, Battle-Tested Organization Operating In Constant Change Mode…
Express Scripts is a savvy company when it comes to consumers, patients, pharmacy benefits, managed care and employer groups. Depending on the arrangement, it has successfully competed against or collaborated with Costco, CVS, Prime Therapeutics, Rite Aid, Target, Walgreens and Walmart. It masterfully acquired what was once the nation’s largest PBM, Medco, and assimilated it into its business operations. It has been the PBM for many of the nation’s largest healthcare insurance companies, managed care organizations, employers and government healthcare plans.
…According to Fortune, Express Scripts is ranked at number 22 in the Fortune 500; it processes more than 1.5 billion claims every year…
Based in St. Louis, Express Scripts grew quickly over the years by targeting flagship accounts to accumulate large numbers of total covered lives and by acquiring other PBMs along the way; while Medco was by far their largest PBM buy, they established a track record before that of buying up lesser-scale competitors. It is well-conditioned to operating in an increasingly consolidating, regulated and competitive business environment. The loss of their largest client is the latest of a long series of challenges Express Scripts has taken on since it became one of the top five PBMs in the nation during the 90’s and eventually the largest independent PBM in the country.
Express Scripts has many options…
- Re-negotiate their existing arrangement with Anthem with the goal of retaining them as a client and prevent their departure as of 2019. This would likely require Express Scripts to lower their rates with Anthem. Express Scripts would need to find other ways to overcome the loss of revenue and solidify ways not to capitulate to other large customer account demands for lower rates.
- Predictably, it can go into a cost-savings mode as it sorts things out. More out-sourcing and reduced back-filling of openings as staff retire or move onto opportunities with other companies. These measures won’t begin to make up for the loss of Anthem but may free up funds for other initiatives. Cost-cutting measures can be immediately and long term corrosively detrimental to organizational effectiveness despite its reputation for contributing to profitability. They have to be done carefully so as not to disrupt current operations and customer service levels critical to Express Scripts’ ongoing success.
- Adapt an extra assertive and refined business development / sales strategy to capture large scale employer and other accounts with hefty numbers of total covered lives over the next 15 months and an equally intensive client retention program. Express Scripts could target several “jumbo” employer plans as “must wins” and be especially mindful of not losing any of its existing client base moving forward.
- Explore alternative business models like contracting with large for-profit and not-for-profit healthcare systems, long term care facility operators and other healthcare providers to help them establish stronger regional / metropolitan or sector dominance. These would not fill the Anthem gap or have the immediate bang-for-the-buck large scale wins that large employer groups have but conceivably open pathways into other higher margin service segments.
- Historically, Express Scripts has grown in large part from acquisitions. It scaled up over the years through acquiring mail order pharmacies, specialty pharmacies as well as small to mid-sized PBMs until it made its largest deal to acquire a PBM larger than itself, Medco. There is the potential for Express Scripts to scale up further by acquiring one or more PBMs which will be substantially smaller than they are -likewise if they choose to buy a specialty pharmacy. A company (or companies) complementary to the PBM business like claims processing, benefits consulting or pharma / medical analytics may align well with their existing PBM business and allow them to expand beyond it. If the acquisition(s) are sizable, they may also shield Express Scripts with enough debt for it to avoid being acquired itself.
- Optimize hub and specialty pharmacy opportunities with pharmaceutical manufacturers. This approach could help them redefine and fine tune new streams of revenue with potentially higher margins while helping them diversify from conventional managed care organization and large employer contracting strategies. The resources to initiate this are already in place; Express Scripts could amplify its marketing / sales strategy in this area to widen its position but they would not be enough to fully offset the loss of the Anthem revenue.
- Amazon has been expanding its reach into healthcare. Express Scripts would offer a direct pathway for Amazon to quickly penetrate consumer / patient healthcare, managed care, employer and other payer sectors in full scale fashion. While Amazon has been able to manage growth across the nation and account for various state-by-state commerce laws, tax policies, etc.; pharmacy and prescription drug dispensing / shipping laws are incredibly complex to navigate. By partnering with Express Scripts, Amazon would gain nationwide market access; Express Scripts would gain a new, unique customer that would put it at further odds with its contracted retail pharmacy networks. Amazon / Express Scripts could choose to engage the employer and managed care sector or develop programs centered on Amazon’s 65 million Prime members — and open market consumers both insured and uninsured. Either way, an Amazon / Express Scripts tandem is potentially an innovative new business model established competitors in retail and PBM circles would have to account for.
- Walmart has been quietly fortifying its pharmacy unit’s leadership ranks. Over the last few years they have added a number of pharmacy heavy hitters from Walgreens with proven experience in pharmaceutical / rebate contracting, retail pharmacy network contracting, mail order pharmacy, managed care and employer contracting. Express Scripts would add enormous PBM muscle to Walmart’s pharmacy business initiatives. Walmart claims 90% of the U.S. population lives within 10 miles of one of its 4,700 stores giving Express Scripts direct patient access which can be a substantial specialty pharmacy asset. A Walmart and Express Scripts partnership (or perhaps merger?) would compete against CVS Health retail (CVS stores and Target pharmacies) plus the PBM unit (which has a 10 year contract with Aetna) and against Walgreens and its collaboration with Prime Therapeutics. A buyout of Express Scripts by any retailer would change its “independent” PBM status immediately; how it would stand under Amazon is debatable.
Over the next few months, the Anthem / Express Scripts business story is well worth following. If Anthem does leave Express Scripts, the new PBM provider had better be well-prepared to take on such an enormous mass of consumers / patients. Benefit eligibility data, prescription records and employer / member communications associated with the transfer from Express Scripts to another PBM would be a sizable, complex and expensive undertaking for Anthem and a new PBM partner to orchestrate. So far there has been no definitive news who the new Anthem PBM is.
While the possible exodus of their largest client is a significant issue for Express Scripts to account for, in many ways it reflects their historic ongoing existence in the PBM sector. They are truly a battle-tested organization; if Anthem does indeed exit; it will test Express Scripts’ experience and fortitude. Conversely, it will very likely be a catalyst for them to develop new strategies and services to generates sales revenue while also providing the basis to modify their business model to stay ahead of the changes in the healthcare industry.
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