Business

Cigna bets on getting bigger as rising costs vex health business

Under pressure to tame ever-increasing health care costs, the companies that help millions of Americans manage their medical care are wagering that they can be stronger and simpler by joining forces.

Cigna Corp.’s proposed $54 billion acquisition of Express Scripts Holding Co., announced on Thursday, is the latest sign that the medical supply chain — where multiple companies are responsible for different aspects of care — has become too cumbersome.

Health care spending is inexorably rising, accounting for an estimated 18 percent of the US economy last year. Critics such as billionaire Warren Buffett, who has called soaring health costs a “tapeworm” sapping the country’s strength, view the complexity of the system and its large number of middlemen as a culprit.

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Insurers, drug-benefit managers, drug distributors, pharmacies, and large medical groups currently all get a cut of the profits from caring for patients. Bringing more of those businesses under one roof might help streamline some of those costs and improve care, at least in theory.

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“We saw this as the beyond-a-shadow-of-a-doubt best strategic proposition,” said David Cordani, the chief executive of Cigna, on a conference call discussing the deal. The companies are focused on lowering costs and “removing complexity in the health care system.”

Executives offered few details on how merging would help their patients and clients while boosting their own profits. But the deal could help Cigna compete with UnitedHealth Group Inc., which has clinics, drug benefits, and insurance business, and CVS Health Corp., which agreed to buy Aetna Inc. for about $68 billion, linking its pharmacies and drug-benefit plans with the insurer’s coverage.

Employers are increasingly restless over their high health care bills. Amazon.com Inc. plans to team with Buffett’s Berkshire Hathaway Inc. and JPMorgan Chase & Co. on a new venture aimed at lowering costs and improving care for their employees. And large employers from Walmart Inc. to Blackstone Group LP are experimenting with ways to reduce their outlays on employee health care.

While a combined Cigna-Express Scripts would have substantial bargaining power over drug prices, it remains to be seen whether that muscle would reduce costs for the employers and patients who ultimately pay the bill.

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The deal “doesn’t mean health care costs are going to go down,” said Michael Rea, of Rx Savings Solutions, which has an app that helps patients find lower drug costs.

Pharmacy benefits managers have come under particular pressure in recent weeks from critics of the health sector’s inefficiencies. The harshest attacks have been aimed at a system of rebates that critics say obscure a drug’s true cost and often don’t benefit patients.

President Trump’s Council of Economic Advisers, in a report last month, criticized the companies’ market power and the opacity of their drug-price contracts. On Wednesday, Food and Drug Administration Commissioner Scott Gottlieb called drug plans’ business a “rigged payment scheme.”

Express Scripts is the largest of the remaining independent pharmacy-benefit managers. The company had previously touted the benefits of staying independent, though the quickening pace of health deals in recent weeks appears to have forced its hand.

Shares of Express Scripts gained 8.58 percent to $79.72, while shares of Cigna fell 11.44 percent to $172.00.