UnitedHealth buys Illinois company for $12.8B – here's how it affects the industry

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In a hefty move that expands its prescription pricing industry presence, UnitedHealth Group is purchasing an Illinois-based pharmacy benefit management company in an all-cash deal worth $12.8 billion.

UnitedHealth, based in Minnetonka, will absorb the newly acquired Catamaran Corp. into its OptumRx unit, the two companies announced in a press release Monday morning.

OptumRx and Catamaran are both pharmacy benefit management companies – they negotiate drug prices, reimbursements and fees between drug manufacturers, health insurance providers and pharmacies, with the stated goal of bringing costs down. (Scroll down for more on how they say they save money – and also make money.)

The Wall Street Journal reports that before the deal, OptumRx is the third-largest pharmacy benefit management company in the industry – and Catamaran, based in Schaumburg, Illinois, is the fourth-largest.

Their merger is essentially a play to gain ground on the industry's two biggest giants – Express Scripts Holding Co. (No. 1), and CVS Health Corp. (No. 2), the Wall Street Journal says.

What do these companies actually do?

USA Today explained the role of pharmacy benefit management companies (referred to as PBMs in shorthand) in a piece last year, detailing how quickly they're becoming money-makers.

Basically, the pharmacy benefit management companies will work with a drug manufacturer to set a price of a drug, and then how much a pharmacy will be reimbursed. The difference is essentially revenue for the PBM.

For example, USA Today explains:

The cost of one months' worth of Lipitor is $21.60, an audit found. The drug store where it's sold to the individual gets reimbursed $10.83. The difference of $10.77 went to the PBM.

PBMs say ultimately, they save people money. They're so big and have so many customers, they can negotiate lower prices from drug companies and pass those savings along to the consumers and employers.

One study said PBMs could mean nearly $2 trillion in savings on prescription drug costs from 2012-21.

A CNN and Fortune piece from October 2013 cast some doubt about such claims however. An auditor with Pharmacy Outcomes Specialists said the PBMs "effectively pad bills by $8 to $10 a prescription." And one health systems nonprofit found its prescription costs quickly went up after signing on with PBM Express Scripts.

That said, the story notes claims of savings are hard to verify or disprove, because information on actual drug prices and the rebates being given is nearly impossible to track.

More on the OptumRx purchase

The OptumRx and Catamaran news release notes 2014 revenues in the pharmaceutical market are expected to be $100 billion – and will likely grow to a staggering $400 billion by 2020.

Catamaran has been managing more than 400 million prescriptions annually for 35 million members.

Together with OptumRx, the newly-merged company expects to fulfill more than 1 billion prescriptions. Reuters says United's market share in the space will jump from 15 percent, to 20 percent.

The sale is expected to close in the final quarter of 2015.

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