Yesterday, the Federal Trade Commission (FTC) weighed in with a letter to New York State Senator James Seward. Their conclusion? “We are concerned, however, that the Bill will have the unintended consequence of harming consumers.”
Here are at least two good reasons why you should pay attention to the FTC's letter:
- The FTC explains how they think about PBMs, pharmacy, and mail order. There’s some common ground with my comments in The Unexpected Losers from New York’s Anti-Mail Bill.
- Certain statements in the letter reaffirm my view that the FTC will eventually approve the Express Scripts (NASDAQ:ESRX) / Medco Health Solutions (NYSE:MHS) merger per ESRX-MHS: Antitrust Issues.
THINKING LIKE THE FTC
Here’s the key third paragraph of the letter, broken down with editorial commentary from yours truly.
“The Bill will limit a health plan’s ability to steer beneficiaries to a lower cost mail order vendor of maintenance drugs, via financial incentives or other terms of coverage, whenever a competing retail pharmacy is willing to fill prescriptions at “comparable” prices.”
I know that pharmacy owners will howl in protest, but the FTC is not too concerned with steering as long as beneficiaries are steered to a lower cost option. As far as the FTC is concerned, this forces consumers, who only pay a small portion of drug costs out of their own pocket, to make better economic decisions.
“By restricting a health plan’s ability to offer favorable treatment to a low cost mail order pharmacy, the Bill undercuts pharmacies’ incentives to bid aggressively for a share of that health plan’s business. Reducing those incentives is likely to raise the prices that consumers pay for the prescription drugs that their health plans cover.”
The FTC is concerned with fostering competition, not favoring a certain type of business over another. Go watch the cartoon explaining “how competition helps you get more for your buck.” Yes, I know that someone who owns a pharmacy business with a cost-disadvantage versus mail will feel differently.
“Some cost increases may be passed on to plan beneficiaries in the form of higher out-of-pocket prices. In some cases, plans may respond to higher costs by reducing the scope of prescription drug coverage, or by eliminating prescription drug coverage entirely."
This point is why I referred to plan sponsors (third-party payers) as possible losers from the New York bill in The Unexpected Losers from New York’s Anti-Mail Bill. The owner of the mail pharmacy (usually a PBM) charges less to an employer or health plan—the third-party payers who foot most of the bill for prescription drugs.
Forgive me for being a bit grandiose, but the economy is sucking wind right now. It is unnecessary and wasteful to drive up health-care costs for New York businesses with protectionism for local pharmacists.
“For those reasons, FTC staff recommend that the Bill not be enacted.”
WHAT ABOUT ESRX-MHS?
The letter offers useful insights into the current thinking on PBMs from certain key offices and bureaus of the FTC, giving us incremental insight into the potential antitrust issues surrounding PBM-owned mail pharmacies.
First, the FTC reminds us that their 2005 study found “…that mail order pharmacies typically are less expensive than retail pharmacies for both health plans and their members.” This findings still holds true, based on my analysis. And it’s an especially important point because the pharmacy industry is making a big deal about the concentration of mail order volume in a combined ESRX-MHS business.
The FTC has no illusions about the contentious nature of the PBM/pharmacy relationship. On page 3, the FTC staffers explain why mail-order competition is good for consumers and plan sponsors, but perhaps not for pharmacy owners. I’ll quote two whole paragraphs because it’s worthwhile reading:
“FTC research has found that mail order pharmacies typically are less expensive than retail pharmacies, for both health plans and consumers. For this reason, health plans, insurers, and PBMs use a variety of incentives to encourage the use of mail order pharmacies, especially for beneficiaries taking maintenance medications. For example, plans may offer lower co-payments for mail order drugs, or charge deductibles for retail purchases, or impose limitations on the number of times a prescription may be refilled at a retail pharmacy. Some health plans even have “mandatory mail order” programs that reimburse beneficiaries for maintenance medications only if the beneficiaries fill those prescriptions by mail.Keep in mind that this letter was released almost three weeks AFTER the ESRX-MHS deal was announced. Yet the FTC is restating its view that mail-order pharmacies help to reduce costs for consumers and plan sponsors.
These restrictions sometimes limit choices, but they help keep costs down for consumers because they help the health plans get better prices from the pharmacies. Pharmacies often offer lower prices for higher customer volume – in other words, they offer bigger discounts to health plans or PBMs that give their members an incentive to use those pharmacies. Also, if health plans are able to exclude a pharmacy from their network or channel customers elsewhere, that creates a strong incentive for pharmacies to bid aggressively and offer better deals. All of these factors help consumers get lower prices.”
As I highlight in ESRX-MHS: Antitrust Issues, the FTC recognizes that an oligopsonistic PBM market structure can be pro-competitive and favorable for customers.
You may not like my conclusion, but the New York letter supports my view that the FTC will ultimately approve the ESRX-MHS merger.
Quick reminder: Don’t shoot the messenger.