Anthem suit over drug costs may start trend

Litigation follows failed contract renegotiation

By Shelby Livingston, Business Insurance, 3/27/16

Anthem Inc.'s lawsuit over pharmacy benefit manager Express Scripts Holding Co.'s pricing practices sparks questions about transparency in the PBM industry and what the future may hold for stand-alone PBMs.

Indianapolis-based Anthem last week filed a nearly $15 billion lawsuit against St. Louis-based Express Scripts alleging the nation's largest PBM breached its contract with the health insurer by charging higher-than-competitive prices for its services.

According to the suit, filed in U.S. District Court for the Southern District of New York, Anthem also alleges Express Scripts breached its contract by not performing services in a “prudent and expert manner” and through system defects, inadequate training of workers and a lack of expertise.

The suit is the culmination of a monthslong dispute in which Anthem claims it tried unsuccessfully to negotiate lower pricing.

Anthem alleges that Express Scripts' pricing exceeds competitive benchmark pricing by more than $3 billion annually, or $13 billion for the rest of Anthem's 10-year contract with Express Scripts, plus $1.8 billion for the time it would take Anthem to transition PBM services once the contract ends in 2019, according to the lawsuit. The overpricing “has resulted in massive damages to Anthem and an obscene profit windfall to (Express Scripts),” Anthem alleges.

Express Scripts, on the other hand, has “consistently acted in good faith and in accordance with the terms of its agreement with Anthem,” a spokesman said in an email. “We believe that Anthem's lawsuit is without merit.”

PBMs help health insurers process claims, manage retail pharmacy networks and negotiate rebates with drugmakers. Many experts consider PBMs essential for health insurers to score the best prices for drugs.

Analysts disagree on the outcome of the dispute.

Chicago-based Morningstar Inc. senior research analyst Vishnu Lekraj said in a research note that he believes Anthem and Express Scripts will reach an agreement, as “Anthem's alternative PBM vendor choices are limited.”

Meanwhile, Ana Gupte, New York-based managing director and senior research analyst at Leerink Partners L.L.C., said in a report that while “partial pricing relief” for Anthem is likely through the end of the contract, she expects the health insurer to look for another PBM partner beyond 2019.

That partner could be OptumRx Inc., a unit of UnitedHealth Group Inc., she said.

But losing Anthem could be costly for Express Scripts, said Randy Vogenberg, Greenville, South Carolina-based partner at Access Market Intelligence.

“It's a lot of money, and Anthem's a big client for Express Scripts,” he said.

According to Fitch Ratings Inc., Anthem accounted for 16.3% of Express Scripts' 2015 sales, or $16.6 billion. The suit also could prompt other Express Scripts clients to question if they're getting the best deal on PBM prices, sources said.

“What's going to happen is you could see more of this kind of (legal) activity, where in the past they would just work it out because everybody was making money,” Mr. Vogenberg said.

Now, rising health costs, thanks in part to costly specialty drugs, make it necessary to find savings anyway possible, he said.

The fact that profits are getting squeezed also means there's a bigger spotlight on the lack of transparency in the PBM industry, Mr. Vogenberg said.

The suit may be “the tipping point that will force transparency, certainly, but will also cause change in the way health plans and PBMs and probably (drug) manufacturers do business,” he said of a business that can be “convoluted.”

“The lawsuit challenges a fundamental aspect of PBM-insurer relationships: the value of a PBM's negotiating power with pharmaceutical manufacturers,” Fitch said in its report.

The increased scale that Anthem will derive from its proposed merger with rival health insurer Cigna Corp. could reduce PBMs' negotiating power relative to the scale of a combined Anthem and Cigna, Fitch said. If Anthem switches to another PBM, that could indicate a stand-alone PBM like Express Scripts isn't “best positioned to pass through cost savings to clients.”

Other experts, however, see a future for stand-alone PBMs.

“Most people in the industry will tell you that PBMs have staying power. Their clout and leverage will always make them a viable play for employers, regional health plans and even large multistate insurers,” Josh Golden, Atlanta-based practice leader of employer consulting at Pharmaceutical Strategies Group L.L.C., said in an email.

Employers and other plan sponsors can learn lessons from the Anthem-Express Scripts dispute, said Craig Oberg, St. Paul, Minnesota-based managing consultant at PBM consultant The Burchfield Group Inc.

“This should be an encouragement to all purchasers of PBM services that they should be cautious about long-term agreements and even renewing existing agreements without testing the market,” Mr. Oberg said.