Anthem seeks $3B more in drug savings from Express Scripts

Indianapolis-based health insurer Anthem Inc. wants $3 billion a year more in savings on drugs from Express Scripts Holding Co., and is threatening to ditch the company in a move that would depose the pharmacy benefit manager as the country’s biggest.

The insurer, which contracts with Express Scripts to manage prescription drug costs for its members, believes the pharmacy manager should be passing along about $3 billion a year more in the savings it negotiates from drug companies, CEO Joseph Swedish told investors Tuesday at the J.P. Morgan Health Care Conference.

Express Scripts disputed Swedish’s description of the terms between the two companies, and the $3 billion figure.

“We are entitled to improved pharmaceutical pricing that equates to an annual value capture of more than $3 billion,” Swedish said at the San Francisco meeting. “To be clear, this 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.

Anthem and Express Scripts have an unusual arrangement that stems from Anthem’s sale of its pharmacy-benefits business to Express Scripts in 2009. The insurer is entitled to periodic reviews of how much it pays for drugs, a process the companies last went through in 2012. They haven’t yet reached a deal on the most recent talks.

‘In good faith’

Express Scripts said that Anthem was mischaracterizing the situation.

“Express Scripts has consistently acted in good faith and is in full compliance with the terms of its agreement,” said Brian Henry, a spokesman for the company. “While the contract calls for good faith negotiations regarding a pricing review, it does not mandate specific price adjustments. Furthermore, Anthem is not entitled to $3 billion.” He said the company valued its relationship with Anthem.

The two may be running out of time. “We have a very involved dispute resolution process in the contract that has been fully exhausted,” Thomas Zielinski, Anthem’s general counsel, said Tuesday after the investor presentation. “That said, we remain in dialogue.” He said Anthem took the dispute public because the company wasn’t getting the savings it needed to offer more competitive products, such as Medicare drug plans.

Express Scripts shares fell 3.1 percent, to $82.92 each, in trading after the market closed.

Pharmacy benefit managers, led by Express Scripts, have helped force much of the current debate around drug prices in the U.S. They’ve succeeded in wringing steep discounts on expensive therapies by excluding some treatments unless their makers offer better prices. In 2014, Express Scripts said it would block Gilead Sciences Inc.’s hepatitis C treatment Harvoni from its main list of covered drugs in favor of a competing treatment from AbbVie Inc. The resulting price war led to discount from the drugs’ list prices that were worth thousands of dollars per patient.

The benefit to Anthem could ultimately be at least $600 million, partly because the savings would result in lower rates that would help the insurer attract and keep customers. Yet, Anthem, if it does drop the company, doesn’t have many options to turn to. Consolidation in the industry has led to just two other major players: CVS Health Corp., and OptumRx, a unit of Anthem competitor UnitedHealth Group Inc.

Still talking

Express Scripts said Monday that the companies are still talking. “I can’t think of a time, with any client, where we’ve had a contractually defined price review where we’ve reached a point where we couldn’t ultimately settle it out,” Tim Wentworth, Express Scripts’ president, said at the conference Monday, before Anthem’s remarks. Anthem accounted for 14 percent of Express Scripts’ revenue in 2014, according to Express Scripts’ annual report.

"Both of us have to step back and see whether we’re honoring the contractual terms of the agreement," Zielinski said. If not, “you have your legal remedies.”

They need to agree on what Zielinski called competitive benchmark pricing. If Express Scripts, the U.S.’s biggest pharmacy benefit manager, doesn’t come back to the insurer with what he called a “good-faith counter,” the insurer may look for another pharmacy benefit manager that can give it better prices.

Anthem said earlier Tuesday that it expects adjusted profit this year of at least $10.80 a share, up from $10.16 in 2015. The profit forecast doesn’t include any savings from a new pharmacy deal with Express Scripts, Swedish said. The $3 billion savings estimate also doesn’t take into account Anthem’s pending acquisition of health insurer Cigna Corp., he said.

Anthem shares closed Tuesday at $135.60, up 5.6 percent.

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