One of the central organizational principles in the US market -- indeed, in all modern Western, non-centralized economies -- is that competition is good for consumers. When market share is diffuse, and multiple businesses have to battle for the same customers, they have to offer the best price possible. All else being equal, customers will choose the business whose products and services are the best value for their money. This, in turn, spurs and rewards innovation, which is the driving factor in a free capitalist economy.
These tenets hold true for innovation in medicines as well: competition among pharmaceutical manufacturers, among wholesalers and among pharmacies (respectively) all accrue to patients' benefit, resulting in the most efficient pricing, quality of services and access to life-saving medicines.
Government meddling is typically antithetical to competition-driven free markets, but there's a paradoxical exception: the role that regulators properly play in dismantling and preventing monopolies or monopolistic behavior, in order to ensure that a free market is truly free.
Why? If you're the only kid on the block selling lemonade during a hot August, you know you can charge a full dollar per cup; but once your neighbor starts selling the same thing for 75 cents, you're going to figure out a way to either drop your price or beat his quality -- unless you're like the steel barons of the early 1890s. That is, in which case you and the neighbor kid form a new company that charges $1.25 per cup.
Maybe you even agree to use the lowest-cost lemonade powder (rather than actual lemons) to increase profits, since you no longer have to worry about quality competition. That's great for each of you, but it's your thirsty neighbors who lose, since they would pay significantly less per cup under a more competitive scenario.
On a scale thousands of times larger, the lemonade stand example illustrates the sort of anti-competitive, monopolistic behavior that could result from a proposed $29 billion merger between two pharmacy benefit managers (PBMs), Express Scripts and Medco. Both of these companies already command significant market share (about one third of managed prescriptions). The proposed deal is currently under scrutiny by the Federal Trade Commission, which must ask: if approved, would US patients end up like thirsty neighbors in August, with prices and quality at risk?
A strong argument can be made that the existing pharmacy market is already too centralized. For one thing, there are a decent number of players in the PBM market; of these, just three account for nearly 60% of the nation's total drug volume. Though that's less than 100%, a well-settled principle of antitrust law is that 100% market share isn't required to give major players an opportunity to engage in monopolistic behavior.
For proof of the power that this gives to the "Big Three," consider the now-broken negotiations between one of those big three, Express Scripts, and pharmacy chain Walgreens regarding TRICARE members. (A quick glossary: Express Scripts is a PBM, Walgreens is a pharmacy chain, and TRICARE serves as the PBM for the nation's military and military retirees.)
At issue in the negotiations was whether Walgreens could continue to serve as a pharmacy provider for TRICARE members. According to reports, Walgreens wanted to remain in the TRICARE network, offering a number of significant concessions to Express Scripts. But Express Scripts thumbed its nose at Walgreens, and as of January 1, 2012, TRICARE members will have to go elsewhere to fill their prescriptions.
One can argue that the lack of competition enabled Express Scripts to snub Walgreens: Express Scripts' size, combined with the absence of competition, gave Express Scripts a sort of monopolistic power in negotiations over pricing. The result: TRICARE members will now have fewer choices about where and when to fill their prescriptions.
How would this get worse if the merger between Express Scripts and Medco -- two of the big three -- is approved? For one thing, it would effectively double the size of Express Scripts, which would become the largest company in an already concentrated field. The new company would singlehandedly control more than 60% of the nation's mail order prescription drug business and manage prescription drug plans for over 150 million Americans.
For patients, this raises the specter of increased prices -- a foreseeable result when market share is concentrated in a small number of players. Moreover, the lack of competition could mean a lower quality of care, since patients will have fewer choices -- meaning that big market players will have fewer worries about losing customers.
Politicians regularly decry high prescription drug prices, but simultaneously draw a blank when asked how to improve medical care in the US. One important answer is found in basic free market principles: competition among pharmacy providers spurs innovation, better service and products, and lower prices. Government properly intervenes in the free market to protect consumers by ensuring that market share is sufficiently diffuse. As regulators consider the Express Scripts/Medco merger, they should consider the patient's point of view -- and whether the market is already so concentrated that the proposed merger will simply make an existing problem worse.
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Spread pricing example: In addition to the per member fee, PBM charges employer $56 for a member's prescription. PBM then gives pharmacy $4.32 for the same prescription. PBM pockets $51.68.
What is wrong with this? Employer thinks the pharmacy gets $56. Drugs would be a lot less expensive if it weren't for PBMs. If the employer would just cut out the middle man and give the pharmacy $15 they could save $41 on this one example.
In addition to lowering medication costs, PBMs drive out pharmacy fraud, waste and abuse; increase patients’ adherence to prescribed medicines; proactively identify and correct prescription errors and ensure cost-effective delivery of medicines. Our efforts save billions of dollars annually and extend millions of lives.
As a combined company, we’ll collaborate with pharmacies, physicians and benefit plan sponsors to further improve America’s healthcare beyond what either company can do on its own. Express Scripts and Medco have well-established track records of doing what’s right for patients. The merger would enable us to do even more.
Thom Gross
Express Scripts
Tell everyone about the PBM practices of SPREAD PRICING & REPACKAGING and let the consumers decide if PBMs actually lower the price of medications.
Your above response is filled with lies and inaccuracies.
Daniel Johnson
4th Year Pharmacy Student
What a sham your company and position are. Look at all the waste that PBM's create. Mailing 90 day supplies of meds over and over when people don't need them any more. You are all doing nothing for healthcare but creating more and more wealth for your companies at the expense of employers and patients nationwide. Daniel's example of spread pricing and repackaging are totally real and true. PBM's have added way more cost to the system than they have ever saved.
And In this real-world history, unlike the writer’s hypothetical lemonade stand, the evidence is clear: PBM competition has remained robust, new players continue to enter the marketplace, and the industry has applied continual downward pressure on the cost of prescription drugs, driving out healthcare waste, and improving outcomes for patients.
The merger of Express Scripts and Medco would only accelerate that trend.
Today, more than 40 PBMs compete for market share. The market is highly dynamic, and its shape can shift dramatically when a handful of large plan sponsors switch from one PBM to another, which is common. There is no shortage of strong PBMs. Twelve separate PBMs cover the Fortune 100.
PBMs help pharmacies by providing benefits of technology, instant adjudication of prescriptions and notifications of harmful interactions and contraindications. Our network offers more than 56,000 pharmacies nationwide, of all sizes and in all locations.
PBMs also offer patients the convenient and cost-effective option of home delivery of medications. If you have a chronic disease, such as high cholesterol, high blood pressure or diabetes, taking a generic drug and having it delivered to you at home is the least costly option. Again, it is an option, one of many that are available to plan sponsors to offer to their employees. Our goal is to make sure that patients receive their medicine in the most convenient, cost-effective way possible.
Thom Gross
Express Scripts