ESRX-MHS: Antitrust Issues
I give the Express Scripts / Medco Health Solutions deal a 60% chance of being approved by the Federal Trade Commission. I think it’s going to be a very tough fight for antitrust approval, but perhaps not for the reasons you think. The Agreement and Plan of Merger filed on Friday gives us a peek at the companies’ strategy for clearing the antitrust hurdles. But note that there is no termination fee if the companies don’t get antitrust clearance.
The combination will create a company with greater negotiating leverage against other participants in the pharmaceutical system. (See pages 24-30 and 43-45 of The 2010-11 Economic Report on Retail and Specialty Pharmacies for background.)
- Generic manufacturers, which sell drugs to PBM mail pharmacies
- Brand-name manufacturers, which negotiate rebate and discount contracts
- Pharmacies, which negotiate network agreements
- Wholesalers, which supply brand-name drugs to PBM mail pharmacies
No surprise that the pharmacy industry hates this deal. For example: Pharmacists: Proposed Express Scripts-Medco Merger Would Reduce Competition and Raise Health Care Costs.
However, their complaints of “monopoly power” are misguided when describing the relationship between a PBM and pharmacies, manufacturers, or wholesalers. These organizations are not customers of a PBM in the context of the supply chain. They are sellers of goods or services. The appropriate word here is oligoppsony—a market in which there are many sellers but few buyers.
The Horizontal Merger Guidelines (HMG) document published by the Federal Trade Commission (FTC) and Department of Justice (DOJ) provides a nice, concise overview of how the agencies will review the deal.
The FTC recognizes that an oligopsonic market structure can be pro-competitive and favorable for customers, as the agency pointed out in its statement on the Caremark/Advance PCS deal.
The real antitrust questions for the FTC will derive from potential market power issues facing customers of a PBM—the plan sponsors or third-party payers. Will competition remain strong enough to ensure that a portion of any cost savings (from bargaining power or efficiencies) get passed through to plan sponsors?
National market share is less relevant given the competitive dynamics of the PBM industry. Instead, I expect the FTC to examine the key question above on a market-by-market basis. The FTC is likely to look separately at the large employer/plan market, regional health plans, mid-market employers, and other PBM client markets.
The companies certainly don’t view FTC approval as a slam dunk. There is no termination fee if the deal fails to get antitrust approval. Section 5.8(e) (page 68) of the Agreement and Plan of Merger lays out the steps that Express Scripts has already agreed to take to get the deal through the FTC.
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