Health insurer Cigna Corp. (CI) has decided to expand its relationship with pharmacy-benefit manager Catamaran Corp. (CTRX) through a new 10-year deal that Cigna said will combine the two companies’ drug-purchasing scale while adding to the insurers’ earnings.
The deal also marks a big win for Catamaran, where shares have been under pressure–falling nearly 16% since the end of April, including a slide Monday–as investors worried the company could lose a top customer. Instead, Cigna, which already outsources some Medicare-related business to Catamaran following an acquisition last year, is boosting the companies’ ties.
Shares of Lisle, Ill., based Catamaran surged 13% to $55.09 in after-hours trading, while shares of Bloomfield, Conn.-based Cigna slipped slightly.
The new deal allows Cigna to keep a pharmacy-management business that helps restrain overall medical costs for the company’s mostly self-insured clients, Cigna Executive David Cordani said. At the same time, Cigna and its clients will benefit from the increased clout that comes from teaming up with the fourth-largest pharmacy-benefit manager by retail prescriptions.
PBMs manage drug benefits for corporate clients and insurers, using their buying clout to try to secure rebates with drug makers and favorable terms with retail pharmacies.
Cigna now has a reshaped drug-benefit business to market to clients who may outsource such business to other companies.
“This strategic PBM partnering agreement will complement Cigna’s strengths of partnering with physicians to engage customers in their overall health and wellness,” Mr. Cordani said in a release. “Connected to Catamaran’s industry-leading health-care information technology and service solutions, we will deliver differentiated options for clients and more affordable customer solutions in a rapidly evolving market.”
Cigna, focused mostly on commercial health insurance, is one of the largest managed-care companies. Catamaran became one of the big pharmacy-benefit manager by retail prescriptions through an acquisition last year, and it trails just Express Scripts Holding Co. (ESRX), CVS Caremark Corp. (CVS) and UnitedHealth Group Inc.’s (UNH) in-house PBM in size.
Cigna will retain control of functions like managing the formulary, or a list that describes available drugs and their cost for members, plus sales and marketing and day-to-day customer- and client-facing functions. Catamaran will cover functions like prescription-drug procurement, inventory management and claims processing, among other steps.
Cigna estimated the deal will add 50 cents a year to per-share earnings starting in 2015. The company also expects a one-time, approximately $25 million after-tax charge associated with the deal.
Questions about Cigna’s PBM plans have been a simmering worry for Catamaran ever since Cigna announced plans in late 2011 to buy Medicare-focused insurer HealthSpring. That is because HealthSpring was the top PBM client of SXC Health Solutions–a benefit manager that later became Catamaran through a deal–and investors were worried that the relationship could suffer if Cigna chose to bring the HealthSpring pharmacy business in-house, to its own PBM.
Cigna fanned the flames by talking openly, though with few specifics, about how the HealthSpring deal gave it new reason to evaluate its PBM options. The old contract between Catamaran and the Cigna-HealthSpring business is scheduled to wrap up at the end of this year.
“We looked at a variety of options and alternatives,” Mr. Cordani said in an interview. He called the new deal “a very good win for three parties–the customer, Cigna and Catamaran.”
Though medical and drug benefits are often viewed separately, PBMs and health insurers alike are increasingly focused on how patients’ sometimes poor adherence to prescription drugs can boost medical costs, and how medical and drug costs are interconnected. Cigna felt it was important to keep its medical and pharmacy-benefit programs tied together, Mr. Cordani said.
At the same time, the PBM industry has been consolidating, highlighting the value of clout when it comes to getting the best deals on drugs. Catamaran itself is the result of a recent deal. Express Scripts became the industry’s biggest player last year by buying large rival Medco Health Solutions. UnitedHealth is in the process of bulking up its internal PBM by bringing in-house business it had outsourced to Medco.
Date: June 10, 2013