Market-share analysis shows changing PBM climate, growth as Medco spins off

Drug Cost Management Report, August 29, 2003

Medco Health Solutions joined the ranks of publicly traded PBMs this month, and was immediately added to the Standard & Poor's 500 stock index. Merck's former PBM subsidiary entered the public arena claiming to be the largest PBM by virtue of its $33 billion annual drug spend. Credit Suisse First Boston (CSFB) initiated coverage of Medco Health (ticker symbol: MHS) with an "outperform" rating. CSFB analyst Kevin Berg notes that Medco is also the market leader in terms of number of scripts, with 559 million scripts in 2002.

So where does that leave AdvancePCS and the other 96 PBM-related companies AIS has been tracking for the past four years? Berg notes that all the public PBMs are of interest to investors now because their unique position in the middle of the U.S. prescription drug supply chain allows them to profit from all the major market forces affecting prescription drugs. Those forces include the aging of the population, generic utilization, biotech drug approvals and mail-order operations. AdvancePCS, Express Scripts and Caremark also have "outperform" ratings from CSFB.

With PBMs in the national spotlight as potential players in a Medicare drug benefit, this is a good time to examine AIS's own survey data for a snapshot of PBM market share today and growth of the industry over the past few years. DCMR has been tracking all the PBMs--public and private--on a quarterly basis since 2000. Since that time, the PBM industry has grown 30% as measured by membership, and a whopping 56% as measured by number of scripts per year.

That explains why FORTUNE magazine's list of the 100 fastest growing companies, released this month, includes five PBMs or PBM parent companies among its 22 health care firms. Many of the listed companies are actively involved in managing drug costs, or are participating in current trends influenced by drug cost management--including a specialty pharmacy company and a disease management firm and several drug makers. The publicly traded independent PBMs are the largest, but by no means the only significant players in the PBM industry. Figure 2 shows the 10 fastest-growing PBMs for the past three years, as measured by PBM membership. Most of these dramatic expansions are due to acquisitions. Consolidation has slowed considerably compared with the rate four years ago.

From AIS's survey data, we estimate that PBMs may be covering as much as 57% of the U.S. population. This is based on adding all PBM covered lives, and subtracting all those that are known to be non-managed lives, or those under administrative-services-only (ASO) contracts, to avoid duplicate counting of members. Since a few PBMs did not provide that breakdown of covered lives, this percentage estimate is likely to be a little high.

In addition, we estimate that PBMs are processing 57% of the claims at chain drug stores as measured by number of claims processed per year. However, when PBM market share is measured by drug expenditures, only about 46% of prescription drug expenditures are paid via PBMs. This indicates that PBMs are paying significantly less per prescription than are other payers. The National Association of Chain Drug Stores estimated that PBMs were processing two-thirds of all U.S. prescriptions as of 2001.

Among PBMs, the three largest are AdvancePCS, Medco Health Solutions, and Express Scripts, Inc., but market share can be measured in several ways.

PBMs that are based in retail pharmacy companies, mail-order pharmacy, or claims processing companies tend to have higher market share as measured by prescription volume than as measured by the other indicators. This indicator favors companies with a high volume of mail-order business because each mail-order prescription is typically counted as equivalent to three retail prescriptions, to account for the fact that mail order typically fulfills a three-month supply.

And PBMs with a focus on pharmacy network contracting, such as AdvancePCS, tend to have higher market share as measured by covered lives than they do by the other indicators. Note that the total membership claimed by PBMs totals more than 403 million members--138% of the total U.S. population. Measurement of covered lives may include many lives that are under service-only contracts or are pharmacy network lives under discount purchasing plans. There is wide variation among PBMs as to how many of their "covered lives" are actually under fully insured risk contracts.

See the next three issues of DCMR for analysis of PBM survey data on mail penetration, cost trends by therapeutic category, and trends in benefit structure.

Figure 1. Selected Companies From
FORTUNE Magazine's 100 Fastest Growing

                      Annual
Company               Revenue       Description

Amerisource-       $47.82 billion   Drug wholesaler and parent of
Bergen                              PBM PharMerica, and
                                    AmerisourceBergen Specialty
                                    Group, one of the largest
                                    suppliers of specialty
                                    pharmaceuticals.

WellPoint Health   $18.24 billion   The second largest health
Networks                            insurer. Parent of WellPoint
                                    Pharmacy Management, one of
                                    the largest PBMs.

AdvancePCS         $14.11 billion   One of the largest PBMs, with
                                    initiatives in specialty
                                    pharmacy, disease management,
                                    electronic prescribing.

Express Scripts    $13.66 billion   One of the largest PBMs, with
                                    some of the largest managed
                                    care contracts, including
                                    UnitedHealthcare. Also has
                                    specialty pharmacy operations.

National Medical   $570.6 million   Mid-sized PBM that has been
Health Card                         growing steadily since its IPO
Systems                             in 1999. Anticipates 40% growth
(NMHCRx)                            this year, according to FORTUNE.

Source: FORTUNE, September 2003.

Figure 2. Fastest Growing PBMs, by Percentage Membership Hike,
Past Three Years

2002-2003              2001-2002           2000-2001

CIGNA Pharmacy         SMCRx (600%)        Aetna US Healthcare Pharmacy
  Management (150%)                          Management (192%)
ACS State Health-      NMHCRx (235%)       National Pharmaceutical
  care (formerly                             Services (157%)
  Consultec) (54%)
Prescription           PharmaCare          RxAmerica (113%)
  Solutions (45%)        Management
                         Services,
                         Inc. (140%)
CBCA Rx (30%)          ScripSolutions      WellPoint Pharmacy Manage-
                         (63%)               ment (110%)
4D Pharmacy Manage-    4D Pharmacy         MedImpact Healthcare Systems
  ment Systems,          Management          (108%)
  Inc. (27%)             Systems,
                         Inc. (57%)
RESTAT (25%)           Managed Pharmacy    Anthem Prescription Manage-
                         Benefits            ment (80%)
                         Inc. (45%)
PharmaCare Manage-     National Pharma-    Scrip Solutions (77%)
  ment Services,         ceutical
  Inc. (25%)             Services (33%)
National Pharmaceu-    HealthExtrasRx      Consultec (44%)
  tical Services         (26%)
  (17%)
WellPoint Pharmacy     Health Resources,   Pharmacy Services Group
  Management (12%)       Inc. (23%)          (38%)
Anthem Prescription    MedImpact Health-   National Medical Health Card
  Management (10%)       care Systems        Systems (35%)
                         (20%)

Source: AIS's quarterly survey of PBMs, conducted exclusively for DCMR.

Figure 3. PBM Market Share by
Number of Covered Lives

AdvancePCS                             19%
Medco Health Solutions, Inc.           15%
Express Scripts, Inc.                  12%
WellPoint Pharmacy Management           9%
MedImpact Healthcare System, Inc.       6%
Caremark Rx, Inc.                       6%
Eckerd Health Services                  4%
PharmaCare Management Services, Inc.    4%
Other PBMs                             25%

Source: AIS's quarterly survey of PBMs, conducted exclusively for
DCMR.

Note: Table made from pie chart.

Figure 4. PBM Market Share by
Number of Prescriptions per Year

Medco Health Solutions, Inc.                18%
ACS State Healthcare (formerly Consultec)   16%
AdvancePCS                                  15%
Express Scripts, Inc.                       14%
MedImpact Healthcare Systems, Inc.           6%
Caremark Rx, Inc.                            5%
First Health Services Corp.                  5%
WellPoint Pharmacy Management                4%
Other PBMs                                  17%

Source: AIS's quarterly survey of PBMs, conducted exclusively for
DCMR.

Note: Table made from pie chart.

Figure 5. PBM Market Share by
Annual Drug Spend

Aetna Pharmacy Management                    3%
Caremark Rx, Inc.                            2%
Other PBMs                                  14%
Medco Health Solutions, Inc.                21%
Express Scripts, Inc.                       19%
AdvancePCS                                  18%
ACS State Healthcare (formerly Consultec)   15%
MedImpact Healthcare Systems, Inc.           5%
First Health Services Corp.                  3%

Source: AIS's quarterly survey of PBMs, conducted exclusively for
DCMR.

Note: Table made from pie chart.