Tuesday, September 22, 2009

PBM Consolidation Ahead (redux)

In early June, I laid out the five reasons why I expect PBM Consolidation Ahead.

The prospects for more consolidation seem even higher now, especially in light of recent news about CVS Caremark (CVS) and Medco Health Solutions (MHS). I also think that health care reform will end up being a net positive for the PBM industry, increasing the need for more scale.

I estimate that the big three PBMs – CVS Caremark (Pharmacy Services), Express Scripts, and Medco Health Solutions – will process about 45% of all prescriptions filled in a retail drug store in 2009. I would not be surprised if that figure hits 60% by 2014.


In June, I laid out five factors that favor consolidation within the PBM sector:
  1. The FTC’s decision not to challenge the Express Scripts' (ESRX) acquisition of Wellpoint's (WLP) Next Rx in-house PBM business.

  2. The perceived financial value of in-house PBMs (in light of the valuation assigned to Next Rx)

  3. The value and role of PBMs in the system – Pharmacy owners tend to scoff at the economic logic behind PBMs and/or accuse me of unrelenting bias. Alas, neither perspective is accurate. The Wall Street Journal recently predicted that Drug Managers Should Keep Their Health, referring to PBMs as “the arteries of the prescription-drug network.” (PBM-haters, feel free to insert your own joke about “bloodsuckers.”)

  4. Lack of concentration – Still true.

  5. Need for generic scale – By 2015, more than $90 billion of current branded product revenues will be lost to generic competition. PBMs need clout with generic drug makers, especially given the prospects for reduced per-script profitability on generic prescriptions.
As a sixth factor, I'll add in the still-uncertain nature of health care reform.

The various proposals and bills all suggest an increase in the number of people covered by prescription drug insurance. These plans are not going to administer themselves, regardless of coverage guidelines or the government’s involvement. Even the Medicaid drug benefit is administered by the states within the requirements set by the Federal government (via the Centers for Medicare and Medicaid Services).

Yes, I know that there are so-called transparency provisions in at least one version of the reform passed by the House. (See Battle Erupts Over Disclosure on Drug Prices.) However, I don’t believe that these measures will make it into the final version of any reform bill (or have much teeth if they do make it there).


Given the six factors above, I suppose the following stories may not appear shocking.

At a recent Thomas Weisel Partners Healthcare Conference, CVS Caremark Corp. (CVS) Chief Financial Officer David Rickard predicted further consolidation. As reported in More Consolidation For Pharmacy Mgmt Cos Inevitable - CVS CFO, he said:
As major PBMs keep gaining share, "what won't happen is some of those in the non-top three will become, you know, competitively unfit, and so there will be a further consolidation within the industry."
(The meaning of this verbatim quote may have been lost in translation, but he does suggest further consolidation ahead.)

In addition, Reuters reported that Medco is seen as the lead bidder for Aetna’s PBM in the aptly-named article Medco seen as lead bidder for Aetna's PBM: sources.


So, what do you think about the likelihood and impact of PBM consolidation?


  1. PBM consolidation raises questions about the competitiveness of the sector. For the time being, anyway, the FTC seems to think not. The real issue seems to be that most patients have almost no competition in healthcare plans (they take the one or possibly two their employers offer), and the threat of Wal-Mart is debatable. After all, if 75% of all Rx's are paid for via PBMs, unless Wal-Mart somehow emerges as a noteworthy player behind the scenes, the competitive threat from the Arkansas-based retail giant seems more like wishful thinking than a genuine competitive threat.

  2. Good morning Adam.

    Such a lovely topic to write about at 5am.....and especially wonderful to view this thing 1st in line on my Crackberry.

    OK, so does this ultimately mean more margin erosion for the retail trade?

    I see this as more drugstore consolidation, more volume, and of course lower reimbursement levels.

    Oh yes. Also the consumer better become more astute on taking their meds properly because they surely won't learn from the very busy drugstores....at least in the traditional methods.


  3. Lynn James EverardSeptember 22, 2009

    It seems that for years across multiple segments the federal government and some payers have slowly but successfully divided product from service, commoditizing the product (pharmaceuticals) and devaluing the service (dispensing, compounding, delivery, etc.). Today it seems like more and more retail pharmacies, infusion providers and home medical equipment providers are viewed as box movers who can live on low margins.

    This viewpoint won't be welcomed by NCPA, NACDS and many other organizations whose members deliver vital and valuable services but the people in DC know they cannot keep going down the same path they have been on and any form of universal health care legislation is likely to bring the whole thing to a breaking point. It is not that no one values your service. It is just that they don't have the money to pay you what your services are worth.

    Right now we don't need health care reform. We need a national referendum on what kind of country we are going to be and what kind of health care system we want to have.

    Lynn James Everard, C.P.M.

  4. I hope Adam doesn't have cardiac arrest but I agree that PBM consolidation is likel;y to occur and unlike Adam I do not think that bodes well for the payer. The FTC doesn't seem to care anymore about market monopoly and its effect on competition. I am old enough to remember when RX csards first appeared and the dispensing fee was $5.00 plus AWP thus allowing a comfortable gross margin for the retailer. The PBMs took care of that by squeezing all of the margin out and putting it in their pocket. Some estimate they are adding $7.00 to $11.00 per RX to the payers tab. Some payers have wised up and adopted totally transparent contracting principles and relegated the PBM back to a PBA where they started and should have remained. Consolidation will only hinder the payers ability to contract in this manner and therefore "Caveat Emptor!"

  5. “Roger all that” to your latest blog on PBM consolidation. But is there any realistic level of same that would finally attract FTC and/or DOJ attention?

  6. Generic drug market strong through 2015. i wanted to comment on this article where fein was quoted. i wondered if these "formost experts" have run a pharmacy recently.Generic approval is backed up and many of the drug companies are focusing on developing high priced specialty drugs. so i dont know about how strong generics will be. profit for pharmacies? have you talked with pharmacist who run these places? you buy a bottle for $1.00 sell it for $4.00 to stay competitive with walmart and do 400 of those a day. pay three pharmacists and 6 techs and the rent and what is left? check your prices on brands like #1 lipitor. check the sales of the top 5 drugs year after year and you will see the money comes from the brand name drugs. the reps give the docs the newest stuff "the latest and greatest" which they are required by ethics to give to their patients. it works better than the last stuff so the patient askes for a script of it and the insurance pays for it. the deals are made with the insurance and manufactures. look up first data bank and every big drug company. the articles are not about how focused these companies are on patient care! Pharmacy owners and staff work there because they care about patients care. if they wanted to make money they would be formost consultants. Pharmacy owners do not live in mansions. Generics will not rule the world finacially. When a drug cost $4 and the AWP is $156 then there is something wrong. Pharmacy owners do not set the price. people who refer to mac, wac, and or awp are refering to made up prices and do not work where the rubber meets the road. show me a very rich pharmacists and ill show you someone who works for a large drug company and not the owner of a pharmacy or staff member. yes, if you have to pay cash then you will take a hit and the pharmacy will make a buck. people with no insurance to not visit the doctor as much and they certainly cant comply with docs directions. they try and keep their kids from getting too sick and the older people are just screwed until they get bad enough the state has to take care of them. very few people pay cash for their $720 avelox antibiotic. they do pay $30 for a bottle of oxy though. 781 factories in india FDA approved. where is the money? not in the pharmacy staffs pocket i gaurantee it!! the problem with most things are the big corps, not the small biz owners like Pharmacits. i think people who write these articles and claim to be experts should make their finacial portfolio public and we can use that as a guide line and not these articles which many of are desinged to get readers and hits = money. or do you not talk about ways to make money from the internet and writing around here. thats a whole different problem. get a group together and make a change, or just charge them for some type of subsciption to some bloated information down the line. Sick people need to be cared for by people who care about them and not some bottom line $. its not fun to see what happens when people focus on money for me and lose site of care for the whole. pbms are consolidating...most people dont even know what a pbm is or does. tell me how i can get the newest drugs to my sickest patients! you will have more readers and hits and subscriptions than you can handle.

  7. I'm not going to respond point-by-point to the illogical and punctuation-free rant above. However, I do want to highlight question 8 from the FAQ.

    8. Do you invest or own stock in the public companies that you mention? No. I do not invest or own stock in any individual public companies. I only own stock through general mutual funds. Please note that Pembroke Consulting, Inc. does not make investment recommendations, on this website or otherwise.

    Also, treat yourself to The Elements of Style by Strunk & White.