The Importance of Timing: the Express Scripts and Medco Merger

question 44

Essay

The Importance of Timing: The Express Scripts and Medco Merger

• While important, industry concentration is only one of many factors antitrust regulators use in investigating proposed M&As.
• The timing of the proposed Express Scripts–Medco merger could have been the determining factor in its receiving regulatory approval.
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Following their rejection of two of the largest M&As announced in 2011 over concern about increased industry concentration, U.S. antitrust regulators approved on April 2, 2012, the proposed takeover of pharmacy benefits manager Medco Health Solutions Inc. (Medco) by Express Scripts Inc., despite similar misgivings by critics. Pharmacy benefit managers (PBMs) are third-party administrators of prescription drug programs responsible for processing and paying prescription drug claims. More than 210 million Americans receive drug benefits through PBMs. Their customers include participants in plans offered by Fortune 500 employers, Medicare Part D participants, and the Federal Employees Health Benefits Program.

The $29.1 billion Express Scripts–Medco merger created the nation’s largest pharmacy benefits manager administering drug coverage for employers and insurers through its mail order operations, which could exert substantial influence on both how and where patients buy their prescription drugs. The combined firms will be called Express Scripts Holding Company and will have $91 billion in annual revenue and $2.5 billion in after-tax profits. Including debt, the deal is valued at $34.3 billion. Together the two firms controlled 34% of the prescription drug market in the first quarter of 2012, processing more than 1.4 billion prescriptions; CVS-Caremark is the next largest, with 17% market share. The combined firms also will represent the nation’s third-largest pharmacy operator, trailing only CVS Caremark and Walgreen Co.

The Federal Trade Commission’s approval followed an intensive eight-month investigation and did not include any of the customary structural or behavioral remedies that accompany approval of mergers resulting in substantial increases in industry concentration. FTC antitrust regulators voting for approval argued that the Express Scripts–Medco deal did not present significant anticompetitive concerns, since the PBM market is more susceptible to new entrants and current competitors provide customers significant alternatives. Furthermore, the FTC concluded that Express Scripts and Medco did not represent particularly close competitors and that the merged firms would not result in monopolistic pricing power. In addition, approval may have reflected the belief that the merged firms could help reduce escalating U.S. medical costs because of their greater leverage in negotiating drug prices with manufacturers and their ability to cut operating expenses by eliminating overlapping mail-handling operations. The FTC investigation also found that most of the large private health insurance plans offer PBM services, as do other private operators. Big private employers are the major customers of PBMs and have proven to be willing to switch PBMs if another has a better offer. For example, Medco lost one-third of its business during 2011, primarily to CVS Caremark.

In addition, to CVS Caremark Corp, PBM competitors include UnitedHealth, which has emerged as a recent entrant into the business. Having been one of Medco’s largest customers, UnitedHealth did not renew its contract, which expired in 2012, with Medco, which covered more than 20 million of its pharmacy benefit customers. Other competitors include Humana, Aetna, and Cigna, all of which have their own PBM services competing for managing drug benefits covered under Medicare Part D. With the loss of UnitedHealth’s business, Express Script–Medco’s share dropped from 34% in early 2012 to 29% at the end of that year.

Critics of the proposed merger argued that smaller PBM firms often do not have the bargaining power and data-handling capabilities of their larger competitors. Moreover, benefit managers can steer health plan participants to their own pharmacy-fulfillment services, and employers have little choice but to agree, due to their limited leverage. Opponents argue that the combination will reduce competition, ultimately raising drug prices. As the combined firms push for greater use of mail-ordering prescriptions instead of local pharmacies, smaller pharmacies could be driven out of business, for mail-order delivery is far cheaper for both PBMs and patients than dispensing drugs at a store.
-Speculate as to how the Express Scripts-Medco merger might influence the decisions of their competitors to merge? Be specific.

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