When Congress passed the Affordable Health Care Act in 2010, patients, health care 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 (ESRX), works with clients to make the process of purchasing prescription medication easier and less costly. The St. Louis, Mo.-based company was Incorporated in 1986. (Investing In The Healthcare Sector).

Insurance giant Cigna (CI) announced in early March of 2018 that it would be acquiring Express Scripts in a deal worth around $67 billion. It remains to be seen if the deal will go through, but if it does, Cigna will gain a powerful moneymaker, explained here. 

Why Pharmacy Benefit Managers?

Express Scripts signs clients (like hospitals and health insurance companies) by promising to lower rising prescription drug costs. As described by Express Scripts, “PBM companies combine retail pharmacy claims processing and network management, formulary management, utilization management and home delivery pharmacy services to develop an integrated product offering to manage the prescription drug benefit for payers.” 

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. 


Express Scripts has three main stakeholders—its clients, the client’s members, and itself. Clients include health insurers, employers, and the state and federal government (through Medicaid on the state level and Medicare and Affordable Care Act plans at the federal level). The client’s members are the patients (or prescription drug consumers).

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 while 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 is 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.

Revenue and Profit Model

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 96.2% of revenues in 2016. Express Scripts can further improve its profit margin in several ways: lowering costs through bulk purchasing and higher rebates, increasing generic dispensing rates, and increasing mail order dispensing. It's possible this line of thinking led to the potential Cigna merger. 


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.

The Bottom Line

The Express Scripts business model is based on generating savings, some of which it passes on to it clients and their patients and some of which is keeps as profit. Should Cigna acquire Express Scripts, they would have more power to drive down prices by consolidating under a single umbrella.