NEW YORK UnitedHealth Group Inc (UNH.N) is pushing into managing pharmacy benefits, bucking a trend among U.S. health insurers and threatening the dominance of the three largest companies that help negotiate drug pricing.
Rivals WellPoint Inc WLP.N and Aetna Inc (AET.N) have sold or outsourced prescription drug benefits. UnitedHealth -- the largest U.S. health insurer by market value -- has signaled it is moving in the other direction to seek new growth.
The company is seen as likely to take over the $11 billion drug benefits business it outsourced to No. 1 benefits manager Medco Health Solutions Inc MHS.N.
And well before that partnership expires next year, UnitedHealth's OptumRx unit is winning union and municipal contracts. It is now targeting employer accounts, including those who use its competitors' health insurance plans.
OptumRx CEO Jacqueline Kosecoff said in a recent interview the company is "very interested in the employer market and are getting very aggressive on bidding some very large accounts."
OptumRx's facilities are running at 50 percent capacity, given it plenty of scope to bring the Medco business in-house, according to one analyst's estimate.
That alone would boost UnitedHealth earnings 3 percent in 2013, according to Sanford Bernstein analyst Ana Gupte, before profits from any other contracts the company might win.
Taking the Medco business would vault OptumRx's prescription volume by about 50 percent to over 500 million total annual prescriptions, according to Lazard Capital Markets. That would help close the gap with bigger players Medco, CVS Caremark Corp (CVS.N) and Express Scripts Inc (ESRX.O), giving UnitedHealth the scale to wrest greater drug discounts.
UnitedHealth Chief Executive Stephen Hemsley told an investor conference last week its business was "emerging as a preferred alternative to the three largest PBMs."
"It's an unexploited growth opportunity, given that they do have an asset that is capable of competing with the Big 3," said Brian Wright, an analyst with Citadel Securities, who covers both PBMs and health insurers. For a graphic sizing up the PBMs, see r.reuters.com/byq99r
Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies. UnitedHealth is also a major provider of prescription plans under the Medicare program for the elderly.
The sector's importance has grown with the passage of a new U.S. healthcare law last year that heaped new regulations on the traditional insurance business and prompted insurers to seek new avenues of growth. In addition, a heightened focus on reducing costs throughout the healthcare system has made PBM services all the more attractive.
Morningstar analyst Matthew Coffina puts the odds at 75 percent that UnitedHealth takes back all of its business from Medco, which has already lost two major contracts in a more fiercely competitive market.
In the meantime, UnitedHealth's OptumRx has been "more and more active" in pursuing business, said Drew Crawford, CEO of rival pharmacy benefit manager Benecard PBF.
"They're kind of getting their feet wet with it," Crawford said. "But they're United. They're going to figure this out and they're going to bring the right people in to do it the right way, and they're going to be a formidable competitor."
OptumRx chief Kosecoff joined UnitedHealth when it acquired PacifiCare Health Systems for $9.2 billion in 2005. The combined company's drug-benefit unit began focusing on Medicare, taking advantage of the law that in 2006 created a drug benefit under the U.S. health program for seniors.
The unit then focused on Medicaid plans for low-income Americans and in 2009 began to make more gains in the commercial business serving employers.
"You can't do too many things at once well and I wanted to make sure that, when we entered the commercial space, we entered it in a way where we were going to be very successful," Kosecoff said.
Among its selling points for clients, Kosecoff cites the ability to offer flexible plans for employers and to draw on UnitedHealth's data analysis division that includes 1 billion in health claims -- a "huge repository of data."
This year, the company expects as much as $19 billion in revenue from OptumRx, up about 14 percent, with 13 million to 14 million members.
FIGHTING AN AURA
Despite its size and ambition, insurer-owned PBMs such as UnitedHealth's OptumRx do not have a strong record of carving out drug plans from employers using a rival health insurer for other benefits, said Chris Robbins, CEO of Arxcel, which consults for businesses on their pharmacy benefits.
But UnitedHealth may have an advantage in being able to offer tools to manage costs for clients, Robbins said.
"Maybe they have to just get over that aura of being an internal PBM versus an external PBM," he said.
UnitedHealth may yet balk at such an ambitious undertaking. Should Medco feel desperate, it might offer UnitedHealth extremely favorable terms. Or the two sides could compromise, with UnitedHealth bringing in some of the contracted business.
UnitedHealth also may find itself with a highly prized asset that would be an alluring acquisition target.
WellPoint sold its drug benefits business to Express Scripts for $4.68 billion in 2009. Considering Express Scripts' success with it, WellPoint "probably left some money on the table," Morningstar's Coffina said.
"If United were to do a similar deal, they would probably get a much richer price than WellPoint did," he added. "It might just make more sense to sell it."