Doubts emerge about drug industry mergers - acquisitions of pharmacy benefit management companies raise antitrust concerns

Business & Health, Nov, 1994

An unsettling evolution has been taking place in the world of pharmacy. The most obvious development has been a flurry of pharmacy benefit-management (PBM) company acquisitions by major drug manufacturers, beginning last November with, Merck & Co.'s acquisition of Medco Containment Services, Montvale, N.J., which manages $4 billion in drug expenditures annually, for $6.6 million. Merck is headquartered in Whitehouse Station, N.J.

In May, SmithKline Beecham paid $2.3 billion for United Healthcare Corp.'s Diversified Pharmaceutical Services, Bloomington, Minn., which controls annual drug expenditures of $2 billion. Through Diversified, Smithkline, the world's third largest health care company, now has exclusive rights to disease management data generated from the 1.6 million members of United Healthcare HMOs.

Now Eli Lilly & Co.'s $4 billion offer for McKesson Corp.'s PCS Health Systems, in Phoenix, the country's largest PBM influencing $6 billion in drug expenditures yearly, awaits approval from the Federal Trade Commission.

Fearing that the acquisition may have anticompetitive effects, since buying PCS can influence the purchase of billions of dollars of drugs, the FTC has indicated that it may impose strict conditions on Lilly. The limitations may force PCS to maintain an open formulary in which physicians and druggists may choose from a relatively unrestricted list of drugs.

The National Association of Chain Drug Stores (NACDS) in late September made a formal request to the FTC to reject Lilly's acquisition of PCS on antitrust grounds. It would result in higher drug prices, said Ronald L. Ziegler, NACDS president and. CEO. NACDS also wants the FTC to reexamine the Medco and Diversified acquisitions. NACDS has started its own PBM, Pharmacy Direct Network of Alexandria, Va., which competes with Medco, PCS, and Diversified Pharmaceuticals.

These three huge PBMs share about 80% of the managed drug benefit market, while more than 35 other companies divide the remainder. According to Emron, a marketing and communications company in Warren Township, N.J., that specializes in managed care, there are 145 million people with a managed pharmacy benefit and 100 million of them get drugs through a PBM. Janice Ellis, president and CEO of Ellis Management Marketing Group in Kansas City, Mo., says PBMs cover about 45% of the total drug benefit market.

These alliances are giving the three big drug companies new leverage after low-cost branded and generic drugs were aggressively marketed by PBMs to physicians. PBMs have forced drug companies to give discounts or risk losing business to manufacturers willing to cut prices.

PBMs design and manage the payer's pharmaceutical benefit by processing claims, creating drug formularies, negotiating pharmacy fees, obtaining rebates and discounts from drug manufacturers, and developing pharmacy networks. Through sophisticated electronic systems linking payers, medical providers, and pharmacies and capturing patient information, PBMs can accurately monitor physician prescribing and dispensing habits. Managed care companies and PBMs can then, try to change the physicians' behavior.

It's no secret that these PBMs can aid their parent drug companies by adding their products to formularies. Merck, Lilly, and SmithKline Beecham will have access to claims data indicating utilization patterns, which, in theory, will lead to effective disease and outcomes management by making better matches between diseases and drugs. In turn, the PBMs can take advantage of clinical support from the manufacturers.

IS COMPETITION OUT THE DOOR?

Craig Stem, Pharm.D., president of Propharma Pharmaceutical Consultants in Northridge, Calif., says it is too early to be sure, but his self-insured employer clients are afraid the manufacturers will use the PBM acquisitions as a way of avoiding competition by limiting the number of manufacturers integrated with each PBM.

"Employers don't believe that the manufacturers are operating in a competitive marketplace, and they doubt that their PBMs will continue to be able to control costs," Stern continues.

Frank M. Brocato, president and CEO of the Florida Gulf Coast Health Coalition in Tampa, which has 180 members representing 90,000 employees, describes the drug company-PBM alliances as a "two-edged" sword. "On the negative side, the acquisitions open doors for pharmaceutical companies that buy PBMs to market their own brands over others for certain diseases, even if the client is already using another brand," Brocato says.

But, he praises the alliances for providing more streamlined administrative services, especially data collection, tracking, and analysis. "Some drug companies are beginning to target certain disease disorders with which they are familiar. This should provide more control and knowledge [of disease management!. I expect purchasers to become more prudent by relying on information about the most appropriate treatment and drugs communicated through clinical data.

"There also may be more opportunity to bring wholesale prices to the table for increased affordability," continues Brocato. Patricia Wilson of Associates & Wilson, consultants in Rosemont, Pa., fears that the new alliances could be bad news for employers "because if no barrier exists between the two parties, the PBM could push the party line to encourage increased usage." But she adds, "Employers can prevent this if they do their homework and realize what drugs are working.