Maybe you’ve noticed that companies that are already at the top of their industries have become rather brazen about trying to increase their profits and share prices by buying up their nearest competitors.
Who can blame them? For years now, the courts and regulators have turned a blind eye as industry after industry consolidates into two or three dominant firms. And for years, fee-driven corporate lawyers and investment bankers have been knocking on boardroom doors peddling the notion that they can win approval for any merger just by divesting a subsidiary or two or establishing some fictitious “Chinese wall” to prevent one division from knowing what the other is doing. (Alas, we’re even importing our metaphors from China!)
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
That “anything goes” mentality took a hit recently when the Justice Department dared to challenge the purchase of T-Mobile by AT&T. Now its stepsister, the Federal Trade Commission, has the opportunity to definitively usher in a new era in antitrust by blocking the $29 billion merger between Express Scripts and Medco, two of the biggest pharmacy benefit managers — the companies that handle the prescription drug portion of your health insurance.
This is a fluid and rapidly changing segment of the health-care sector. While two of the big insurance companies, Wellpoint and Aetna, have effectively sold their in-house PBMs, Cigna continues to run its own in-house pharmacy business, and United Health, the largest insurer, recently jumped into the business in a big way.
In 2007, meanwhile, CVS, the big retail drugstore chain, went “upstream,” buying Caremark, another PBM, in the process generating lots of complaints from independent pharmacies that the Caremark PBM is steering much of its retail business to CVS. The independents now fear any further consolidation of PBMs will only add to their woes as more and more prescriptions are routed through the PBMs’ own mail-order pharmacies rather than through the corner drugstore.
The independent pharmacists have good reason to be concerned — because of competition from the big retail chains and the PBMs, they’ve become an endangered species. Some of this is the result of competition that is thuggish and unfair and results in inferior and less-convenient service for customers. But some of it reflects the hard economic reality that mail order is a cheaper and more efficient way to fill prescriptions and scale is important when negotiating prices with patent-wielding monopolists in the pharmaceutical industry. Over time, we will miss them the way we miss the local ice cream parlor and dressmaker.
There’s little question that combining Express Scripts and Medco will generate operating efficiencies. These companies now invest large sums in sophisticated computer systems to manage orders, control inventory, bill customers, detect dangerous drug combinations and nudge patients to take their meds and fill their prescriptions. Having to invest in one system rather than two will result in significant savings for the combined operation.