Medco-Express Scripts merger would further concentrate PBM market

Two of the three largest pharmacy benefit managers, Medco and Express Scripts, have announced their intention to merge in a $29.1 billion deal, creating a heavyweight player in what critics say already is a concentrated market.

"It would be really bad for practically everybody except for their shareholders," said David Balto, an antitrust attorney, senior fellow at the left-leaning Center for American Progress and former head of policy at the Bureau of Competition at the Federal Trade Commission. He is leading a coalition of groups opposed to the merger.

Pharmacy benefit managers are similar to health plans in playing an intermediary role with the goal of saving employers and consumers money. PBMs negotiate with pharmacies and drug manufacturers on behalf of employers or health plans. Like health plans, the larger they are, the deeper the discount they usually can achieve.

PBMs also promise to save customers money by administering tiered formularies, handling preauthorizations for specialty medications, and encouraging members to switch to mail-order service and generic drugs over brand-name pharmaceuticals.

Upon the mid-July announcement of the deal, Express Scripts CEO George Paz said the Express Scripts-Medco combination would "drive costs out of the system" by getting lower prices from drugmakers and greater ability to track if patients are taking their medicines.

Medco and Express Scripts, along with CVS Caremark, controlled an estimated 80% of the PBM market by 2008, after more than a dozen mergers and acquisitions in the preceding few years.

That market concentration prompted the American Antitrust Institute, which promotes market competition and antitrust enforcement, to highlight PBMs in a 2008 report, pointing to the industry as one badly in need of antitrust regulation. Balto is member of the AAI advisory board.

Not much has changed since the 2008 report, and Balto said physicians should be concerned about the potential Medco-Express Scripts deal. With fewer PBMs in the market, doctors' prescribing preferences may be more often overruled by just a few companies that can control formularies and push for therapeutic substitutions.

For example, when PBMs drive patients to use mail-order pharmacies with the aim of saving money, the results can burden physicians, Balto said. Without a neighborhood pharmacist, patients will lean heavily on physicians when they have problems with their medications.

Analysts expect a Medco-Express Scripts merger to affect the health insurance market as well. Health plans' relationships with PBMs have grown closer in recent years: WellPoint sold its PBM -- NextRx -- to Express Scripts in 2009 for $4.7 billion.

Since 2004, UnitedHealth Group has run its own PBM but also worked with Medco in a sort of hybrid arrangement. United's business reportedly was responsible for about 17% of Medco's revenue. Medco CEO David Snow said during the company's July 22 earnings call that after discussions with United during the week before the call, Medco determined that it would not renew its contract with United because the terms United proposed "did not meet the needs of our shareholders." Snow told analysts the decision not to renew its agreement with United and its decision to merge with Express Scripts were on "independent tracks." Snow said he expected United to take its PBM operations in-house. (See correction)

United has been focused on growing its service businesses under the Optum umbrella, including OptumRx, its PBM. Analysts said that with the end of its partnership with Medco, United may make a run at competing with the big PBM players.