Prime Therapeutics will pay $1.35 billion to acquire Magellan Rx Management, a pharmacy organization that manages specialty drugs for patients with complex health conditions and works with many state Medicaid programs.

It is the first acquisition by Eagan-based Prime, a pharmacy benefits manager (PBM) owned by Blue Cross and Blue Shield of Minnesota and 18 other health insurers that use the Blue brand.

With the acquisition, Prime Therapeutics will return to operating its own mail-order pharmacies and specialty drug distribution facilities.

"This is a very different strategy for us and will make Prime a much more robust, full-service pharmacy organization," Ken Paulus, the chief executive and president of Prime Therapeutics, said in an interview. "We're growing substantially. This acquisition will increase our footprint by about 50%."

Prime employs about 4,700 people, including about 2,600 in Minnesota. Magellan Rx has about 2,700 employees.

The acquired business will keep operating as a stand-alone unit. Even so, Paulus said he believed the deal will "grow employment in Minnesota pretty substantially."

Magellan Rx Management is a division of Magellan Health. In January, Magellan Health was acquired by St. Louis-based health insurer Centene Corp. in a $2.2 billion deal.

Pharmacy benefit managers (PBMs) negotiate drug prices with manufacturers and create pharmacy networks to set the cost structure of medication benefits within health insurance plans.

Magellan Rx has expertise in managing a subset of drugs known as specialty pharmaceuticals, Paulus said, that are higher-cost medications for complex conditions. In many cases, patients receive the drugs through infusions.

Managing specialty drugs in-house allows Prime to better control an expense driving up medication costs, he said.

Prime operated its own specialty pharmacy distribution centers and mail-order pharmacies before the 2017 launch of it Walgreens joint venture called AllianceRx Walgreens Prime. Walgreens bought Prime's 45% ownership interest for an undisclosed sum on Dec. 31.

"Pharmacy makes up of about 30% of overall health care costs in the United States," Paulus said. "So, it's no small deal. Our job is to help our nation manage that 30%, and it's growing substantially. It's part of the reason we're making this move, this acquisition. It's to help our patients, members, caregivers and health plans that we work with mange that ballooning cost."

In addition, Magellan Rx has full-service PBM capabilities and has become a vendor to state Medicaid plans in 28 states and the District of Columbia.

In the past decade, many Medicaid programs became suspicious that the health insurers they hired to run managed care programs for beneficiaries weren't passing along all the savings that PBMs negotiated with drug manufacturers and pharmacies. As a result, Medicaid programs turned to vendors like Magellan Rx to manage the pharmacy benefit independent of health insurers, Paulus said.

"The reason for the separation is to create some — avoidance of conflict of interest, if you will," he said.

One practice that's troubled Medicaid directors and policymakers has been "spread pricing," where PBMs reimburse pharmacies for medications but then charge state Medicaid programs and health plan customers a higher price for the same drugs. Paulus said neither Prime nor Magellan Rx engages in spread pricing. The companies are committed to transparency with their fees, he added.

Prime Therapeutics was the sixth-largest PBM in the country in 2021 with about 4% of the market, according to Drug Channels Institute. The group estimates that three larger PBMs connected with for-profit health insurers — CVS Health/Caremark, Cigna/Express Scripts and Optum Rx — control about 80% of the market.

Minnetonka-based UnitedHealth Group owns Optum Rx as well as UnitedHealthcare, the nation's largest carrier.

Prime Therapeutics is a private for-profit company that's owned by nonprofit Blue Cross and Blue Shield insurers. Last year, the company says it processed more than 400 million pharmacy claims.

Magellan Rx Management ran into troubles this year when it took over pharmacy benefit management for the Medicaid program in California. Patients complained of widespread problems in having their prescriptions filled. Paulus said the situation has since been brought under control.

In February, the Magellan pharmacy unit announced plans to deliver medications this year to patient homes via drone technology.

"We're all trying to come up with new ways of getting these medications to an individual's home," Paulus said. "Magellan has been very innovative in testing new ideas about how to deliver those medications. … I think that will be part of our future."

The deal is expected to close in the fourth quarter.