Wednesday, June 03, 2009

PBM Consolidation Ahead

Looking at some recent news stories, I see more consolidation among Pharmacy Benefit Managers (PBMs). Here are my 5 reasons.

1) The FTC -- Last week, the Federal Trade Commission (FTC) allowed Express Scripts' (ESRX) acquisition of Wellpoint's (WLP) Next Rx in-house PBM business to proceed. As I see it, this deal solidifies Express Scripts' position among the top three PBMs. (BTW, the FTC's non-action is bad news for the independent pharmacist's quixotic quest to undo the CVS Caremark deal.)

2) Financial Value of In-House PBMs – The valuation of NextRx is making other insurers see dollar signs. As Dinah Wisenberg Brin reports in Cigna Comments Prompt Speculation On Drug-Benefits Unit Plans, Cigna's Chairman and Chief Executive H. Edward Hanway said:

"We obviously have new benchmark information now relative to not only what the value placed on the WellPoint PBM was, but also what some of the terms of that relationship were, what some of the capabilities agreed to between the two parties were, and we will use that as part of our benchmarking," Hanway said. "We will evaluate the PBM and we will ultimately do what's obviously in the best interest of our customer value proposition and hence our shareholders, so we are looking at that actively."

A few weeks ago, Cigna's then-CFO Mike Bell made a similar point:

"In light of WellPoint's recent announcement with Express Scripts, we are open to looking at strategic alternatives…The price tag of the WellPoint acquisition certainly got a lot of people's attention, certainly ourselves included." (per Reuters)

3) Marketplace Value of PBMs – The latest deals also provide a counterpoint to the "PBMs add no value" critics. The use of a PBM reflects many individual business decisions by payers and insurers. If PBMs really add "no value," then sophisticated payers and insurers would simply bypass them and perform the activities themselves. However, the Wellpoint Next Rx transaction with Express Scripts suggests that the opposite trend is occurring.

4) Lack of Concentration – Unlike other parts of the pharmacy supply chain, the PBM market is not yet an oligopoly as measured by the four-firm concentration ratio in the first quarter of 2009:

  • Top 4 by annual prescription volume = 55% (source)

  • Top 4 by membership = 41% (source)

5) Need for Generic ScaleGeneric drugs are a major source of profitability for retail and mail pharmacies. Buying power matters, especially given the volume of upcoming patent expirations. CVS Caremark (CVS) has become the single largest buyer of generic drugs in the United States and can use any cost advantage in the marketplace.

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Your thoughts?

6 comments:

  1. AnonymousJune 03, 2009

    Don't forget that Express Scripts will raise $1.6B in equity to finance the WLP deal, so they will still have lots of dry powder (debt) if they need it.

    http://finance.yahoo.com/news/Express-Scripts-offering-23-apf-15409597.html

    ReplyDelete
  2. AnonymousJune 03, 2009

    Adam, mark your calendar for 6 months from now to review how the WalMart 90 day generic program will impact PBM's. Clearly, as people CONTINUE to tighten their belts, we will see more WalMart shoppers, both with employer groups and individuals.....thus impacting traditional drug chains as well as the PBM's (and their mail order divisions).

    Have a good summer....and look forward to re-addressing this topic in December!

    ReplyDelete
  3. AnonymousJune 03, 2009

    Your view of PBMs is very clear. When the truth of their unethical practices comes to light, they will be regulated.

    The PBM's rip-off health plans, provide false figures (or atleast make them look how they wish).

    Lets look at a few:
    1)price spreading between what retail pharmacy receives and what they bill health plans.
    2)Repackaging to produce their own ndc's which they set the price for.
    3)Keeping the branded rebates for themselves, not passing it on to the purchasers.

    The total lack of transparency should raise a HUGE red flag.

    You know how to fix healthcare? Pay the providers, not the leech side industries (like insurance companies, pbm's, and certain bias economists)

    ReplyDelete
  4. Adam:

    Another thought-provoking post, as usual. Keep up the great work!

    One question I ponder is whether the advantage of scale is really translated to the PBM customer. We all want to assume the intuitive view that bigger buys better and, as a result, offers better discounts. Without the benefit of a truly transparent supply chain, we can only guess.

    On a related note, I'm always amused when an individual payor of substantially smaller size, is able to receive better net cost pricing in their PBM contract,from the same PBM, then they can as a participant in a large, national buying coalition.

    ReplyDelete
  5. AnonymousJune 07, 2009

    What will be most interesting is to see the impact of the ultimate Sam's club on PBM's. Sam as in Uncle Sam.

    Let's see the impact of healthcare reform on traditional benefit models.

    ReplyDelete

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