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Mergers, drug price competition may cut employers' costs

Mergers, drug price competition may cut employers' costs

Three significant events in 2006 involving prescription drug pricing could be the combination punch employers have been seeking in the long-running boxing match against runaway pharmacy benefit costs.

The merger of Nashville, Tenn.-based Caremark Rx Inc.—which buys drugs directly from manufacturers and distributes them through a network of 60,000 pharmacies as well as mail order—with Woonsocket, R.I.-based CVS Corp. will benefit employers and health plans by creating an integrated and cost-effective pharmacy services provider, both companies' executives said in making the announcement in November.

But an even better offer made last week for Caremark by St. Louis, Mo.-based PBM Express Scripts Inc. would create an even larger company that could have even greater leverage to demand lower prices from drug manufacturers, enabling both of these PBMs to pass on those discounts to employers.

Employers also should benefit from Wal-Mart Stores Inc.'s announcement in September that it was rolling back prices on nearly 300 prescription generic drugs. The effort, rolled out in the Tampa, Fla., market and later expanded to nearly the rest of the nation, ignited a national price battle. Minneapolis-based Target Corp. said it would match the Bentonville, Ark.-based retailer's new pricing strategy.

In addition to saving money for employers with prescription drug plans, the retail competition should stimulate greater use of generics, which are seen as vital in efforts to reduce employers' drug costs, benefit experts say. Many benefit consultants also expect lower generic pricing at retail pharmacies to put pressure on PBMs to reduce the wholesale prices they charge employers for many of the same drugs.

The impact of the third major drug pricing event of 2006 is less certain.

Employers, organizations and other PBM users are unlikely to feel an immediate impact of the proposed resolution of class action litigation against First DataBank Inc., the nation's leading provider of average wholesale pricing for pharmaceuticals, industry experts said. However, if the settlement is finalized, PBM users could see more competitive drug prices going forward.

The settlement also could lead to the end of the AWP system, which some PBM experts suggested artificially inflated some prescription drug prices. The AWP often is the starting point in negotiations for employers seeking discounts from their PBMs.

The lawsuit, which was filed by two union plans, alleged that First DataBank, a San Bruno, Calif.-based division of publisher Hearst Corp., conspired with San Francisco-based drug wholesaler McKesson Corp. to arbitrarily increase AWP markups to 25% from 20% between 2002 and 2005, resulting in overpayment to PBMs and pharmacies of as much as $4 billion.

Under the proposed settlement, First DataBank would reduce average wholesale prices by 5% and eventually cease publishing the drug price benchmark that insurers, employers, pharmacies and PBMs use in setting prescription drug prices.