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Anthem Expects to Generate Substantial Savings from Pharmaceutical Pricing in 2016

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Anthem’s pharmaceutical pricing in 2016

In 2016, Anthem (ANTM) plans to negotiate improved pharmaceutical pricing with its contractual PBM (pharmacy benefit manager), Express Scripts (ESRX). The negotiations, if successful, are expected to generate an annual value of more than $3 billion for Anthem.

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Anthem’s initiative with Express Scripts

In December 2009, Anthem sold its PBM business to Express Scripts and entered into a ten-year contractual agreement with the latter for certain pharmacy services. While Express Scripts provides services such as claims processing, prior authorization operations, and benefit execution, Anthem continues to offer key services such as formulary design and customer service to its members. Other major health insurance companies including UnitedHealth Group (UNH) and Humana (HUM) operate in-house PBM businesses.

Other health insurance companies such as UnitedHealth Group (UNH) and Humana (HUM) operate in-house PBM businesses.

Anthem’s repricing provision

Anthem’s pharmacy contract with Express Scripts mentions that, effective on December 1, 2015, Anthem will analyze the market and enter into good-faith negotiations for obtaining competitive pharmaceutical prices. This provision is not contingent on any requirements such as extensions of contract.

Anthem has also obtained competitive benchmarks for pharmaceutical repricing based on multiple reference points obtained from vendor pricing discussions and third-party expert consultants. The company is thus actively trying to engage with Express Scripts for implementing the repricing provision.

The benefits could extend beyond 2019

If the company succeeds in its negotiations, it would imply annual savings for Anthem’s customers from 2016–2019, and the benefits could also extend beyond 2019. These pharmacy-related savings are expected to translate into improved affordability, which should lead to higher member retention and increased new enrollments for Anthem. This could result in additional 20% savings over the $3 billion projected in contractual savings.

Investors can gain exposure to Anthem through the iShares Russell 1000 Value ETF (IWD) and thereby reduce the excessive company-specific risks of investing directly in Anthem. Anthem accounts for about 0.32% of IWD’s total holdings.

Continue to the next part for our analysis of Anthem’s medical care ratio in 4Q15.

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