• Anthem says Express Scripts overcharges it for pharmacy plan
  • Prime Therapeutics says it would welcome Anthem's business

Express Scripts Holding Co. has led the charge in complaining about costly drugs it believes are overpriced. The biggest U.S. pharmacy-benefit manager has pitted drugmaker against drugmaker in an effort to negotiate lower prices on behalf of insurers and employers -- sometimes triggering price wars with its aggressive actions.

Now its biggest customer, Anthem Inc., is using that playbook on Express Scripts. The giant insurer’s Chief Executive Officer Joseph Swedish said Tuesday that Express Scripts is overcharging Anthem to the tune of $3 billion a year. Anthem threatened to take its business elsewhere. Prime Therapeutics LLC, a competitor, already has said it’s eager to take over the Anthem account. Express Scripts shares have declined 9.4 percent to $77.51 since then.

The dispute shines a light on the obscure world of managing drug benefits, a unique business where third-party middleman such as Express Scripts, CVS Health Corp. and Prime Therapeutics are hired by employers or insurers to manage patients’ prescriptions. Benefit managers such as Express Scripts say they’re saving employers billions of dollars a year by using their clout to negotiate big -- and typically secret -- rebates off the list prices for top-selling drugs.

Opaque Contracts

Because the exact terms of the deals that pharmacy benefit managers, or PBMs, negotiate on individual drugs are almost always secret, critics have long complained it’s unclear how good of a deal their customers are getting.

Drug pricing in PBM contracts “is so complicated that it is difficult for anyone to sift through and understand what is going on,” said Michael Rea, CEO of Rx Savings Solutions, an Overland Park, Kansas, company that provides consumer software to help employers and health plans save money on drugs. “There are a handful of people in the nation who really understand how the pricing works.”

Anthem said it doesn’t know how much money Express Scripts is making from its business. Investors laughed when Anthem General Counsel Thomas Zielinski said at the J.P Morgan conference that Express Scripts isn’t known for its financial transparency.

Cutting Costs

“We make money when plan sponsors save money,” said Brian Henry, a spokesman for Express Scripts, who says the company’s tools help drive down costs.

Express Scripts’ clients “are sophisticated purchasers who receive full visibility into our approach, and they can audit our pricing and guarantees at any time,” Henry said. “By definition, all PBMs are transparent, meaning that they provide their clients with full disclosure to contractually agreed upon pricing terms, rebates and other guarantees.”

Express Scripts returns the “vast majority” of rebates its negotiates to clients, he said. The company disagrees that it owes Anthem $3 billion a year. “Anthem is purchasing drugs at rates they readily agreed to,” Henry said.

Yet if Anthem does drop Express Scripts, it doesn’t have many options to turn to. Consolidation in the drug benefit industry has led to just a handful of other major players: CVS Health, which manages drug benefits for Anthem’s competitor Aetna Inc.; OptumRx, a unit of Anthem’s other main competitor UnitedHealth Group Inc.; and Prime Therapeutics.

‘Transparent Business Model’

Prime manages drug benefits for nonprofit Blue Cross and Blue Shield plans in 20 states. It “would be privileged to assist Anthem in their efforts,” said Jim DuCharme, Prime’s president and CEO. He said his company has a “completely transparent business model.”

CVS Health declined to comment on whether it would be interested in Anthem’s business, and UnitedHealth didn’t respond to e-mails seeking comment.

“PBMs contract with very, very sophisticated purchasers who are entitled to negotiate any level of transparency they want,” said Mark Merritt, president and CEO of the of the Pharmaceutical Care Management Association, an industry group. “Payers really are in the driver seat.”

Express Scripts may be earning an operating profit margin of 5.5 percent to 6.5 percent on the Anthem contract, which is probably far higher than what CVS Health gets from managing drug benefits for Aetna, according to an estimate by Evercore ISI analyst Ross Muken in a note to clients on Wednesday.

“To be clear,” Swedish told investors at the J.P. Morgan Healthcare Conference, the $3 billion “is the amount by which we would be overpaying for pharmaceuticals on an annual basis.” Much of those savings would be passed on to clients, he said.

Management Contract

One factor that makes the Express Scripts-Anthem deal unusual is that Express Scripts paid $4.7 billion in 2009 to acquire Anthem’s drug-benefit plan, NextRx, along with a 10-year contract to manage drug benefits for Anthem members that expires in 2019.

“Anthem opted to receive a larger upfront payment in lieu of assuming increased risk on PBM pricing and a potentially greater benefit over the term of the 10-year contract,” said Henry of Express Scripts. 

The contract allows Anthem to review periodically what it pays for drugs and to negotiate new terms. The companies last went through the process in 2012. They haven’t yet reached a deal on the most recent talks.

Good-Faith Talks

Express Scripts denied that it owes Anthem $3 billion and said it’s in full compliance with the agreement. The contract doesn’t mandate specific price adjustments, just good-faith negotiations, Express Scripts said.

It’s not clear how long the dispute may drag on, said Garen Sarafian, an analyst at Citigroup Inc. But there are reasons for both sides to settle, eventually. Anthem accounts for about 14 percent of Express Scripts’ annual revenue, or roughly $14 billion, money that would be hard for Express Scripts to replace.

“The common perception is that Anthem has a lot of leverage,” Sarafian said.

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