Executives Dismiss Antitrust Concerns In Proposed Medco, Express Scripts Merger

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By Ralph Lindeman

Testifying before a Senate Judiciary panel, top executives from Express Scripts and Medco Health Solutions Dec. 6 disputed claims that a planned merger between the two companies would stifle competition among pharmacy benefit managers (PBMs) and increase costs for health plans and their customers.

Representatives of local pharmacies and consumer groups, meanwhile, warned that the proposed $29.1 billion merger between two of the nation's largest PBMs would lead to “unparalleled market concentration” and force consumers to use impersonal mail-order operations to obtain prescription drugs.

Their testimony came during a two-hour hearing of the Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights. The panel examined the pros and cons of the proposed merger of Express Scripts and Medco, which currently manage prescription drug benefits for about 115 million people, accounting for nearly one out of every three prescriptions filled in the United States.

If the merger is approved, the merged company would become the largest mail-order supplier of prescription drugs for patients with chronic conditions.

“There's no doubt this merger will be good for Express Scripts and Medco and for their shareholders,” said Sen. Herb Kohl (D-Wis.), the subcommittee chairman. “But while this merger may serve these two companies' private interests, our job on the antitrust subcommittee is to examine whether this merger will serve the public interest and will benefit or hurt competition and consumers.”

Company CEOs Cite Merger Benefits

George Paz, chairman and chief executive officer of Express Scripts, told the panel that his company negotiates with large drug manufacturers and retail pharmacies “to get the best possible prices” for customers. “Our business model is one of alignment,” he said. “We make money when plan sponsors and consumers save money. The union of our companies will accelerate our ability to do just that.”

He cited a study by the Government Accountability Office that he said found average drug prices negotiated by PBMs were 18 percent below the average cash retail price.

Mail-order pharmacies reduced the price of medications by 27 percent over the cash price paid for branded products and by 53 percent for generic medications, he said.

David B. Snow, chairman and CEO of Medco, pushed back against the notion that Express Scripts and Medco, together with CVS Caremark, compose the nation's “big three” PBMs that control the pharmacy benefit management market.

In fact, he said, more than 40 PBMs compete in the market, including at least 10 that serve the Fortune 50 companies and 17 that serve the Fortune 500 companies.

For plan year 2012, Medco lost some $10 billion in business to other PBMs, he said. “These are the facts, and they dispel the notion that the combination of Medco and Express Scripts represents a threat to consumers and client choice,” he said.

Community Pharmacies Oppose Merger

Taking an opposing view, Susan L. Sutter, representing the National Community Pharmacists Association, warned that the merger would result in “unparalleled market concentration” in an industry in which the two companies already control one-third to two-thirds of all prescriptions filled.

“PBMs directly set reimbursement rates for community pharmacies, and then for us it's ‘take it or leave it’ because an independent pharmacy has absolutely no chance to negotiate,” asserted Sutter, who owns three independent community pharmacies.

Community pharmacies are in direct competition with PBM mail-order operations, she noted, “So it's no surprise that these PBMs try to shift patients to their mail-order pharmacies.”

Michael J. Bettiga, testifying on behalf of the National Association of Chain Drug Stores, expressed doubt about claims that PBMs pass along purported savings to health plans, employers, and consumers.

“In fact, the PBM industry is fraught with allegations of extensive deception and fraudulent practices,” he said. He noted that some 30 state attorneys general had recently won more than $30 million in penalties from PBMs.

PBM Market ‘Failing,’ Consumer Rep Says

Also expressing concern about the merger, David Balto, a former director of the Federal Trade Commission's antitrust policy office, told the panel: “You need three things for a market to work well: choice, transparency, and a lack of conflict of interest. In all three regards, this market receives a failing grade.”

Balto urged the committee to recommend that the proposed merger, now being reviewed by the FTC's Antitrust Bureau, be rejected. On Sept. 2, the two companies said they had received a second request for information from the FTC about the merger (173 HCDR, 9/7/11).

“You don't need a Ph.D. in economics to know that when three goes to two, competition is decreased,” said Balto, who testified on behalf of several consumer groups, including Consumers Union, Consumer Federation of America, and the U.S. Public Interest Research Group.

In response to questioning from Sen. Mike Lee (R-Utah), the subcommittee's ranking member, Balto said the high profits reported by Express Scripts and Medco in recent years suggested they were not passing along savings to health plans and consumers.

“PBMs are intermediaries, like credit card companies,” he explained. “If there is competition, you would expect their profits to be low … Their profits are skyrocketing, which suggests that savings are not being passed on.”

Information about the hearing, including witness statements and a webcast, is at http://www.judiciary.senate.gov/hearings/hearing.cfm?id=9b6937d5e931a0b792d258d9b333669a .