When Congress passed the Affordable Health Care Act in 2010, patients, healthcare providers, and health insurance companies alike all worried about the changing landscape of prescription drug costs. A class of companies called pharmacy benefit managers, or PBMs, has flourished in the difficult-to-navigate environment of the modern healthcare system. The largest of the PBMs, Express Scripts (formerly traded under ESRX), works with clients to make the process of purchasing prescription medication easier and less costly. Express Scripts generates the large majority of its revenues from the sale of prescription drugs, with a minute portion of revenues coming from additional services and fees.

Express Scripts was founded in 1986 in the greater St. Louis, Missouri area. It became a subsidiary of New York Life Insurance Company a few years later and was made a publicly traded company in 1992. Over nearly three decades after this shift, Express Scripts grew at a rapid pace, acquiring other PBMs and related ventures like ValueRx, NextRx, and Medco Health Solutions in the process.

Insurance giant Cigna (CI) announced in early March of 2018 that it would be acquiring Express Scripts in a deal worth around $67 billion. The deal was approved by federal antitrust officials in Sep. 2018 and completed on Dec. 20, 2018. Cigna suggested in a press release that the acquisition will "dramatically accelerate the number and breadth of value-based relationships" for the healthcare company.

According to the 2017 annual report, which is Express Script's most recent publicly available one, the company generated just over $100 billion in revenue for 2017. Adjusted EBITDA for that year was $7.4 billion. At the time of its acquisition by Cigna, Express Scripts was the largest PBM in the United States.

Fast Fact

Cigna completed its acquisition of Express Scripts in Dec. 2018.

Express Scripts' Business Model

Express Scripts has three main stakeholders—its clients, the client’s members, and itself. The company serves a wide variety of clients, including health insurers, managed care providers, employers, union benefit plans, workers' compensation plans, and the state and federal government (through Medicaid on the state level and Medicare and Affordable Care Act plans at the federal level). The clients' members are the patients (or prescription drug consumers). Express Scripts offers prescription drug utilization plans to these clients, aiming for a balance between cost parameters and member needs. Express Scripts divides its operations into two categories: PBM and Other Business Operations. PBM services consist of clinical programs, specialized pharmacy care and services, home delivery pharmacy services, drug utilization review, benefit design consultation, and more. Other Business Operations services include provider and pharmaceutical services, as well as medical benefit management services.

Express Scripts focuses on three key areas to lower costs and generate profit:

  • Formulary Management: Express Scripts establishes formularies, which are lists of designated drugs that benefit plan managers are willing to pay for on behalf of the patient/customer. These formularies are typically tiered such that the first tier contains drugs that are covered and have the lowest co-pay through the top tier, which has the highest co-pay. Formularies benefit the three stakeholders, the client benefits through lower drug costs, and the patient/customer benefits through a lower co-pay. Like all pharmacy benefit management companies, Express Scripts also negotiates with drug manufacturers for volume discounts (rebates) on drugs in the formularies, passing a portion of these savings along to its clients and retaining the remainder as profit.
  • Dispensing Location: There are two ways customers can acquire their prescription drugs: at a retail location or through the mail. PBMs typically have a wide retail pharmacy network. The Express Scripts network consists of over 83 million members, 28,000 employees, and 1.4 billion annual prescriptions as of March 8, 2018. The company uses its size and scale to negotiate drug prices with the retail network and receive discounts, some of which are passed along to the client and some of which it retains as profit. Mail order delivery is another drug delivery method. Doctors submit the prescription to the Express Scripts system directly and the patient receives the drug in the mail. This is typically used for drugs that are taken on an ongoing basis rather than one-off prescriptions. When using mail order, patients are less likely to run out of drugs and the cost of drugs is generally much cheaper as well. Express Scripts benefits because they don’t have to pay the intermediary (the retail pharmacy) and they own and control the distribution center, resulting in lower costs and higher profit margins for Express Scripts.
  • Pushing Generic Drugs: Express Scripts encourage generic drugs over branded. They are able to improve generic dispensing rates through the use of e-prescribing, which guides physicians to automatically select a generic, and through the mail order dispensing process. Encouraging the use of generic drugs, like pushing patients to use mail order dispensaries, generates higher profit margins for the company.

According to the company’s 2017 full year results, Express Scripts had full year income of $4,517.4 million in the 12 months during 2017. The company also had 2017 revenues of $100,064.6 million, down from the previous year's revenue of $100,278.5 million.

Key Takeaways

  • At the time of its acquisition by Cigna, Express Scripts was the largest pharmacy benefit management (PBM) company in the U.S.
  • Express Scripts makes most of its revenue through the delivery of prescription drugs, with some additional revenue coming from other services and fees.
  • Express Scripts' clients include employers, managed care providers, health insurers, and more.

Express Script's Prescription Drug Business

Express Scripts derives the majority of its revenues from the delivery of prescription drugs through either the retail network or mail order dispensing. Revenues from the delivery of prescription drugs represented 98.2% of revenues in 2017.

Fast Fact

Express Scripts' annual Drug Trend Report is a key analysis of prescription drug costs and utilization.

Future Plans

Prior to its acquisition by Cigna, Express Scripts made a major effort to upgrade its technological profile, according to Forbes. This is likely part of an attempt at making the company more streamlined and efficient, as well as more profitable. At the same time, technological upgrades can allow clients to better serve their members as well.

If it Isn't Broken, Don't Fix It

Since the acquisition was completed in late 2018, not a great deal about Express Scripts has changed, at least to the outside observer. Part of Cigna's interest in acquiring the company was because of their already-obvious mutually beneficial qualities. With that in mind, it may not have been necessary to completely revamp the Express Scripts business model in order to integrate it into the Cigna model.

Key Challenges

Express Scripts competes with other PBMs that are either independent or owned by managed care organizations or retail pharmacies as well as other benefit model competitors like brokers. While there are low barriers to entry, there are many factors that can impede the competitiveness of a PBM, such as the ability to contract with retail pharmacies, the ability to negotiate discounts on prescription drugs with drug manufacturers, the ability to navigate the complexities of governmental reimbursement, and the ability to the manage cost and quality of specialty drugs. Going forward, Express Scripts must adapt to changes in the pharmaceuticals industry, changing regulations at the federal and state levels, and new customer and client needs in order to remain as highly profitable as it is today.