Anna Wilde Mathews and Jonathan Rockoff authored Megadeal Unites Drug Rivals in a published WSJ.com article of July 22, 2011. The article addresses the merger of two pharmacy benefits companies, Express Scripts Inc. and Medco Health Solutions Inc., along with the merger’s ramifications on the health care industry. This strategic merger is expected to impact the pharmacy benefit manager (PBM) market in conjunction with influencing drug costs and channels and possibly raising anti-trust concerns.
The main characters in this article include the merging PBM companies Express Scripts Inc. and Medco Health Solutions Inc. Their PBM competitor companies include UnitedHealth Group Inc. with its OptumRx pharmacy unit, Walgreen Co., and CVS Caremark Corp. These PBM companies compete against each other for contracts with employers and health plans.
Thomas Gryta defines Pharmacy Benefit Managers as companies who “process prescriptions for the groups that pay for drugs, usually insurance companies or corporations, and use their size to negotiate with drug makers and pharmacies.” (2011) Pharmacy Benefit Managers serve as liaison between the paying companies and the health care system’s variables. Their revenue comes from service fees of processing prescriptions, managing mail-order pharmacies, and negotiating reduced costs with drug companies.
This consolidation, along with others in the health services industry, factors a drive to cut costs and thus, increase revenues. By combining purchasing power and control over a large percentage of the drug industry, PBM’s can negotiate reductions in drug costs for themselves and their consumers. They can procure less expensive generic drugs from generic manufacturers, negotiate rebates and discounts from brand-name manufacturers, negotiate network agreements with pharmacies, and leverage prices with wholesalers. Their consolidated size can create intense pressure points on all affected venues and change the purchasing dynamics of the market.
Generally, an industry consolidation can generate concerns regarding monopolistic tendencies and negative affects on market trends. In a monopoly, companies maximize profits, control prices, place prohibitive barriers to entry, and minimize competition. As expected, this PBM consolidation did raise similar concerns by the NCPA (2011) and encouraged the FTC to block the consolidation based on monopoly power and market domination. However, the NCPA is incorrect when describing this merger as a monopoly. Monopolies typically occur in a supply chain market. PBM’s are sellers of goods and services. As such, this consolidation is in fact an oligopsony, describing a market with many sellers and few buyers. An oligopsony market allows for competition and compliments consumers. The anti-trust concern, however, may be whether competition will remain strong enough to pass any cost savings to the PBM’s customers, i.e. employer plans, health plans, and other client markets.