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HEALTH CARE
Merger Ump Misses the Call
Posted by David McCann | CFO.com | US
April 2, 2012 3:29 PM ET

Many observers of the pharmacy benefits management (PBM) industry, including myself, were disappointed to learn this morning that the Federal Trade Commission had approved the merger of the largest and third-largest PBMs, respectively Medco and Express Scripts.

With less competition in the PBM market, most of the unhappy observers ı legislators, state attorneys general, consumer-protection groups, retail pharmacies, and certainly many corporate users of PBMs ı were likely concerned about the financial consequences for companies and/or individuals. As for me, while I think the FTCıs decision is absurd, Iım miffed mostly because I predicted the deal would be quashed.

Express Scripts CEO George Paz said in a statement that the merger ıis exactly what the country needs right now. It represents the next chapter of our mission to lower costs, drive out waste in health care, and improve patient health.ı If you believe that, I have a friend in Africa whoıll be happy to share his millions with you if youıd please provide your bank account number.

What the country needs right now is a long, hard examination of the FTC, which voted three to one in favor of the merger. The dissenter, commissioner Julie Brill, said in a separate statement that the merger will create ıa duopoly with few efficiencies in a market with high entry barriers ı something no court has ever approved.ı Duh. Doesnıt everyone know that?

Not the other three commissioners, who said in their own statement that ıthe merging parties are not particularly close competitors, the market today is not conducive to coordinated action, and there is little risk of the merged company exercising monopsony power.ı I donıt have a degree in economics, but Iım comfortable in my skepticism.

The Express Scripts-Medco combination will command more than half of the countryıs retail PBM market. The lone remaining mega-player, CVS Caremark, will control something on the order of 20% to 25%. ıItıs scary,ı says Ed Kaplan, national health practice leader for the consulting firm The Segal Company. ıSome of my [corporate] clients are disappointed.ı

Still, Kaplan says, the fear is probably unjustified. ıThere are just enough other playersı ı like Catalyst, Cigna, informedRx, Optimum, and SXC ııı ıthat have enough investment infrastructure that our clients could move to one of them if the terms the jumbo PBMs offer become noncompetitive. And they would move. Moving a PBM contract is not like moving a medical plan.ı Kaplan says heıs talked to a number of other informed observers who think that too.

Fair enough. But opposition to the deal has been so widespread and heated that I donıt know who could be very surprised if it ultimately does push up drug prices, and at a time when companies and their health-plan participants are collectively nearing the breaking point after years and years of steep increases in overall health-care costs.

Let the games begin.

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