Pharmacy benefit manager mergers yield mixed resultsPosted On: Aug. 5, 2012 12:00 AM CST
Recent mergers and acquisitions among pharmacy benefit managers have created larger companies that could have greater negotiation power for prescription pricing.
But some experts say employers are leery that consolidation could present them with fewer and less flexible pharmacy benefits options.
Jeff Jonas, a research analyst with Gabelli & Co. Inc. in Rye, N.Y., said pharmacy benefit managers such as Woonsocket, R.I.-based CVS Caremark Corp. and St. Louis-based Express Scripts Inc. appear to have passed along savings to clients, as they have acquired competitors and leveraged their economies of scale.
“I think it's actually fairly positive for the employers,” Mr. Jonas said. “For the member, I don't think they really see much of a change. (PBMs) try to minimize disruption in the mergers, but they're not reshaping the industry or reshaping the way it operates.”
However, Larry Boress, president and CEO of the Chicago-based Midwest Business Group on Health, said deals may be limited to the largest or most sophisticated employers that know how to effectively negotiate pricing and service with growing pharmacy benefit managers.
“Any time you reduce competition, you're at risk as a purchaser if you're not large enough to be able to get the kind of relationship you want,” Mr. Boress said.
Several mergers and acquisitions have occurred among the sector'slargest in the past few years. Express Scripts Inc., formerly the third-largest pharmacy benefit manager, closed on a deal this year to buy Medco Health Solutions Inc. of Franklin Lakes, N.J., the nation's largest, for $29.1 billion. And CVS Caremark Corp. became the nation's second-largest pharmacy benefit manager after CVS Corp. bought Caremark Inc. for $21.2 billion in 2007. Those rankings are according to Business Insurance's 2011 list of the 10 largest pharmacy benefit managers, based on unbundled revenues.
Lisle, Ill.-based SXC Health Solutions Corp. bought Rockville, Md.-based Catalyst Health Solutions Inc. for $4.4 billion early this year. The merged company, now dubbed Catamaran, claims it is now the fourth-largest in the nation based on prescription volume.
While the largest pharmacy benefit managers have been consolidating, they have bought smaller competitors, too. For instance, Express Scripts acquired WellPoint Inc.'s NextRx subsidiaries in December 2009. And SXC has completed four acquisitions, including the Catalyst purchase, since January 2011.
A spokesman for Catamaran said the company's merger combined SXC's information technology model with Catalyst's customer service strengths. The result, he said, has been a “flexible” larger company that has been able to win new contracts with major and middle-market employers.
“While scale is important, skill is even more important,” the Catamaran spokesman said. “And we have the right people on board to drive the costs down for clients and employers.”
Express Scripts said in a statement its acquisition of Medco has “proven to be very competitive in the marketplace.”
Gabelli's Mr. Jonas said recent mergers have been driven by the companies' desire to have more negotiation power for prescription pricing and the ability to attract business from large employers. Wall Street also has looked favorably upon such deals, he said.
“Whether it's your IT systems or whether it's purchasing the drugs, especially on the generic drug side...there are huge synergies when you combine these companies,” Mr. Jonas said.
Mr. Jonas said employers seem to be receiving lower prices despite having fewer pharmacy benefit manager competitors to choose from.
“You always worry if (they are) going to abuse their market position and not share any savings with the client,” Mr. Jonas said. “We haven't seen that in their profit margins.”
Mr. Boress said the biggest firms tend to offer pricing deals and customized plan structures for the largest employers or for “squeaky wheels” that are vocal about their pharmacy plan needs.
However, Mr. Boress said that many employers are opting to work with smaller firms because they offer more pharmacy plan flexibility in order to compete with larger pharmacy benefit managers.
Houghton Mifflin Harcourt Publishing Co. has contracted with its group health carrier, Cigna Corp., for pharmacy benefits in the past several years, said Carl Cudworth, Austin, benefits director for the textbook company.
He said larger firms seem to have flexible drug plans that fit the needs of a company like Houghton Mifflin. But lower costs have been the main selling point.
Mr. Jonas expects the mergers and acquisitions trend to slow because companies are “starting to run out of targets” to buy.