Tuesday, April 3, 2012

Express Scripts & Medco Merger Approved, Now What?

For the record I was an opponent of the Express Scripts (ESI) and Medco merger.  The FTC, in a 3 to 1 vote, has determined that the merger doesn't violate antitrust laws thus permitting it to move forward. The two behemoth PBMs quickly completed the merger today.  Let's examine the impact on stakeholders in the U.S. pharmaceutical supply chain:  manufacturers, pharmacies, payors, and patients. 

From Wikipedia, "A true duopoly (from Greek duo δύο (two) + polein πωλεῖν (to sell)) is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity."

The merger of ESI and Medco essentially creates a duopoly.  Combined with CVS/Caremark, the nation's second largest PBM, the two companies account for 73% of all prescriptions dispensed in the USA. Pharmaceutical manufacturers eager to place expensive brand prescription medications onto PBM formularies will experience more pressure from ESI to increase rebates and lower prices.  


If you've read all my previous posts then you know rebates from manufacturers to PBMs take on many names and sometimes aren't even classified as rebates, but instead as reimbursements.  The point is that any money (rebate) paid out by a manufacturer to a PBM is due solely to the PBM's huge patient database therefore100% of those rebates should go back to the payors [whom fill these databases with patient lives]. I'll discuss this more in a bit. 

Some pharmacies, like manufacturers, will experience increased pricing pressure from the largest PBM in the USA.  Prior to the approved merger ESI had already flexed its muscle with Walgreen's. The two companies weren't able to agree on reimbursement rates.  ESI proposed to lower rates. Walgreen's was resistant to adhere to ESI's pricing pressure at least until now.  I expect Walgreen's has reluctantly swallowed their pride and is currently on the phone to ESI begging for the deal it initially shot down.  Good luck with that!   

Chain pharmcies will not be the only class of trade to take a hit in this deal.  Independent pharmacies, including mail-order, specialty and retail, will see EBITDA decline.  Pharmacies are reimbursed, by PBMs, based on a pre-determined pricing contract.  I can tell you as an independent pharmacy owner these reimbursements are too small and will get smaller.  

I'm not a greedy business owner.  I run a tight ship and focus unforgivingly on waste elimination.  I expect only a fair return.  Because of my experience working for Eli Lilly and Co. I know how expensive it is to bring a new drug to market and just as important how little it costs, relatively speaking, to manufacture the drug after FDA approval.  A pharmaceutical manufacturer can easily realize an 80% gross margin. 

For example, a 90-day supply of Actos cost us approximately $530.00.  We consider ourselves fortunate if a PBM reimburses us $550.00 (plus a $25 patient co-pay) for dispensing this medication to a plan participant.  In other words, don't shoot the messenger!  The next time you have a complaint about rising drug costs it's not your pharmacist's doing.  

Nothing pains me more when I read about the CEO of ESI, George Paz, expressing how much patients will benefit from this merger.  Really?  Employers, federal and state governments capitalize the U.S. pharmaceutical supply chain not patients.  The health insurance marketplace, unlike most marketplaces, is one in which the end user or beneficiary doesn't carry most of the financial burden.  

Payors or plan sponsors have to "get smart" about their pharmacy benefit.  Now more than ever the focus must be put on 100% transparency. Buyer beware, there is not a PBM on the planet that won't say it's 100% transparent.  Transparency is not created equally.

With the help of a really good consultant, define transparency internally. Then hold potential suitors accountable too it and don't waiver a single inch.  If the relationship falls short of your definition of 100% "true" transparency then find a new partner.  The very large and smart payors may very well benefit from this merger.  

A very large and smart employer (25,000+ lives) may experience a rebate increase while drug costs could decline.  This is true only in the case ESI passes all the savings on to its very large customers. Smaller and less knowledgeable payors might see no change at all or worse see an increase and basically be told take it or leave it.  Be sure to hire a brilliant team of consultants to work on your behalf and help determine which side of the fence you're on.    

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