Aetna takes mail-order in-house; ends contract with Express Scripts

Drug Cost Management Report, Nov, 2002

Aetna is bringing its mail-order operations in-house, and is negotiating to buy a mail-order unit. Currently, mail-order functions for Aetna's pharmacy benefit members are handled by Express Scripts, while the company's in-house PBM unit, Aetna Pharmacy Management, handles the bulk of other PBM functions for Aetna's members with drug coverage.

The move is part of a company-wide efficiency improvement agenda. Recently, Aetna has been on a cost-cutting spree, which has resulted in improved profits. Aetna reportedly tried to sell its PBM as part of the streamlining effort, but was unable to find an appropriate buyer.

Instead, the company has committed to making the "modest" investment necessary--estimated to be between $10 million and $30 million--to shore up existing PBM capabilities and improve its bottom line with regard to prescription benefits.

PBM Industry Impact

While clearly bad news for Express Scripts and the PBM industry, analysts deny that the change is a catastrophe, and do not predict a trend. The contract represents only about 2% of Express Scripts' business. Express Scripts recently won a large new TriCare contract, which more than offsets the Aetna business that has been lost.

Standard & Poor's said that its ratings and outlook on Express Scripts (BBB-/Stable) would not be affected by the loss of the Aetna contract. Express Scripts had recently raised its 2002 earnings guidance due to higher claims volume and increased use of low-cost generic drugs, despite awareness that the Aetna contract was in peril.

Typically MCO contracts are not high-margin business for PBMs, because they do not include rebate services. Aetna was in a fairly unique position, because it was already performing its own rebate administration and claims processing functions. The mail-order business represents about 10% of the MCO's total drug spend.

If this move makes so much sense for Aetna, does that mean it may become a trend that will result in a significant loss of business for PBMs? Unlikely. CIGNA HealthCare already performs most PBM functions in-house; it restructured and consolidated its PBM efforts as of July 2000. Anthem, PacifiCare and WellPoint are other large MCOs that already have fully functioning PBM units that also serve self-insured employers. Humana, Health Net and UnitedHealthcare have all tried the in-house route, and now contract with large outside PBMs for most functions.

Smaller MCOs will continue to rely on contracted PBMs, and will not likely contract with Aetna or another MCO-based PBM because of inherent conflicts of interest and data confidentiality issues.

The Outlook for Aetna

Aetna CEO John Rowe, MD, says the new pharmacy strategy will capitalize on the company's key strengths, which he identifies as formulary management, claims processing and ingredient pricing. Specifically, Aetna hopes to gain:

* More effective overall medical cost control;

* Better alignment with customers' objectives;

* Enhancement of "speed-to-market" capabilities;

* Ability to capitalize on future shifts in the marketplace;

* Addition of competitive, high-quality integrated mail-order and clinical capabilities;

* Opportunity to leverage existing data and consumer health content assets.

The termination will not be abrupt, but will phase out by the natural expiration date of the contract in the second quarter of 2003. A new mail-order unit is expected to be in place by that time.

But does Aetna really have what it takes to compete in this arena at this time? Figure 7 shows that Aetna Pharmacy Management is a significantly smaller PBM than Express Scripts by any measure.

However, now that it has decided to go down this road, the second largest MCO hopes to become a true PBM contender. With 15 million total members, only 11 million are currently contracting their Rx business through Aetna. Of the remaining 4 million, most probably have PBM contracts with outside PBMs, and Aetna hopes to woo them with more integrated, client-driven capabilities.

After that, who knows? Some speculate that Aetna will have to seek outside business in order to achieve the necessary scale.

Analysts say the move might well make sense for Aetna, because the mail-order business is only a small part of its PBM operations, but is one of the fastest-growing service lines in the PBM business. First Albany analyst Kevin Berg says that, rather than signifying a loss of confidence in the PBM industry, the decision confirms the profitability of the PBM model--Aetna just wants to get the biggest slice possible.

Figure 7. Aetna Pharmacy Management
and Express Scripts Statistics for
Comparison

                                             Aetna Pharmacy
                           Express Scripts      Management

Annual Drug Expenditures   $16,683,524,000   $4,000,000,000
Members in Rx Plans             50,000,000       11,100,000
PMPM Rx Cost                       $333.67          $360.36
Total Rx/Year                  396,940,000       70,764,957
Rx/Year Retail                 273,500,000       67,148,868
Rx/Year Mail                    72,372,000        3,616,089
Pharmacies in Network               56,000           50,000
Mail Order Pharmacies In
  Network                                5                1
Employees                            6,000              295

Source: AIS survey data.