Express Scripts' Acquisition of Medco: Are There Two Sides of the Coin for Independents?

While the initial reaction by those in independent pharmacy was likely OMG, the question is whether there is any silver lining on this deal for independents. If you visit the website for information about the acquisition for pharmacies, it gives you a pretty standard message about how PBMs and pharmacies work together.

Certainly, PBMs have helped the practice of pharmacy by helping create standards, integrating data, forming RxHub (which became Surescripts), promoting e-prescribing, and focusing on adherence (a relatively new phenomenon). But, they’ve also complicated pharmacist’s lives with utilization management and formulary programs and driving mail order. Would some other solution have come up if there weren’t PBMs—of course! Payers need a mechanism to control drug costs and improper utilization (see "A World Without PBMs"), especially back in the days of double digit trend increases. On the other hand, it’s not like PBMs are the only (or I might argue primary) threat to independents… there are the chain drugstores. (FYI: Mail order growth has been flat to negative for almost 2 years now.)

It’s no surprise to hear the standard messaging from NCPA and NACDS:

"The merger would result in a consolidated pharmacy benefit manager with excessive market power that will have anticompetitive effects on patients and the health care delivery system," said the National Association of Chain Drug Stores and the National Community Pharmacists Association.

Certainly, a larger PBM is going to expect to get better rates in their contracts, but the question is how much more is there to give. Most people I’ve talked with believe the curve is fairly flat at this point in terms of being able to lower the acquisition costs, increase rebates, and lower reimbursement rates to pharmacies. Size might not gain much.

As I’ve pointed out, I think specialty is where I would think there is some concern (see Pharmacy Times article) from a competitive perspective. Specialty is the growth area of the business and is already under enormous pressure from a cost management perspective. But, specialty also offers the biggest opportunity to impact costs and outcomes in many conditions like cancer and other high cost areas.

This is a very different animal than traditional mail order, which has already slowed down and become a low growth area. In the recent EMD Serono Specialty Digest 7th Edition, 56% of commercial, 30% of MA-PD, and 53% of Medicaid respondents required the use of a specific specialty pharmacy for specialty fulfillment [typically after the initial fill]. This would concern me as an independent.

That then begs the question of how many specialty pharmacies are typically in the network. Here’s their chart from the report. As you can see, in 57% of the instances, it is limited to 1 to 2 pharmacies (often owned by the PBM). Of course, that’s overstating things since that’s only for non-limited distribution drugs. For limited distribution drugs, there might be multiple other SPs that the consumer can use.

But, those of you that follow my blog know that I’m a fan of the PBM model which has demonstrated savings in multiple studies, and I believe in limited distribution networks. I also believe that independents need to fight for their business based on opportunities to improve outcomes, not simply on the right that they should exist.

So, what would I do as an independent? I would make lemonade.

First, there is an arbitrage opportunity here. Express Scripts and Walgreens have not come to terms. CVS Caremark is a competitor. And, they want to minimize the noise about the acquisition so that it goes through. The independents (if unified) have an opportunity. Why not go to Express Scripts and offer to sign a long-term deal which addresses their concerns (eg, control over the MAC list, MFN type pricing or index pricing, MTM) in return for backing down the rhetoric? Or, why not go to CVS or Walgreens and try to strike a limited network deal to take to Express Scripts as a coalition?

Second, I would take heart in the fact that this acquisition further validates that a standalone PBM model may not be sustainable. If Medco which was the market leader in mail order, had been aggressive in diabetes (with the Liberty acquisition), was doing interesting work in genomics, and had lots of innovation such as the Therapeutic Resource Centers can’t survive, can others? Is this the beginning of massive consolidation and a change in the marketplace overall. If so, how can the independents or retailers in general take advantage of this market disruption to further their case? As I’ve talked about before, I personally believe the individual pharmacist role is massively undervalued (see blog post on this or podcast with Todd Eury on the topic). If it were me, I’d be looking for radical financial model change to reimburse me for the work at the POS and acknowledge that the best long-term strategy for patients that have titrated and are consistently filling a maintenance drug might be via mail order or kiosk where my pharmacist isn’t spending time counting pills and collecting payment.

So, what will happen? IMHO…the acquisition will go through. There will be some job loss and efficiencies gained. The industry will become more payer oriented especially with reform. More consolidation will happen. Independents will survive as they always have. Limited networks will take off. Adherence will be a huge focus. MTM will move to the commercial market in a big way. And, consumers and payers will be happy.

George Van Antwerp is vice president of the Solutions Strategy Group at Silverlink Communications, where he leads the PBM/pharmacy vertical while managing the managed care, Medicare, Medicaid, and population health leads along with solution leads. Prior to Silverlink, he was senior director at Express Scripts, where he led the generic and retail-to-mail efforts. He also worked in business development for Firepond, a CRM software company, and was a consultant with Ernst & Young LLP. His blog, “Enabling Healthy Decisions,” covers a range of issues impacting the health care industry.