In addition to creating “one of the nation’s largest behavioral health platforms,” Centene Corp. will add another pharmacy-related asset to its portfolio with its recently announced $2.2 billion proposed purchase of Magellan Health, Inc.
The deal, unveiled on Jan. 4, will deliver 2 million PBM members and 16 million medical pharmacy lives to Centene, which already has a variety of internal and external PBM relationships. And while those pharmacy lives are just a slice of the transaction compared with Magellan’s behavioral health and specialty health assets — once the transaction closes, Centene says it will be able to establish “one of the nation’s largest behavioral health platforms” with 41 million unique members — they are a key part of the strategic rationale for the deal.
“The transaction also creates additional value across our pharmacy capabilities,” Centene Chief Financial Officer Jeff Schwaneke said during a Jan. 4 conference call to discuss the transaction. “This is a large and significant market — the U.S. market generates 4.5 billion annual prescriptions per year, and 55% of Americans regularly take a prescription. We have invested in this area in recent years given its attractive growth opportunities, most recently with the addition of PANTHERx.”
Centene’s purchase of PANTHERx Rare, LLC, a specialty pharmacy company that focuses on orphan drugs and treatments for rare diseases, closed on Dec. 30.
“As the leader in government-sponsored health care, including medically complex populations, having this capability in-house enables us to better understand the specialty pharma pipeline, clinical requirements and cost-management aspects,” Schwaneke said of Centene’s expanding pharmacy assets. “Furthermore, it creates additional engagement opportunities, which will help us achieve better adherence rates and ultimately improve patient outcomes.”
But when it comes to integrating its new pharmacy-related holdings, Centene may face some challenges.
During the conference call, Bank of America analyst Kevin Fischbeck asked executives whether they’re worried that Magellan Rx Management could lose managed Medicaid business opportunities in states that have carved out their pharmacy benefits, as it will no longer be a “pure-play PBM.” But Centene President, Chairman and CEO Michael Neidorff downplayed such concerns, emphasizing that states’ decisions to carve benefits in and out “are cyclical” and that Magellan will still be able to operate independently under Centene’s umbrella.
Schwaneke added that Centene is trying to position itself to “meet states where they are” — regardless of whether their pharmacy benefits or coverage for other specialized populations are integrated into their medical benefits.
Yet in a research note to investors sent after the call, Jefferies analysts David Windley and David Styblo remained unconvinced, warning about the “risk of customer abrasion” once Magellan is no longer truly independent. “That was a selling point [Magellan] made for all three of its businesses, especially the PBM,” they wrote.
Timothy Epple, a principal at Avalere Health, says that given “the differentiation in how states operate formularies and how states regulate pharmacy benefits, I do think the pharmacy piece of Magellan could be more complex” to integrate than its behavioral health business. “Centene is very state-focused, and you’re basically talking about integrating two assets that likely don’t have perfect overlap in terms of where they’re operating,” Epple tells AIS Health. “And so I think it’s more about threading the needle of regulations and requirements and sort of making sense of the different state environments.”
Epple says that Magellan’s large behavioral health management platform and provider network may be the most valuable piece of the transaction for Centene. “I think payers have grown much more comfortable with the idea that behavioral health utilization, and the integration of behavioral into the rest of their medical services, is a potential avenue for cost control.”
Transaction May Be ‘Preemptive Move’
Epple also points out that unlike in medical care, commercial reimbursement rates for behavioral health care are much closer to the lower rates paid by Medicare and Medicaid — but that could change amid the significant amount of consolidation seen recently in that sector. “If providers consolidate and patients want more access and rates go up, this is sort of a preemptive move…Centene can make sure that they understand and have some control over the rate environment,” he says.
Centene will also be tasked with sorting out its patchwork of PBM relationships. The largest chunk of its pharmacy benefits lives — about 3.5 million — is managed by its legacy in-house PBM, Envolve Pharmacy Solutions, according to data from AIS Health’s parent company, MMIT. But another 1.9 million pharmacy lives are managed by Health Net Pharmaceutical Services — the PBM that was included with the purchaseof Health Net in 2016 — and Centene contracts with CVS Health Corp. to manage about 2.2 million pharmacy lives. Centene has also been migrating more and more business onto the cloud-based PBM it invested in, RxAdvance, and now it will be adding another PBM to the mix when it acquires Magellan Rx Management.
CEO Divulges Little About PBM Strategy
Credit Suisse analyst A.J. Rice asked during the Jan. 4 call whether Centene was considering restructuring its pharmacy benefits strategy once it completes its purchase of Magellan, pointing out the company will “have a lot of different PBM relationships.” But Neidorff said it’s too early to determine what such an effort might look like and any such decision will be made alongside Magellan’s leaders “with consideration of protecting the independence of the company.”
“The idea of just adding one more PBM to the mix — it just gives us another alternative, in a sense,” he added.
Centene and Magellan expect their deal to close in the second half of 2021, pending approval from regulators and Magellan Health’s stockholders, and other customary closing conditions. The transaction was already unanimously approved by both companies’ boards of directors, and affiliates of the hedge fund Starboard Value LP — which own about 9.4% of Magellan Health’s outstanding shares of common stock — have agreed to support the deal. Magellan Health CEO Ken Fasola and other members of the company’s leadership team have agreed to join Centene after the transaction closes.