Humana Pharmacy Unit Seeks Customers Amid Industry Changes

Humana Inc.'s (HUM) pharmacy-benefit manager business, which has struggled to lure clients from beyond its parent company's insurance business, is hoping to gain ground by capitalizing on deal-related turmoil in a consolidating industry.

Whether many customers are really up for grabs remains to be seen during the ongoing selling season for pharmacy-benefit, or PBM, services. But with Express Scripts Holding Co. (ESRX) working to integrate recently purchased Medco Health Solutions Inc. amid an ongoing rift with drugstore Walgreen Co. (WAG), plus two other mid-sized companies planning to join forces, Humana Pharmacy Solutions sees an opening.

"The combination of all that stuff is presenting opportunity," said William Fleming, president of the Humana PBM unit.

The PBM sales season lasts until late summer or early fall, meaning many decisions aren't final yet, but "we're involved in more finalist meetings at this point than we were last year," Fleming added. Also, the request-for-proposals activity "is much higher than at this point last year," he said.

PBMs handle the drug-benefit business for health plans and corporate clients. The PBMs push use of cheaper generic drugs, which are also more profitable for them, while using bargaining power to secure rebates from pharmaceutical companies.

Humana Pharmacy Solutions processes 250 million prescriptions annually, making it the fourth-largest PBM with 6% market share, according to internal estimates. That puts it distantly behind Express Scripts, plus CVS Caremark Corp. (CVS) and a PBM run by UnitedHealth Group Inc. (UNH).

Market-share estimates from pharmaceutical industry consultant Adam J. Fein also suggest two other PBMs are slightly bigger than Humana's. Either way, SXC Health Solutions Corp. (SXCI, SXC.T) is also set to become larger by buying rival Catalyst Health Solutions Inc. (CHSI) through a recently announced $4.14 billion cash-and-stock deal.

Fleming said the majority of prescriptions the Humana PBM processes come from within Humana, which has millions of customers including Medicare patients who get drug coverage through a popular collaboration with Wal-Mart Stores Inc. (WMT). The PBM set out a couple years ago to add outside clients, but Fleming acknowledged this has "been slow going."

Morningstar analyst Matthew Coffina said captive PBMs within insurance companies have long faced challenges competing with big, stand-alone firms, and he's skeptical this will change soon. PBM clients may be testing the waters with more proposal requests, but "I don't necessarily project significant market-share changes," he said.

Indeed, a new J.P. Morgan survey of human-resources executives at 51 big companies indicates neither the Medco deal nor the fractured relationship with drugstore chain Walgreen "appear to be major concerns to existing customers" at Express Scripts. Also, the PBM business is "relatively 'sticky' given high switching costs, and potential for service disruption and member noise associated with a transition to a new PBM provider," J.P. Morgan said.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]