In a move that is likely to stir controversy, the US Federal Trade Commission voted 3-to-1 to approve the $29 billion deal in which Express Scripts will acquire Medco Health Solutions. The combined pharmacy benefit managers would oversee benefits for more than 115 million people, dispense one third of all prescriptions filled in the US and control 60 percent of the market for mail-order drugs.
The decision follows months of intense lobbying by independent pharmacies and other PBMs, including those that distribute specialized medications, which complained the deal would create an anti-competitive monopoly over the flow of prescription drug benefits. As part of their effort, they were able to rally dozens of members of Congress to their cause. But to no avail.
Although the FTC commissioners acknowledged "this was not an easy decision," their review "revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders," the commissioners maintained in a statement released this morning.
"The acquisition of Medco by Express Scripts will likely not change these dynamics: the merging parties are not particularly close competitors, the market today is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power. Under these circumstances, we lack a reason to believe that a violation of Section 7 of the Clayton Act has occurred or is likely to occur by means of Express Scripts' acquisition of Medco."
However, FTC Commissioner Julie Brill dissented by calling the deal a "game changer" and "a merger to duopoly with few efficiencies in a market with high entry barriers – something no court has ever approved." How so? She cites "market structure, the data, the statements of executives of the merged parties and other testimony, the fact that Medco would be poised to play a maverick in this market, the lack of entry capable of replicating the scale of competition lost through this merger, and the lack of efficiencies to overcome the presumption of anticompetitive effects."
What was the majority reasoning, though? They wrote "the market for the provision of full-service PBM services to health care benefit plan sponsors is moderately concentrated and consists of at least ten significant competitors. Our staff’s investigation revealed that competition for accounts is intense, has driven down prices, and has resulted in declining PBM profit margins, particularly in the large customer segment." They cited the growth of PBMs run by large health plans.
The commissioners also maintain PBM customers believe there will be adequate competition. For instance, their analysis found that Express Scripts was more successful targeting so-called middle-market plan sponsors, while Medco focuses on high-volume, large employers. Moreover, CVS Caremark has also succeeded in recent years in capturing business from the other two PBMs.
"Analysis of bidding data produced by the parties and by large, national PBM consultants demonstrates that Medco and Express Scripts are not particularly close competitors, and that other PBMs often compete successfully for employers, including large employers," they write. "The evidence suggests relatively low diversion rates between Express Scripts and Medco,10 which means that the merger’s potential for unilateral price effects is likely to be much smaller than market shares would imply."
In her dissent, though, Brill maintains that, "whether the relevant market is limited to the top 100 or the top 300 commercial employers, or even in an all employer market, the combined firm would have a 45 per cent market share and the Big Three PBMs would have a combined 73 per cent market. And she points out that Aetna, the big insurer, may have its own PBM but relies on CVS Caremark to provide various administrative services.
"I sincerely wish I could agree with the majority that the PBM market will consist of at least nine significant competitors post-merger, plus a fringe. However, I am at a loss to see how any of these purportedly significant competitors can be seen as anything other than a fringe when compared to the Big Three. The numbers literally and figuratively simply don’t add up," she writes..
In explaining their rationale, however, the majority write that they relied on diversion ratios, not just market share. "Diversion ratios measure the degree of substitution between two products relative to others," they note. "Mergers between firms offering products with high diversion rates will tend to cause prices to increase, all things being equal. Low diversion rates suggest that the potential for price increases is low." And the FTC believes the diversion ratios will be lower than market share would suggest, particularly since smaller PBMs have supposedly become more competitive.
Brill disagrees. "The diversion ratios implied by the market shares in an all employer market suggest that a not insignificant number of customers view ESI and Medco as each other’s closest competitors. Sophisticated diversion analysis done by FTC economists confirms this to be the case. In other words, it is insufficient to say, as the majority does, that unilateral effects are unlikely to result from the merger merely because the data indicate that the closest competitor for each of Express Scripts and Medco is not the other, but rather CVS Caremark."
As for the likelihood of an anticompetitive cabal, the majority downplayed this possibility, believing the risk of coordination is small. Why? CVS Caremark has separate interests since its also runs the large drug-store chain; the smaller PBMs and health plans have little incentive to participate in any scheme given recent investments, there is significant competition in the employer market and industry consultants are "well-suited" to counteract any shenanigans. "The PBM market will likely have as many as nine significant competitors post-merger, plus a fringe," the commissioners write. "Coordination among so many firms is extremely difficult."
For her part, Brill points out that the three largest PBMs, which includes CVS Caremark, hold a 90 percent customer retention rate, "creating few opportunities for smaller rivals to displace their installed base." She also maintains the the PBM industry is "replete" with examples in which competition was attempted by others, but failed to materialize. For example, two of the largest insurers, WellPoint and Aetna, have outsourced many functions" (here is the dissenting argument from Brill).
Most of the commissioners, meanwhile, also pooh-poohed the odds that a monopoly would exist for dispensing prescriptions at retail pharmacies. "The proposed transaction would produce a firm with a smaller share of retail pharmacies’ sales -approximately 29 percent - than is ordinarily considered necessary for the exercise of monopsony power. In addition, the data reveal that there is little correlation between PBM size and the reimbursement rates paid to retail pharmacies. Thus, there is no reason to believe that the merger, even if it exceeded the theoretical threshold for the exercise of monopsony power, would in fact lead to lower reimbursement rates," the commissioners continue (monopsonoy is when one buyer, not seller, controls most of a market).
Finally, the commissioners do not believe that specialty PBMs, which largely ell specialty medications such as biologics, will suffer. While noting that drugmakers are the ones that prefer exclusive distribution networks, the FTC commissioners write that, "overall, exclusive distribution arrangements represent only a tiny fraction of specialty drugs and account for a small portion of total drug expenditures. Manufacturers of specialty drugs are not concerned that the combined firm would be able to force them to enter into arrangements limiting the number of distributors" (here is the majority statement).
Certainly, this has been a contentious episode and will likely be debated for some time to come as the facts on the ground play out. But what do you think?
Should the FTC Have Approved This Deal?
- No (82%, 116 Votes)
- Yes (18%, 26 Votes)
Total Voters: 142