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Express Scripts, Medco Argue Deal Won’t Harm Competition

Express Scripts Inc. (ESRX) and Medco Health Solutions Inc. (MHS), facing congressional scrutiny over their plan to form the biggest U.S. pharmacy-benefits manager, told lawmakers the deal would preserve competition and lower costs while improving patient care.

The combined company would control less than one-third of U.S. pharmacy-benefits sales, Express Scripts Chief Executive Officer George Paz said today at a House Judiciary subcommittee hearing. St. Louis-based Express Scripts agreed in July to acquire Medco for $29.1 billion.

“By our estimates, the combined historical shares of the companies would be approximately 30 percent,” Paz said. “This range falls well inside the parameters of mergers which have passed antitrust regulatory review.”

While the Judiciary Committee’s top Democrat, Representative John Conyers of Michigan, had called for the hearing, members from both parties said their constituents were worried about the deal’s potential impact on competition, drug prices and patient care.

“I have serious questions and concerns that the merger could worsen the climate for independent pharmacies and lead to less access and higher costs for patients,” Representative Tom Marino, a Pennsylvania Republican, said at the hearing. “I’m especially concerned about the consolidation it would cause in the mail-order and specialty-drug markets.”

FTC Review

The transaction requires approval from the Federal Trade Commission. The combined company would help cut health-care costs by extracting lower prices from drug companies and ensuring more patients take medicines as directed, Paz and David Snow, chief executive officer of Franklin Lakes, New Jersey- based Medco, told the panel.

“Combining Medco’s expertise in advanced clinical pharmacy with Express Scripts’ expertise in behavioral science will create a new entity that is uniquely able to provide significant progress toward closing gaps in care, saving dollars and saving lives,” Snow said.

Pharmacy-benefits managers act as middlemen for drugmakers, pharmacies and health-plan sponsors, negotiating prices and managing the use of drugs by patients. Their profits are tied to cutting their clients’ drug costs.

There are more than 40 pharmacy-benefits managers in the U.S., and more than 20 of them service the health plans of Fortune 500 companies, Paz said.

Customer Increase

Express Scripts’s customer base would increase 50 percent to 135 million upon clearance of the Medco purchase, according to Arthur Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee. The biggest rival, CVS Caremark Corp. (CVS), serves 85 million customers.

“A merger that reduces the number of key competitors from three to two raises significant competitive concerns,” said David Balto, a Washington-based antitrust attorney representing consumer groups, business organizations and specialty pharmacies who oppose the Medco takeover.

“It’s crucial for us to have aggressive rivalry to try to drive down health-care costs, but with only two major PBMs in the market, that’s certainly going to be lost,” Balto, a former FTC policy director, said yesterday in an interview.

It’s “not accurate” to say there would be only two major pharmacy-benefits managers if the Medco purchase is approved, said Brian Henry, an Express Scripts spokesman, in an e-mail. UnitedHealth Group Inc. (UNH) will be “a fourth significant player,” he said.

UnitedHealth Contract

Medco announced July 21 that it won’t renew an $11 billion contract with UnitedHealth after it expires in December 2012. UnitedHealth, of Minnetonka, Minnesota, has said it plans to take its pharmacy-benefits business in-house.

Large pharmacy-benefits managers already use their size to push pharmacists into onerous contract terms while steering patients toward their own mail-order prescription services, said Joseph Lech, owner of five independent pharmacies in Pennsylvania.

Express Scripts’ purchase of Medco, if approved, will create a “mega-PBM” that will harm patients by “reducing choice, decreasing access to pharmacy services and ultimately leading to higher prescription drug costs,” Lech, a member of the National Community Pharmacists Association in Alexandria, Virginia, told the panel.

Lech, a practicing pharmacist for 30 years, said pharmacy- benefits managers handle 90 percent of the prescriptions he dispenses, and a combination of Express Scripts and Medco would handle 50 percent.

‘Forced Out’

“I didn’t get into the practice of pharmacy to eventually think I would be forced out,” Lech told the panel. “I can’t deny that there may come a time when the decision to say, ‘I can’t do it anymore,’ happens.”

Snow said pharmacy-benefits managers operate in “a very competitive environment” that puts stress on “the economics of an independent pharmacy.” Still, he said his company wants such pharmacies to survive. Many independent retailers join group purchasing organizations to gain more clout in negotiating contract terms, he said.

“We need these retail pharmacies,” Snow said. “Eighty- five percent of all the prescriptions we do for all of our members come from retail pharmacies.”

While the congressional hearing won't directly affect the FTC’s review of the Medco purchase, it “can be influential in shaping public opinion,” said Steven Halper, an analyst at Stifel Nicolaus & Co. in New York.

“We continue to believe that there is sufficient competitiveness within the broader pharmacy benefit market that there is a good probability that the FTC will not challenge it,” Halper said before the hearing in a note to investors.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net

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