Express Scripts Incorporated - Company Profile, Information, Business Description, History, Background Information on Express Scripts Incorporated

14000 Riverport Drive
Maryland Heights, Missouri 63043

Company Perspectives:

Express Scripts has been providing integrated mail and network pharmacy benefit management services since 1986. Since our inception, our mission has been to provide superior services while managing the pharmacy benefit, not maximizing mail order or certain manufacturer products. In addition, we strive to: ensure quality and cost-effective pharmacy services through partnerships with our clients; apply proven managed care principles; provide high-quality customer service.

History of Express Scripts Incorporated

Express Scripts Incorporated (ESI) is the leading independent pharmacy benefits manager (PBM) in the United States. Headquartered outside of St. Louis, with a second and larger service facility in Tempe, Arizona, ESI provides the full range of PBM services from claims and mail-order processing to benefit design consultation, formulary management, drug utilization review, and data analysis. ESI also provides vision care services and infusion therapy services. The company's subsidiary, Practice Patterns Science (PPS), launched in 1995, provides data analysis services by developing, marketing, and supporting proprietary software technology.

With the rising dominance of managed health care and increasing pressure to contain health care costs, ESI has grown rapidly in the 1990s. The company's net revenues reached $544 million in 1995, for a net income of over $18 million, sustaining annual growth rates of up to 50 percent. ESI's pharmacy networks cover more than 46,000 pharmacies in the United States. ESI fills pharmacy orders for more than nine million customers, through such managed care providers as FHP, Inc., NYLife Care Health Plans, Inc., Coventry Corporation, and the 1,700-hospital alliance APS Healthcare, as well as unions, self-insured employers, and insurance companies. Approximately 55 percent of ESI customers are members of HMOs; roughly 22 percent of the company's 1995 net revenues were generated through managed care providers NYLife (formerly Sanus) and FHP. In 1996, ESI expanded into Canada, servicing agreements with the Canadian divisions of Manufacturer's Life, Prudential, and Aetna, among others, with the acquisition of a Canadian PBM, Eclipse Claims Services. ESI has also formed an alliance with CIBA Vision Ophthalmics U.S. to market disease management programs using technology developed by ESI's PPS subsidiary.

ESI's position as the sole independent among the country's top PBMs has proved a strong selling point with its customers. The five other largest PBMs are closely affiliated with pharmaceutical companies: Medco Containment is owned by Merck & Company; PCS Health Systems was purchased by Eli Lilly in 1994; Diversified Pharmaceutical Services is owned by SmithKline Beecham; Value Health Inc. has entered a joint venture with Pfizer Inc.; and Caremark has developed exclusive agreements with several pharmaceutical companies. ESI's independence is likely to continue, as more than 90 percent of the company's stock is owned by its former parent, NYLife Healthcare Management, a subsidiary of New York Life Insurance Company, making the company an unlikely takeover target.

Founded in the 1980s

Express Scripts was born out of the boom in health management organizations of the late 1970s and early 1980s. In 1983, two employees of McDonnell Douglas, then one of Missouri's largest employers, left that company to start up their own HMO, called Sanus Corp. Health Systems. Backed by major investors McDonnell Douglas and General American Life Insurance Co., the private Sanus grew quickly, expanding into the Dallas, Fort Worth, Houston, and Washington, D.C., markets, as well as in St. Louis, signing up 90,000 members and reaching revenues of $30 million by 1985. One year later, Sanus's membership had swelled to 200,000, and revenues topped $100 million. As Sanus grew, it expanded its range of services as well. Considered innovative at the time, Sanus operated not only a HMO but also a preferred-provider plan, or PPO, and a standard health insurance plan. The expansion of Sanus's services led the company to establish GenCare Health Systems as an umbrella operation for the Sanus plans. By then, Barrett A. Toan had joined the company to serve as executive director.

Toan, who held a bachelor's degree from Kenyon College and a master's degree from the University of Pennsylvania's Wharton School of Finance and Commerce, came to the private sector after years in public service. Early in his career, after a period of working as a high school teacher, Toan served as the assistant director with the office of state planning and development in Pennsylvania, and later as a budget analyst and deputy director for the Illinois Bureau of Budget. In the late 1970s, he was appointed commissioner of the division of social services for the state of Arkansas under Governor Bill Clinton, then in his first term as governor. In 1981, Toan moved to Missouri, where he was named director of that state's department of social service.

As director of social service, Toan was placed in charge of Missouri's Medicaid system, which had seen a 40 percent rise in costs in the year before alone. Toan convinced the state legislative to enact major changes in Medicaid, especially in that system's pricing structure. Where previously doctors and hospitals had been allowed to bill Medicaid for services after they were performed, which led to the charging of inflated fees, Toan argued for set fees to be negotiated in advance of treatment. These price caps forced providers to control their own costs, a trend that would lead to the rise of the HMO as the dominant form of health care provision by the mid-1990s.

Toan left public service in 1985, joining GenCare as its executive director, and GenCare, with additional investments from New York Life, expanded into the New York, New Jersey, and Maryland markets. Despite the greater efficiency of managed care over traditional health insurance plans, GenCare found itself paying high prices for its members' prescriptions. Hiring a claims examiner to process prescriptions, however, would not have provided the company greater efficiency. Instead, Toan negotiated with St. Louis-based Medicare-Glaser to process and fill GenCare and Sanus members' prescriptions. Data on prescription orders were then provided to GenCare, eliminating the need for GenCare to enter the data on its own. Medicare-Glaser was, at the time, one of the 25 largest pharmacy chains in the United States, operating nearly 90 pharmacies and full-line drug stores, as well as optical and home health centers, principally in Missouri, but also in Illinois and Connecticut.

Toan quickly recognized that this arrangement had applications beyond the GenCare-Sanus network. In late 1986, GenCare and Medicare-Glaser formed ESI as a joint venture providing mail-order prescription drug and claims processing. Under the agreement, Sanus members in Missouri and Illinois continued to receive their prescription benefit through the Medicare-Glaser pharmacy chain. The remainder of Sanus's 200,000 member network became ESI's initial customers; however, the company quickly began marketing its services to health care providers across the country. Early ESI clients included the cities of Baltimore, Memphis, and San Antonio. Toan became head of ESI, while continuing to lead GenCare.

By 1987, New York Life had begun to increase its investment in Sanus Health Systems, investing more than $50 million in the company, and increasing its investment to as much as $75 million in the following year. New York Life was also an early investor in ESI. In 1988, Medicare-Glaser began to stumble as Walgreen's moved to expand aggressively in the former company's core St. Louis market. By early 1989, with losses mounting, Medicare-Glaser announced it was merging with SupeRx of Arizona, Georgia and Alabama Corp., moving its headquarters to Arizona. At the time of the merger, Medicare-Glaser agreed to sell its 50 percent interest in ESI to Sanus, giving New York Life, which had already gained controlling interest in Sanus, full ownership of both GenCare and ESI. Medicare-Glaser subsequently filed for bankruptcy and closed or sold off all of its stores.

New York Life quickly sold GenCare back to General American, retaining the Sanus HMO and ESI. Toan, however, continued to serve as the head of both GenCare and ESI, both of which were based in St. Louis. Toan remained with GenCare through 1991, when he took the company public. Toan left GenCare in 1992 to turn his full attention to ESI.

Explosive Growth in the 1990s

ESI revenues rose rapidly as it entered the 1990s, from $27.4 million to nearly $72 million by the end of 1991. Membership in ESI prescription plans had also increased, to more than 1.5 million. Part of the company's growth could be attributed to the evolving role of PBMs in general, from mail-order prescription drug discounters and claims processors to playing an active role in patient pharmaceutical management. By 1991 less than 80 percent of ESI revenues were achieved through its mail-order sales. PBMs also began to play a more prominent role in health care management: as managed care slowly became the dominant form of health insurance, patient prescriptions became one of the most expensive insurance benefits. PBMs offered not only discounted drugs but also the ability to offer increased data analysis of the care process, working with providers to define cost-effective treatment, offer patient drug education services, and alert providers to potential inappropriate drug treatment stratagems. ESI's services also expanded to provide eye wear and home infusion therapy programs.

Toan took ESI public in 1992, joining a wave of health care-related firms filing initial public offerings in the early 1990s. ESI's IPO, which raised more than $28 million, was made in part to enable New York Life Insurance to maintain control over the company. ESI offered two classes of stock. The class A stock, which accounted for most of the shares being sold, gave shareholders one vote per share. The class B stock, of which New York Life, through its NYLife Healthcare Management subsidiary, controlled nearly 97 percent, gave shareholders 10 votes per share. In addition, only the class A stock would be traded on the NASDAQ index. Toan was named CEO of ESI, which by then had more than 220 employees and 1,150 clients. Sanus members, however, continued to account for nearly 55 percent of all ESI sales.

ESI stock rose rapidly, from its IPO of $13 per share to a high of $35.25 per share early in 1993. However, investors grew nervous after the inauguration of President Clinton and his attempted health care reforms. ESI stock slipped to $28 per share and then to $21.50. However, ESI continued to grow, expanding its pharmacy network to 28,000; membership reached two million customers in 1992. The following year, ESI signed on FHP International Corp. and Maxicare Health Care, both based in California, which together held three percent of the national HMO market. ESI also added such corporate clients as Lockheed Corp., Service Merchandise Co., and Ingersoll-Rand Co. These new clients doubled ESI's customer base, boosting its share of the pharmacy mail-order market to 2.5 percent--behind leader Medco's 50 percent. In 1993, ESI more than doubled its revenues, to $264.9 million for net income of over $8 million. In response to the increase in its West Coast business, ESI opened a second mail-order service facility in Tempe, Arizona.

ESI was also helped by another trend that swept through the PBM industry. In 1993, Merck & Co. paid $6.6 billion for Medco. This acquisition was quickly followed by SmithKline Beecham's $2.3 billion purchase of Diversified Pharmaceutical Services. Then PCS was purchased by Eli Lilly & Co. for $4 billion. Caremark, a division of J.C. Penney with roughly 15 percent of the PBM market, instituted alliances with Pfizer, Bristol-Myers, Rhone-Poulenc, and Lilly in 1994. The last of the large PBMs, Value Health, announced its joint venture with Pfizer in 1995. Distrust of these new relationships--and suspicion that the drug companies would exert too much influence on the PBMs to include their parent companies' drugs in their formularies, that is, the list of drugs approved for their customers' use&mdash′oved beneficial to ESI. The company's independent status helped lure FHP as a client--one executive at FHP told the New York Times: "Large employers and health plans don't want to get in bed with Lilly or Merck." In 1994, Coventry Corp., a national HMO based in Nashville, also chose Express Scripts as their PBM.

By 1994, ESI had expanded its pharmacy network to 34,000 stores. Its revenues reached $384.5 million, producing a net income of $12.7 million. The company expanded its services by adding workers' compensation prescription services, and also reinsurance. The company's growth also fueled its stock price, which reached $50.50 per share in April 1994. In that year, the company also began to emphasize computer technology, introducing its RxWorkbench software used for analyzing patient prescription data. By the end of 1994, ESI membership had grown to 5.7 million.

The following year, ESI reached an agreement with San Diego-based American Healthcare Systems Purchasing Partners L.P. to provide for that group's network of 800 hospitals and 100 nursing homes. The company also made a deeper investment in information technology by launching its Practice Patterns Science (PPS) subsidiary. PPS offered clients the ability to combine medical and pharmaceutical data in order to identify treatment and spending patterns, allowing for improved patient outcomes at lower cost.

ESI's purchase of Canadian PBM Eclipse Claims Services allowed it to move into that market in 1995. Canadian customers included divisions of Aetna, Prudential, and Manufacturers Life insurance companies. The company also instituted an agreement with CIBA Vision Ophthalmics U.S. to form a managed eye care alliance, marketing disease management programs using technology developed by PPS. By the end of 1995, ESI's revenues had increased nearly 42 percent over the previous year, to $544 million, for net earnings of over $18 million. The company's pharmacy network increased to 45,000 stores, while its membership swelled to more than eight million people.

That number jumped past nine million early in 1996 when APS Healthcare--newly formed in a merger among American Healthcare Systems, Premier Health Alliance, and SunHealth Alliance--signed ESI to provide pharmacy benefits. Despite the gains of ESI and the PBM industry in general in the first half of the 1990s, a majority of large employers still had not switched to the greater discounts offered by PBMs--a situation that only spelled future growth potential for ESI.

Principal Subsidiaries: Practice Patterns Science, Inc.; ESI Canada Inc.

Principal Divisions: Infusion Therapy (IVTx); Managed Vision Care (MVC).

Additional Details

Further Reference

Chesler, Caren, "Leader's Success," Investor's Business Daily, December 20, 1993, p. 1.Jacobson, Gianna, "Independence Creates Niche in Health Care," New York Times, July 15, 1995, Sec. 1, p. 40.Lau, Gloria, "Concentrating Drug Purchases to Reduce Costs," Investor's Business Daily, April 20, 1994, p. A6.Steyer, Robert, "Rx for Growth: Express Scripts Pays off Quickly for Investors," St. Louis Post-Dispatch, March 1, 1993, Sec. Business, p. 12.

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