Wednesday, May 12, 2021

How Cigna’s Growing Pharmacy Platform Expands Its Channel Power

Last week, Cigna released its earnings for the first quarter of 2021. Links below.

I was struck by how quickly Cigna’s Express Scripts PBM business has increased revenues and prescriptions from its retail pharmacy network. Our second chart below highlights this growth.

The businesses in Cigna's Evernorth segment—especially Express Scripts, Ascent Health Services, and InsideRx—are already providing rebate negotiation, network management, and/or a sourcing platform for Prime Therapeutics, Kroger, Humana, GoodRx, and Amazon. 

I expect Cigna’s influence over the drug channel to expand further as other businesses step onto this burgeoning platform.


As always, I encourage you to review the original source material for yourself. Here are links to Cigna’s financial results for the first quarter of 2021: In Cigna’s financial reports, Express Scripts falls under the Health Services segment. During 2020, Cigna rebranded businesses in this segment (including Express Scripts) as Evernorth.


Revenues reported by PBMs reflect their dual role in the pharmacy system:
  • PBM-dispensed prescriptions. PBMs operate mail and specialty pharmacies, some of which are among the largest dispensing pharmacies. Like any other pharmacy, the PBM’s mail and specialty pharmacies earn gross profits from the difference between (1) the reimbursement to the pharmacy minus (2) the pharmacy’s net acquisition cost for purchasing the product. This spread covers the expenses of operating a pharmacy, including: the acquisition cost of the drug; costs of dispensing; pharmacist salaries; inventory holding costs; licensing; and capital expenditures. Mail pharmacies typically do not receive dispensing fees, but a specialty pharmacy could earn service and data fees from manufacturers.

    Following Cigna’s 2018 acquisition of Express Scripts, the companies combined their mail and specialty pharmacy operations. According to Drug Channels Institute figures, the company is the third-largest dispensing pharmacy and the second-largest specialty pharmacy. Neither company operates retail pharmacies.
  • Network-dispensed prescriptions. A PBM establishes a network of pharmacies that allows consumers with prescription drug insurance to readily fill their prescriptions. PBMs are compensated by plan sponsors for managing these pharmacy networks. This compensation is typically paid as per-claim fees and/or spreads between (a) the amount that a PBM charges to a plan sponsor and (b) the amount that the PBM pays to the network pharmacy that dispenses the drug to a consumer. In its financial statements, Cigna includes the total reimbursements paid to pharmacies (ingredient cost and dispensing fee) at the contracted rate to its clients. These amounts include patient copayments and any associated fees.
Cigna’s Evernorth business also earns significant revenues from various fee-for-service clinical solutions.

For more on PBMs’ business models and profits, see Chapter 5 and Section 11.2. of DCI’s 2021 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.


The chart below shows the quarterly revenues and adjusted (30-day equivalent) prescriptions dispensed from Express Scripts’ mail and specialty pharmacies.

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Specialty prescriptions have been driving revenues from pharmacy dispensing. Year-over-year growth in quarterly revenue was 9% to 10% during 2020. Growth slowed to 6% in the first quarter of 2021.

Note that the number of adjusted prescriptions dispensed from Express Scripts’ pharmacies has not significantly changed over the past nine quarters.

As I mentioned here last week, however, we expect pharmacy revenue growth will accelerate, as Prime’s Blue Cross and Blue Shield plans begin exercising the option of using Express Scripts’ pharmacies.


The chart below shows the quarterly revenues and adjusted (30-day equivalent) prescriptions from retail network pharmacies.

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In contrast to the mail and specialty figures, retail network revenues and claims have grown significantly. Over the past two years, quarterly retail network revenues have increased by 63% and adjusted network scripts have grown by 45%.

This growth has primarily reflected two significant business shifts:
  • OptumRx. Until 2019, the health insurer Cigna was OptumRx’s second-largest customer. However, Cigna transitioned all PBM functions—including pharmacy network management—to Express Scripts after its acquisition.
  • Prime Therapeutics. Beginning in April 2020, Express Scripts took over retail pharmacy network contracting for a majority of Prime’s business. (Prime also began sourcing a portion of its commercial rebates via Evernorth’s Ascent Health Services.) This volume transitioned to Express Scripts during 2020, so it is combined with Express Scripts’ market share data in our ranking of the top pharmacy benefit managers of 2020.

    Note that Prime remains a full-service PBM and continues to control core pharmacy benefit management offerings, including claims adjudication and critical functions. Prime also retains responsibility for enrollment and member services for beneficiaries; formulary development; formulary and rebate negotiations with manufacturers of drugs covered under the medical benefit; clinical programs; and other services. We estimate that for 2021, Express Scripts will negotiate formulary rebates for at least 40% of Prime’s annualized equivalent claims volume.
Consequently, Express Scripts continues to gain influence over retail pharmacies. We estimate that the Express Scripts networks (with Prime) already account for more than 20% of retail and long-term care pharmacies’ prescription revenues.


As I see it, the businesses within Evernorth form a negotiation, network management, and sourcing platform that PBMs and other companies can leverage.

For example, Ascent Health Services is gaining scale to extract greater rebates and fees from brand-name manufacturers and deeper purchasing discounts from generic manufacturers. Ascent now handles rebate negotiations for Express Scripts’ PBM business, Prime Therapeutics, Kroger Prescription Plans, and Humana’s commercial business.

Smaller PBMs often lack internal dispensing operations and seem to perform poorly in managing net drug costs. For example, as I noted last June, it appears that Prime was consistently reimbursing retail pharmacies at higher rates than Express Scripts was.

Evernorth has other platform businesses, including Inside Rx, its own consumer-facing discount card brand. The Amazon Prime prescription savings benefit, launched in 2020, utilizes Express Scripts’ Inside Rx program. (See Disruption Delayed: Making Sense of Amazon’s Latest Pharmacy Moves.) Express Scripts is also among the multiple PBMs that provide pricing for the GoodRx discount cards.

As far as I know, Cigna has never explicitly validated my interpretation of its strategy. However, the evidence points to Cigna’s gaining influence as other external companies join Ascent Health Services (for deeper rebates), Express Scripts’ dispensing pharmacies (for better generic and specialty acquisition costs), and Express Scripts’ network management (for reduced retail reimbursements).

If the shoe fits...

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