Express Scripts Inc.’s bid for Medco Health Solutions Inc. may face extended antitrust review by the U.S. Federal Trade Commission, where scrutiny of prescription-drug benefits managers has a decade-long history.
The FTC will have to decide whether CVS Caremark Corp., UnitedHealth Group Inc., and regional and niche companies can offer stiff enough competition to the combined company to keep prices low, said Bob Leibenluft, who headed the FTC’s health division from 1996 to 1998. The process will take about six months, according to Robert Maness, a vice president of Charles River Associates, an economic and antitrust consultant.
Express Script’s $29.1 billion purchase of Franklin Lakes, New Jersey-based Medco would create the biggest pharmacy-benefits management company.
The agency’s attitude toward pharmacy benefit managers, created in part to help rein in health-care costs, is evolving, Joseph Krauss, a former FTC official who is now a Washington-based partner at Hogan Lovells, said in an interview yesterday. That can be seen in its handling of the industry’s last big merger, the acquisition of Caremark Rx Inc. by CVS Corp. in 2007, he said.
Concerns about rising prices for drugs in 2007 led the agency to help scuttle a hostile bid by Express Scripts, allowing CVS’s $21.7 billion offer to prevail.
CVS Caremark Investigation
Now, the FTC is investigating CVS Caremark, looking into allegations by retail pharmacist and union groups that the merged company is overcharging customers, selling private customer data and favoring higher-priced drugs to collect manufacturer rebates.
Pressure for thorough reviews of health-care mergers is also intensifying as President Barack Obama and lawmakers look for ways to reduce health-care expenses, Krauss said.
Express Scripts’s offer for Medco is likely to face “close scrutiny,” he said in an interview.
“The FTC always has been concerned” with the industry, Krauss said.
Cecelia Prewett, a FTC spokeswoman, declined to comment.
Buying Medco would give St. Louis-based Express Scripts the scale to become dominant among companies that manage prescription drug benefits for corporate and government clients.
Medco also said yesterday it lost an $11 billion contract with insurer UnitedHealth Group -- a client as well as a competitor -- that accounted for 17 percent of its business. The loss drops Medco to No. 3 in the industry, trailing Express Scripts and CVS Caremark.
Largest in Decade
The Medco takeover would be the largest in pharmacy services in at least a decade.
Under the agreement between the two companies, no termination fees will be paid if the deal doesn’t get U.S. regulatory clearance.
George Paz, Express Scripts chief executive officer, said on a conference call with analysts yesterday that the companies wouldn’t have combined without confidence of approval by the FTC.
“We believe we will work our way successfully through the regulatory approval process,” he said.
Express Scripts will argue to regulators that the deal won’t crimp competition because Medco mostly handles national accounts while Express Scripts focuses more on small and local businesses, according to three people familiar with the agreement who declined to be identified because the negotiations were private. The company will also contend that UnitedHealth will be a strong No. 3, the person said.
This view may find some traction at the FTC, said Leibenluft.
“These sound like plausible arguments if borne out by evidence,” he said in an e-mail. “The FTC will weigh heavily what PBM customers say in response.”
The FTC is likely to look at whether the market should be defined narrowly by companies such as Express Scripts and Medco, which have national reach, or more broadly, including regional companies and pharmacy managers owned by health plans, he said.
A company that combines Medco and Express Scripts would control about 30 percent of the market by 2013, said Helene Wolk, an analyst at Sanford Bernstein in New York.
Another focus may be how Express Scripts and Medco could use their dominant presence in the mail-order pharmacy market in an anticompetitive way, Maness said.
The deal is likely to increase prices, said David Balto, a Washington-based attorney who has represented independent pharmacists in litigation against CVS Caremark.
“Creating a PBM monopoly is exactly the wrong prescription” for lowering health-care bills, he said in an interview.
The FTC’s examination of CVS Caremark has sensitized the agency to the perils of shrinking competition, Balto said.
In 2009, the FTC started an investigation into business practices related to the merger, and more than 24 states are also probing the company.
CVS has said it’s cooperating with the investigations.
The FTC also reviewed the industry in the mid-1990s. In a 1995 speech, then FTC Commissioner Christine Varney said she was “concerned” about drug companies buying pharmacy benefits manager.
Still, at the time, Varney, who will step down as head of the Justice Department’s Antitrust Division on Aug. 5, said pharmacies’ forming joint ventures with benefit managers may have “significant pro-competitive benefits.”