Mega-PBM Merger: Boon or Bane? - Analyst Blog

The burning issue across the US healthcare industry is converging with the anxiety of the antitrusts. Now the most discussed question in the industry is: How would the proposed merger of two of the three largest pharmacy benefit managers ( PBM ) - Express Scripts ( ESRX ) and Medco Health Solutions ( MHS ) - impact the competitive market scenario?

This is a long-standing debate where opinions diverge into two broad camps. One side believes the merger between the two leading PBMs would expand the service offering and reduce costs. Others contend the union would have an anti-competitive impact, hurting consumer sentiment and possibly leading to higher prices and inferior service. In this context, the third big player in this niche is CVS Caremark ( CVS ).

Why This Uncertainty?

On the back of non-renewal of several contracts, the proposed merger with Express Scripts can prove to be a lifeline for Medco. If the deal goes through, the combined company will emerge as a dominant player in the PBM space.

Uncertainty persists with the US Federal Trade Commission ( FTC ) issuing a 'second request' to both Medco and Express Scripts. The FTC is seeking additional information regarding the pending deal, also supported by the American Antitrust Institute (AAI).

Changing Role of PBMs

PBMs have a vital function in controlling prescription drug costs and improving chronic care management. PBMs work on improving prescription drug therapy management for patients and organize a variety of tools to contain drug costs for payers.

Empirical evidence demonstrates that PBMs deliver cost savings for consumers, labor unions, employers, health plans and government programs alike. As per the Congressional Budget Office ( CBO ) estimate, PBMs have the potential to save as much as 30% in total drug spending relative to unmanaged purchasing.

The researchers claim that PBMs control drug spending by virtue of their advanced technology platforms, with more use of generics and other lower cost medications. The studies also demonstrate that PBMs can limit other health related costs and improve health outcomes by boosting patient adherence to drug therapies.

Patient non-adherence is currently estimated to cost up to $290 billion per year, which represents about 13% of all health expenditures. More importantly, PBMs are playing a significant role especially in the field of clinical management of chronic diseases, where patients account for approximately 96% of drug spending and 75% of total health care expenditures in the US.

The Payoff

Returning to the proposed merger deal, Medco and Express Scripts jointly intend to provide a safer and affordable pharmaceutical coverage by making prescription drugs more reachable for senior citizens, disabled and working families. Additionally, Medco and Express Scripts expect the deal to be beneficial for small businesses and large employers in a difficult global economy. They also expect this to deliver real savings to Medicare and Medicaid beneficiaries and provide a strong base for the US economy.

Economists in favor of the Medco and Express Scripts merger are claiming that the combined PBM can accelerate the annual savings of clients to a large extent. In a recently released study, Jonathan Orszag, who served as an Economic Policy Adviser on President Clinton's National Economic Council estimated that presently Medco and Express Scripts working individually save plan sponsors and consumers roughly $51 billion per year.

Savings from the combined entity will be $87 billion as the mega-PBM merger will be better placed to derive better terms with drug manufacturers and retail network partners. Effective deployment of combined cost saving tools will help benefit the plan sponsors.

Underbelly of Mega Deals

On the other side of the table, protests are loud and clear against the coming together of two of the PBM industry's behemoths. The FTC along with AAI is of the view that the merger may create market concentration in the entire economy, leading to an anti-competitive landscape.

The current scenario is likely to give birth to a sole dominant power which might eradicate the small price takers of the industry. There is an undeniable and widespread fear of reduction in competition leading to higher prices and inferior service, given the fact that the top 3 PBMs hold roughly 50% of the market. The market share goes up to 80% after taking into account the contractual arrangements with large plan sponsors.

The combined company will dominate the PBM market space by covering more than 150 million prescription drug consumers and 50% of the large employer market. Together with CVS Caremark, they will cover approximately 240 million prescription drug consumers. Consequently, post merger, no other top, smaller or regional PBMs would stand in competition harming consumers, plans, employers, unions and pharmacies alike.

Further, concerns are afloat about the distribution of the specialty pharmacy business. Presently, Curascript of Express Script and Accredo of Medco are the two largest specialty pharmacy businesses of US, with a combined market share of more than 50%. This is significant as specialty pharmacy deals with expensive treatments of serious, chronic ailments that often require special handling and control, complex administration and careful monitoring to minimize cost.

Additionally, community and specialty pharmacists are also raising their voices, appealing to the FTC to block the mega-merger. Members of National Community Pharmacists Association (NPCA) apprehend that the consolidation will remove pharmacy access in the underserved communities where the combined powerhouse will operate.

In Conclusion

We expect the merger to limit patient choice by forcing them to take more PBM-imposed mail order. The dependence on the combined Express Script-Medco PBM would necessarily amplify the restriction of purchases in the market which is not unlike monopoly in a product market with its resultant evils.

Community pharmacists are expected to come under pressure by the merged entity that will compel them to enter into unfavorable deals under which the community pharmacy patients will be forced into PBM-owned mail order pharmacies to fill their prescriptions at higher costs to health plans. These are also expected to reduce choices of federal and state programs and ultimately lead to higher prescription drug costs paid by plan sponsors and consumers.

The emergence of a new autocrat in the PBM market is definitely against the law of balanced growth and development. We also believe that increased savings are not necessarily beneficial for consumers, especially in the field of health care. When a dominant power forces healthcare providers to accept less money for services, it is likely that the consumer will face a dilution in the level of service rendered.

CVS CAREMARK CP ( CVS ): Free Stock Analysis Report

EXPRESS SCRIPTS ( ESRX ): Free Stock Analysis Report

MEDCO HLTH SOL (MHS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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