[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE PROPOSED MERGER BETWEEN EXPRESS SCRIPTS AND MEDCO
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 20, 2011
__________
Serial No. 112-58
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_____
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania [Vacant]
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
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Subcommittee on Intellectual Property, Competition, and the Internet
BOB GOODLATTE, Virginia, Chairman
BEN QUAYLE, Arizona, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania [Vacant]
SANDY ADAMS, Florida
[Vacant]
Blaine Merritt, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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SEPTEMBER 20, 2011
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 3
The Honorable Tom Marino, a Representative in Congress from the
State of Pennsylvania, and Member, Subcommittee on Intellectual
Property, Competition, and the Internet........................ 4
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 6
WITNESSES
George Paz, Chairman and Chief Executive Officer, Express
Scripts, Inc.
Oral Testimony................................................. 15
Prepared Statement............................................. 17
David B. Snow, Jr., Chairman and Chief Executive Officer, Medco
Health Solutions, Inc.
Oral Testimony................................................. 42
Prepared Statement............................................. 43
Joseph Lech, R.Ph., Owner, Lech's Pharmacy, Member, National
Community Pharmacists Association
Oral Testimony................................................. 48
Prepared Statement............................................. 51
Dennis Wiesner, R.Ph., Senior Director of Privacy, Pharmacy, and
Governmental Affairs, H-E-B Grocery Company, LP
Oral Testimony................................................. 79
Prepared Statement............................................. 81
Dan E. Gustafson, Partner, Gustafson Gluek PLLC
Oral Testimony................................................. 84
Prepared Statement............................................. 86
Stephanie Kanwit, Counsel, Manatt, Phelps & Phillips, LLP
Oral Testimony................................................. 92
Prepared Statement............................................. 93
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Letter from Matthew E. Baker, Chairman, Health Committee,
Pennsylvania House of Representatives submitted by the
Honorable Tom Marino, a Representative in Congress from the
State of Pennsylvania, and Member, Subcommittee on Intellectual
Property, Competition, and the Internet........................ 6
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, Ranking
Member, Committee on the Judiciary, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 8
Pharmaceutical Care Management Association (PCMA) study submitted
by George Paz, Chairman and Chief Executive Officer, Express
Scripts, Inc................................................... 23
National Community Pharmacists Association (NCPA) document
submitted by Joseph Lech, R.Ph., Owner, Lech's Pharmacy,
Member, National Community Pharmacists Association............. 55
APPENDIX
Material Submitted for the Hearing Record
Responses to Post-Hearing Questions from George Paz, Chairman and
Chief Executive Officer, Express Scripts, Inc.................. 128
Prepared Statement of Adam J. Fein, President, Pembroke
Consulting, Inc................................................ 131
THE PROPOSED MERGER BETWEEN EXPRESS SCRIPTS AND MEDCO
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TUESDAY, SEPTEMBER 20, 2011
House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 3:37 p.m., in
room 2141, Rayburn House Office Building, the Honorable Bob
Goodlatte (Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Coble, Chabot, Issa,
Chaffetz, Marino, Adams, Watt, Conyers, Chu, Deutch and Nadler.
Staff Present: (Majority) Holt Lackey, Counsel; Olivia Lee,
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief
Counsel.
Mr. Goodlatte. Good afternoon. The Subcommittee will come
to order. I have an opening statement.
This hearing will examine the proposed $29.1 billion
acquisition of Medco Health Solutions by Express Scripts.
Express Scripts and Medco are both pharmacy benefit managers,
or PBMs. PBMs are probably among the least known and least
understood big businesses in America. Essentially PBMs act as
middlemen between health insurance plans that offer
prescription drug benefits and the pharmaceutical companies and
pharmacists who manufacture and dispense prescription drugs to
the plan's beneficiaries. But just because most Americans may
not have heard of PBMs does not mean that they are anything
less than enormous businesses with a significant impact on
prices and competition in the market for prescription drugs in
America.
When a person with health insurance fills a prescription,
it is likely that a PBM was involved in setting the copay,
determining the pharmacist's compensation, negotiating rebates
and discounts with the drug manufacturer, and billing the
health insurance plan for the drugs. For a growing number of
prescriptions, the PBM also acts as the pharmacist. PBMs now
control a majority of the mail-order pharmacy business.
PBM's position in the center of the American prescription
drug market has proven very lucrative. In 2010, Express Scripts
and Medco earned a combined profit of about $2.5 billion, with
revenue over $100 billion. The proposed merger we examine today
would combine two of the three largest PBMs and create a
company that would be involved in about a third of all
prescription drugs sales in America.
The combined company would control about 60 percent of the
mail-order pharmacy market and a majority of the specialty
pharmacy market. The combined company would be the incumbent
holding the PBM contract for a majority of the companies on the
Fortune 50. This consolidation would come in a market that has
already come under considerable scrutiny for alleged abuses of
market power. Small pharmacists have long complained that PBMs
leverage market power to force pharmacies into unfavorable and
unfair contracts.
My colleague Mr. Marino of Pennsylvania has led efforts to
even bargaining power between PBMs and pharmacies and
introduced H.R. 1946, the Preserving Our Own Hometown
Pharmacies Act, to empower small pharmacies to negotiate with
PBMs on more even terms.
In addition to pharmacies, PBMs enter contracts with
essentially every major player in the supply and payment system
for prescription drugs. A PBM with too much market power could
demand ever larger rebates and discounts from drug companies,
capturing more of their profits and perhaps leading to a
decrease in competition and innovation to bring new drugs to
market.
A PBM exercising unlawful market power could decrease the
reimbursement rates for pharmacies filling prescription drugs
to levels that make traditional pharmacies unprofitable and
push more pharmacy business to the PBMs' own mail-order
pharmacy business.
And a PBM unchecked by competition could potentially raise
the prices that it charges employers and other health insurance
plan sponsors for administering their prescription drug
benefits. If this merger leads to a decrease in the supply of
prescription drugs and pharmacy services or raises their
prices, then America's prescription drug consumers will bear
the burden.
It is by no means clear that today's merger will have any
of these negative effects. The merging parties argue that far
from raising prescription drug prices, PBMs are essential to
controlling medical costs by negotiating the best possible deal
for health insurance plans and the consumers who are covered by
those plans.
There is evidence that PBMs actually do save health care
costs, and that PBM mergers can help PBMs realize efficiencies
and skills that empower them to save even more money for their
clients. One study released just yesterday estimates that PBMs
would save their clients almost $2 trillion of health care
costs over the next decade.
Another fact to consider is that nearly every major plan
sponsor who is responsible for administering a health insurance
plan hires a PBM to administer the prescription drug benefit
under that plan. If PBMs did not save money for plan sponsors,
then presumably plan sponsors would not continue to engage
them.
This hearing will examine all of the issues surrounding
this merger. I look forward to hearing from our expert witness
panel today. But I would like to conclude my opening remarks by
raising a larger concern that goes beyond the details of this
merger and has to do with our health care economy as a whole.
In the investor call announcing this merger, both Express
Scripts CEO George Paz and Medco CEO David Snow, who are here
today as witnesses, mention the President's health care reform
as a major factor motivating the merger. Mr. Snow said that,
quote, ``I believe you are going to see all sorts of
combinations across the spectrum of health care as everyone
realigns to the new imperatives related to health care reform
and the demands the government is making,'' end quote. I am
concerned that Mr. Snow may have been right. In the 18 months
since the President's health care bill became law, we have seen
a wave of mergers in various levels of the health care economy.
I am concerned that this wave of mergers may be a symptom of a
deeper dysfunction in our health care economy created by the
ill-conceived health care bill.
I hope that today's hearing sheds light on the continuing
debate in Congress over whether last year's government takeover
of health care will have the effect of favoring regulation over
free market, government mandates over competition, and big
businesses over small.
At this time it is my pleasure to yield to the Ranking
Member of the Subcommittee, the gentleman from North Carolina,
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. And it will come as no
surprise to the Chairman my attitude about hearings about
mergers. I have expressed them before, and I want to try to be
consistent on this occasion.
To be clear, the Committee on the Judiciary has
jurisdiction over all laws related to antitrust. Federal
antitrust laws concern the functioning of the marketplace and
competition and are enforceable by the Antitrust Division of
the Department of Justice, the Federal Trade Commission and
private persons.
The proposed merger between pharmacy benefit managers
Express Scripts and Medco Health Solutions is currently under
examination by the Federal Trade Commission, which recently
requested additional information from the companies, signaling
that the FTC is paying attention to us knitting, and that the
deal has raised antitrust concerns with the regulators.
The FTC's so-called second request demonstrates that the
merger will receive close scrutiny, and that the agency stands
ready to fulfill its mission to prevent anticompetitive mergers
and business practices in the marketplace.
In aid of this investigation, the FTC has the authority to
compel detailed, confidential information to which we as
legislators simply do not have access, making it far more
likely that an appropriate determination will be made based on
the facts and not on political pressure.
It should come as no surprise that I believe, as I
indicated in prior hearings before the Committee, that our
oversight function is best reserved to address legitimate
concerns; for example, agency impropriety, incompetence or
inexplicable inaction, or if, as is more likely in this budget-
cutting fiscal environment, the agency is so understaffed or
underfunded that it is ill-equipped to discharge its
responsibilities at all. Fortunately no such claims have yet
been raised with respect to this merger.
In the area of pharmacy benefit managers, this Committee in
prior sessions of Congress has considered whether a limited
antitrust exemption is appropriate to permit independent
community pharmacies to collectively negotiate the terms and
conditions of insurance contracts in order to produce plans
that would arguably protect the patient's choice of pharmacy.
To the extent that this hearing sheds light on whether we
should revisit that question, I believe it could be helpful to
the Committee.
Now, also, other legislative issues, for example, the lack
of transparency of the PBM call structures, that the Ways and
Means Committee could appropriately consider.
I look forward to hearing from the experts assembled here
today. I know that their testimony will provide the public with
a fuller understanding of the issues at hand. But let me be
clear: The ultimate determination as to whether this merger
impermissibly restrains competition or otherwise violates the
antitrust laws lies with the FTC and not with the House of
Representatives or the Judiciary Committee on which we sit
today.
Mr. Chairman, I yield back, and thank you to the Chairman.
Mr. Goodlatte. I thank the Ranking Member.
The Chair will now recognize the gentleman from
Pennsylvania, Mr. Marino, for an opening statement.
Mr. Marino. I thank the Chairman.
Chairman Goodlatte, Ranking Member Watt, I would like to
thank you for holding this hearing today on the proposed merger
between Express Scripts and Medco, and particularly for
inviting my constituent Mr. Joseph Lech to testify.
I believe that this hearing gives us the unique opportunity
not just to discuss the merits of this particular merger, but
to discuss the broader challenges that many community
pharmacists are facing.
In the 10th Congressional District of Pennsylvania, local
pharmacies are the foundation of many communities. People know
their pharmacists and have trusted their advice and guidance
for years. My daughter takes a great deal of medication on a
daily basis. My pharmacist is always there; he knows us on a
first-name basis. There have been situations where we have gone
away and either forgotten or ran out of a prescription. We just
call our pharmacist, and he makes the arrangements, and we are
taken care of wherever we are.
It is personal service like this that makes community
pharmacies so valuable. In fact, nothing has highlighted the
importance of local pharmacies and the role they play in the
community more than the recent events that occurred in
northeastern Pennsylvania over the past few weeks. It is my
understanding that Mr. Lech is prepared to discuss in more
detail a personal story about this. But I can tell you that
without community pharmacies like Mr. Lech's, a horrible
situation for our friends and neighbors could have been much
worse.
Community pharmacies are now facing a number of challenges
that are threatening their ability to continue to provide
personal services to communities and neighborhoods that need
them the most. As a result, we have seen the number of
community pharmacies decline nearly 50 percent since 1980. This
is a disturbing trend, especially because it is small
businesses such as Lech's Pharmacy that will lead us out of
these difficult economic times.
As policymakers it is our job to focus on laws and policies
that empower small businesses to grow and create jobs right
here in the United States. I have serious questions and
concerns that the merger we are discussing today could worsen
the climate for independent pharmacies and could lead to excess
access and higher costs for patients.
I am especially concerned about the consolidation this
merger would cause in the mail-order and specialty drug
markets. According to 2011 Atlantic Information Systems data,
the combined mail-order facilities would concentrate 59 percent
of the mail-order market, and in 2009 the combined specialty
drug market share for Express Scripts and Medco was 52 percent.
There have already been a number of reports where patients are
being directed away from local specialty pharmacies to ones
that may be much farther away and are owned by the PBMs.
While I am concerned about the effects of this merger, it
is important to recognize that regardless of the outcome of the
Federal Trade Commission review, independent pharmacies will
still face substantial difficulties. For this reason I have
introduced H.R. 1946, the Preserving Our Hometown Independent
Pharmacies Act, that would be one step toward leveling the
playing filed for community pharmacies. This legislation would
allow independent pharmacies to join together to negotiate the
terms and conditions of insurance contracts, to produce plans
designed that would better protect the patient's access to
their pharmacy of choice and are fair to the pharmacies. This
legislation would put an end to the ``take it or leave it''
tactics that small pharmacies are currently forced to accept.
Many of my colleagues from the Committee and Subcommittee have
already joined me in these efforts by cosponsoring this
legislation.
In conclusion, I would like to enter into the record a
letter I received from the Pennsylvania House of
Representatives chairman of the Health Committee, Matthew
Baker, in opposition to the merger. In the letter he stated,
PBMs' record of controlling costs is questionable, and the
proposed merger would limit the ability of both the private and
public sector to control health care costs, thus resulting in a
significant reduction of competition.
Again, I would like to thank the Chairman for holding this
important hearing. As the FTC commits its review and continues
of this proposed merger, I would ask that they pay special
attention to what it would do to patient access to the local
pharmacies and the personal care these pharmacies provide. I
look forward to working with you, Chairman Goodlatte and
Ranking Member Watt, to ensure that we are doing everything we
can to give hometown pharmacies the opportunity to grow and
create jobs, while providing the best care for our families.
Mr. Goodlatte. I thank the gentleman, and, without
objection, the letter from Mr. Baker will be made a part of the
record.
[The information referred to follows:]
__________
Mr. Goodlatte. We are pleased to be joined by the Ranking
Member of the full Judiciary Committee, the gentleman from
Michigan, Mr. Conyers, and I am pleased to recognize Mr.
Conyers.
Mr. Conyers. Thank you, Chairman Goodlatte and Mel Watt,
our Ranking Member.
I had said before that I have rarely met a merger that I
liked, but this is one that I like more than the ones that I
don't like. And so the biggest problem I have here is that the
small pharmacies and independents are urging me not to support
it, and I hope I hear persuasive discussion that will lead me
to go along with this circumstance.
Now, this is a case of a small company taking over a bigger
company, isn't it, which is also quite unusual. So here we come
with these intermediaries, these folks that work in between the
pharmacy benefit managers. How did they get into the picture?
Where did they come from? What created them? I understand there
are more than 40 floating around, and I think--and I hope I
heard my leader Mel Watt say that we determine what is--what
violates antitrust, not the FTC. But that is what is in our
jurisdiction anyway.
So I come here thinking that in the long run somebody is
going to go out of business if they don't merge. I don't want
to try to tell you I have looked at the books of anybody, but
what I am hearing is if this merger doesn't take place, it is
not unlikely that somebody will go out of business, so that
from a jobs perspective this is a strong case for the merger.
And so I will introduce into the record my complete
statement and ask that all of you expect me to discuss Chairman
Goodlatte's observation that the wave of mergers were the
result of the ill-conceived health care bill. I hope that you
are all prepared to answer that question.
And I thank you, Chairman Goodlatte.
Mr. Goodlatte. I thank the gentleman.
[The prepared statement of Mr. Conyers follows:]
__________
Mr. Goodlatte. And it is now my pleasure to introduce our
witnesses. We have a very distinguished panel of witnesses
today. And before I introduce them, I would like them to stand
and be sworn.
[Witnesses sworn.]
Mr. Goodlatte. Thank you, and please be seated.
Each of the witnesses' written statements will be entered
into the record in its entirety. I ask that each witness
summarize his or her testimony in 5 minutes or less. To help
you stay within that time, there is a timing light on your
table. When the light switches from green to yellow, you will
have 1 minute to conclude your testimony. When the light turns
red, that is it. It signals that the witness' 5 minutes have
expired.
Our first witness is George Paz, chairman and CEO of
Express Scripts, Incorporated. If the merger is approved, Mr.
Paz will be the chairman and CEO of the new merged company.
Our second witness is David Snow, chairman and CEO of Medco
Health Solutions.
Our third witness is Joseph Lech, an independent community
pharmacist from Tunkhannock, Pennsylvania.
Our fourth witness is Dennis Wiesner, a senior director of
the H-E-B grocery chain with responsibilities for privacy,
pharmacy and government affairs.
Our fifth witness is Dan Gustafson, a founding member of
the Minneapolis law firm Gustafson Gluek.
Our sixth and final witness is Stephanie Kanwit, counsel at
the law firm Manatt, Phelps & Phillips.
Mr. Paz, we will begin with you. Welcome.
TESTIMONY OF GEORGE PAZ, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, EXPRESS SCRIPTS, INC.
Mr. Paz. Thank you, Mr. Chairman and Members of the
Subcommittee.
Mr. Goodlatte. You may want to turn on that microphone and
pull it close.
Mr. Paz. Thank you, Mr. Chairman and Members of the
Subcommittee. Thank you for the opportunity to explain how the
combination of these two innovative companies can benefit the
Nation's patients and its public and private purchasers. I
believe that today's hearing will demonstrate that this merger
is one of the best prospects to secure safer and more
affordable prescription drugs for tens of millions of
Americans.
I would like to begin by addressing a concern on every
American's mind: jobs. Health care costs are a worrisome part
of running a business. Yesterday an important new study was
released, which I ask to be included in the hearing record. It
concludes that for every 1 percentage point reduction in
prescription drug costs, 20,000 jobs in the United States can
be funded.
PBMs have a proven track record of generating savings for
employers and their workers. There are many proven tools
available through PBMs like Express Scripts and Medco that
reduce drug costs, and this merger will sharpen and expand the
availability of these tools.
Four of us on this panel are part of the same noble
mission. Patients in need of medicine rely on us for access to
affordable care. Each us is committed to the highest ideals of
the practice of pharmacy: accuracy, safety, affordable care,
and service.
Mr. Lech's pharmacies are a part of our network. We are the
PBM for Blue Cross of Northern Pennsylvania, the insurer that
covers many of his customers. We work with literally thousands
of independent pharmacies like those of Mr. Lech all across the
country, and we value those relationships.
Mr. Wiesner's employer, H-E-B, has been our client for many
years. His chain of stores are also an important part of our
pharmacy network. Let me also acknowledge Mr. Wiesner's service
on the Texas Board of Pharmacy, where he is developing the next
generation of skilled pharmacists to serve patients.
I am proud to report that one of my company's employees was
just named the outstanding young pharmacist of the year by the
Texas Pharmacy Association.
Each of us here today should ask ourselves what is in the
best interest of a patient when they are trying to fill a
prescription? And who is there to ensure that the American
family is getting the best value for their money? PBMs help
American families and their employers get the best possible
deal while improving safety. We make the use of prescription
drugs safer and more affordable.
After a patient has been seen by their caregiver and has a
prescription that needs to be filled, they are hardly in a
position to negotiate with a drug company or a pharmacy. They
just know they need the prescription filled as their ticket to
getting well. If they are one of our patients, when they walk
into a pharmacy, they have all 13,0000 Express Scripts
employees standing with them. Before they ever receive their
medicine, over 100 safety checks are conducted by our system,
one of most advanced high-tech systems in the world. In less
than 2 seconds, we determine if there is a clinically
appropriate, less costly generic drug available. We also make
sure the patient is not subject to adverse drug events.
Further, what patients pay is reduced on average by 30 to 40
percent. For Mr. Lech, Mr. Wiesner and other pharmacies, they
receive safety information, and they are assured payment,
eliminating $7.3 billion in bad debt to pharmacies each year.
These are all giant leaps forward for patients and pharmacies
that companies like our help create, and we make these benefits
available to over 65,000 pharmacies in every corner of the
United States.
I believe drug costs are still too high for American
families. When the big drug companies' charge for their
medicines keeps going up, and large retail drugstore chains
want to dictate prices, I want a fair deal for our patients and
employers. That mission goes to the core of what our companies
are all about. We are fully aligned with our patients and
employers. We make money by saving them money. This union of
our two companies will strengthen our ability to do just that.
In my formal testimony I go through many of the tools we
have developed to drive down drug costs while improving health
outcomes. We have a proven track record.
There are other benefits to the health care system by
combining our two companies. For example, one, we increase
patient adherence and reduce unnecessary medical expenses; two,
we help the FDA monitor drug shortages and identify safety
concerns quickly; three, we empower Federal and State
responders from all public health and respond to natural
disasters; and, four, we help law enforcement address fraud,
waste and abuse.
In conclusion, the merger of Express Scripts and Medco is
the best opportunity to continue to lower drug costs while
improving health care today and for the immediate future.
Mr. Chairman and Members of the Subcommittee, I thank you
for the opportunity to speak to you today.
Mr. Goodlatte. Thank you for your testimony, Mr. Paz.
[The prepared statement of Mr. Paz follows:]
Prepared Statement of George Paz, Chairman and Chief Executive Officer,
Express Scripts, Inc.
introduction
Chairman Goodlatte, Ranking Member Watt, and Members of the
Subcommittee, my name is George Paz and I am the Chairman and Chief
Executive Officer of Express Scripts, Inc. Express Scripts is
headquartered in St. Louis, Missouri and has more than 13,000 employees
located in 13 states including Arizona, Florida, Indiana, New York,
Ohio, Pennsylvania and Texas.
I wish to thank the subcommittee for the privilege to testify and
share my perspective on why and how the proposed merger of Express
Scripts and Medco Health Solutions will be a win/win for the nation's
patients and its public and private purchasers. It is my hope that
today's hearing will also make clear why failure to finalize and
approve the merger will eliminate one of the best prospects we know to
secure safer, better and more affordable pharmaceutical coverage and
care for tens of millions of Americans.
Express Scripts is one of more than 40 pharmacy benefit managers,
or PBMs, operating in the United States. Every year, Express Scripts is
hired by thousands of small businesses, Fortune 500 employers, Taft-
Hartley funds, managed care plans, and state and local governments to
manage the pharmacy benefits for more than 50 million patients.
Clients appreciate what we do to help them provide cost-saving,
medically appropriate prescription drug coverage for American workers
and families. Failure to produce savings and value for our customers
means they turn to our competitors or attempt to manage the costs
themselves. We are quite proud, however, that our clients ``re-elect''
us 98% of the time. Several of our more widely known clients such as,
Blue Cross Blue Shield of Northeast Pennsylvania, Blue Cross Blue
Shield of Massachusetts, MetLife and Lowes have contracted with Express
Scripts for more than a decade.
Express Scripts is a genuine American success story. We have grown
rapidly over our 25-year history, bringing innovation to the
marketplace, driving out unnecessary or expensive spending in the
pharmacy benefit and making medicines safer and more affordable. Since
being founded in 1986, much has changed in the world. One overriding
principle that forms the bedrock of our company never wavered: our
goals will always fully align with our clients' needs.
Simply and most accurately put, we and our competitors in the PBM
industry are successful when our clients save money through lower
employer and employee health premiums and/or reduced out-of-pocket
costs while at the same time enhancing safety and more positive medical
outcomes. To the extent we fail to deliver on that promise, we fail to
retain and sustain our client base and business model.
pbms lower prescription drug costs for consumers & payers
At Express Scripts, we work hard on behalf of our clients to rein
in high drug costs, improve patient outcomes, advance the practice of
pharmacy, and assist law enforcement in critical efforts to stop fraud,
waste and prescription drug abuse. With nearly four billion
prescriptions filled in the United States last year alone \1\, pharmacy
is the most frequently used part of health care and demands the
sophisticated tools and expertise only PBMs can bring to bear.
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\1\ http://www.imshealth.com/deployedfiles/ims/Global/Content/
Corporate/Press%20Room/Top-line%20Market%20Data/2010%20Top-
line%20Market%20Data/2010_Distribution_Channel_
by_RX.pdf
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Express Scripts' fundamental mission is to make medicines safer,
more affordable and more accessible. PBMs make prescription drugs more
affordable for clients by creating old-fashioned American competition
among brand-name and generic drug manufacturers as well as among more
than 60,000 chain drugstores, mass merchandisers, independent
pharmacies, and grocery pharmacies. We ``ride the same horse'' with our
clients, helping them benefit directly from our bargaining know-how and
world-class clinical initiatives.
At a time when many Americans struggle to afford their medications,
sometimes having to choose between a rent check and the prescription to
keep their diabetes under control, our role has real meaning in the
lives of so many. When a patient visits a pharmacy, she leaves with
both peace of mind and the right medication to improve her health and
well-being. Whether a patient realizes it or not, through our rapid and
robust high-tech adjudication process, more than 100 safety checks
occurred before she left the pharmacy. These safety checks avoid costly
drug interactions, contraindications, and other harmful medication
errors. PBMs save lives and deliver real value for millions of
Americans every day.
pbm-generated competition lowers drug prices
PBMs have had tremendous success in driving down prescription drug
costs for patients and payers. In doing so, PBMs have relied upon a
wide range of tools and techniques, including expanded access to less
costly, medically appropriate generic drugs, step therapy programs, and
home delivery pharmacy. According to our data, Express Scripts members
utilizing our full complement of tools enjoy an additional annual
average savings of over 11 percent per year. These savings are in
addition to the discounts from negotiating with drug makers, which
average 27 percent below the average cash price consumers would pay at
a retail pharmacy for brand name drugs and 53 percent below the retail
cash price for generic drugs.\2\
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\2\ US GAO ``Effects of Using Pharmacy Benefits Managers on Health
Plans, Enrollees and Pharmacies'' GAO-03-196
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The decisions we make and the innovations we bring forward are
rooted in the best clinical data available anywhere in the world. A key
tool PBMs rely upon to increase competition in the prescription drug
supply chain begins with a Pharmacy and Therapeutics (P&T) Committee.
Comprised of an independent group of highly-trained physicians and
pharmacists, these panels review every marketed prescription medication
to ensure safety, clinical appropriateness, and establish coverage
parameters to guide formulary (the list of covered medications)
development. These P&T Committees are focused solely on the clinical
benefit of these medicines and are not involved in negotiations with
pharmaceutical manufacturers, contracting with network pharmacies, or
any other aspect of a PBM's business. The P&T Committee develops
independent, science-based clinical parameters consistent with best
medical practices, which PBMs use to build innovative programs and
negotiate with drug makers to compete at the lowest price.
Perhaps a P&T Committee's role can be best explained through the
example of a class of medications that treat high blood cholesterol
(hyperlipidemia). Payers, whether health plans, employers or the
federal government, spend more on prescription medications in this
class than any other group of medications. Within this therapeutic
class, there are dozens of available treatments. Looking just at
statins, a sub-class that lowers LDL cholesterol, there are seven
different medications available. As the P&T Committee reviews this
class, clinicians examine all the available data, weed out the ``me-
too'' drugs from truly novel therapies, and determine that a clinically
comprehensive formulary should include generic medications and only one
high-potency statin. With only one high-potency statin needed on the
formulary, the manufacturers of these products blindly bid at the
lowest possible price in an effort to ensure placement on the
formulary. Price variation in this class is significant, with the
monthly treatment costs varying from $11 to more than $200 \3\.
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\3\ http://www.consumerreports.org/health/resources/pdf/best-buy-
drugs/StatinsUpdate-FINAL.
pdf
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In 2010, brand drug makers increased prices on statins by an
average of 9.3 percent. Yet because of Express Scripts' sophisticated
negotiating tools, our clients' exposure to this increase was limited
to 6.3 percent--which translates to a 32 percent discount for clients.
Our business model is a winning formula for patients, payers, and the
entire health care system. Each of our clients makes their own choice
about how to use these savings. Some use the savings to offset premium
increases. Others offer these savings to patients through reduced
copayments, coinsurance, or through copayment waivers altogether.
Interestingly, the number of patients receiving treatment for high-
blood cholesterol actually increased last year, addressing a public
health concern well documented by the Centers for Disease Control and
Prevention (CDC)\4\.
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\4\ Kuklina EV, Shaw KM, Hong Y. Vital Signs: Prevalence,
Treatment, and Control of High Levels of Low-Density Lipoprotein
Cholesterol--United States, 1999-2002 and 2005-2008. Morbidity and
Mortality Weekly Report. 2011;60(4):109-114. Available at: http://
www.cdc.gov/mmwr/pdf/wk/mm6004.pdf Accessed February 4, 2011.
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PBMs are creating competition in the drug supply chain. If a dozen
different prescription medications treating the same condition were all
covered by a health plan at identical levels, drug makers would be
incentivized to maximize prescription drug prices to whatever level the
market would bear. Instead, the use of independent P&T Committees
creates a market dynamic where the manufacturers of these products must
compete with one another for placement on the plan formulary. The
result--patients and plan sponsors save money and have better health
outcomes.
pbms have driven dramatic decline in drug trend in the past decade
The emergence of PBMs correlates directly with the reduction in the
rate of growth in prescription drug costs. In the late 1990s, the rate
of growth in the cost of pharmaceuticals was at an all-time high annual
growth rate of 18 percent. This growth rate was simply unsustainable.
Employers seeking to rein in costs were desperate for help and began
turning to PBMs in earnest for solutions. Throughout the 2000s, the
annual rate of growth was reduced gradually to just 5 percent in
2009.\5\ This historic decline in drug trend is attributed to a variety
of factors, including the expanded use of cost-effective generic
alternatives. Trend management tools that promote the use of generic
drugs are the single most potent tool to lower drug spending. Largely
because of the leadership from companies like mine, the use of generic
drugs has saved American patients and payers $824 billion in the last
decade alone \6\.
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\5\ National Health Expenditure Data from the Centers for Medicare
& Medicaid Services. https://www.cms.gov/NationalHealthExpendData/
downloads/highlights.pdf Accessed September 14, 2011.
\6\ http://www.gphaonline.org/about-gpha/about-generics/case/
generics-providing-savings-americans
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medicare part d: working as congress intended to lower seniors' drug
costs
Medicare and more than 40 million older Americans and people with
disabilities have also benefitted from PBMs' tool and techniques. Prior
to the advent of Medicare Part D in 2006, about one in three Medicare
beneficiaries lacked prescription drug coverage. Without comprehensive
drug coverage provided through PBMs, millions of seniors every month
faced agonizing choices that either meant forgoing needed medications
or diverting scarce resources away from rent or food to pay for their
prescriptions. Working together on a bipartisan basis, Congress passed
historic legislation in 2003 modernizing Medicare by adding a much-
needed prescription drug benefit.
Despite dire predictions by some of high costs and low
participation, Medicare Part D has exceeded expectations. Beneficiary
satisfaction is very high, with seniors enjoying broad access to a wide
range of medicines. Plan participation is robust, with dozens of health
plans and PBMs acting as prescription drug plan (PDPs) sponsors or Part
D sub-contractors. Premiums are far lower than originally forecast and
the program has come in under budget. In fact, the Center for Medicare
and Medicaid Services announced in early August that 2012 Medicare Part
D premiums will actually go down for the first time in the program's
six year history. This is due to competition amongst Medicare Part D
plans (administered by PBMs) and increased generic utilization.\7\
While there are important distinctions between Medicare Part D and how
PBMs operate in the commercial marketplace--particularly how Part D's
design protects drug makers from competition for certain classes of
drugs--Part D nonetheless builds on many of PBMs' core business
functions.
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\7\ http://www.hhs.gov/news/press/2011pres/08/20110804a.html
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improving patient care through prescription-drug adherence programs
While Express Scripts and Medco have built very different
capabilities to serve their patients, we have a shared mission to
protect working families and small businesses from high prescription
drug costs. Express Scripts has advanced this goal by applying
behavioral sciences to healthcare to understand the reasons why
patients may not always adhere to their medications. More than half of
all patients fail to engage in behaviors consistent with their
intentions. This disconnect between patient intent and reality results
in the wasting of more than $18 million of pharmacy benefits each and
every day. Imagine if our system could recoup even a modest portion of
this waste? These resources could be allocated much more effectively in
other parts of the system.
Express Scripts helps close this intent-behavior gap and improve
patient outcomes through the application of behavioral sciences.
Inherently, we all want to use the least costly medicine, delivered as
safely as possible. Any number of barriers can come along that trip us
up--leading to non-adherence, financial waste and poor outcomes. We cut
through the noise and create simple to execute programs allowing people
to act on their best intentions. While Express Scripts has focused on
improving compliance, Medco has made a key priority of managing chronic
illness through Therapeutic Resource Centers (TRCs). TRCs focus on
patients diagnosed with different chronic diseases and employ an array
of specially trained clinicians to optimize therapy effectiveness,
maximize health outcomes by improving adherence, and help patients
avoid adverse drug interactions. While our clinical capabilities are
very different, we share the same goal and these capabilities will be a
powerful complement to one another when the merger receives regulatory
approval and is finalized.
Let me leave you with another example of how this combination will
improve healthcare. You recall the excitement around the mapping of the
human genome. We were promised a golden era of medicines. By and large,
that promise has not been fulfilled. By bringing together our
companies' complementary expertise in behavioral sciences and
pharmacogenomics, we have the potential to truly deliver on the real
promise of personalized medicine: ensuring that patients get the right
treatment at the right time for the best outcome.
reducing pharmacy fraud, waste and abuse
Another shared goal of Express Scripts' and Medco's business is
driving waste out in the pharmacy benefit, deterring fraud, and
reducing prescription drug abuse. In 2010, Americans unnecessarily
spent more than $400 billion on their health care, and risked their
lives and health, by choosing the wrong medication, pharmacy or through
simple but all-too-frequent non-adherence to their doctors'
instructions \8\. Beyond wasteful prescription drug spending, these
costs include unnecessary hospitalizations, testing and treatment in
costly emergency rooms. These are very real problems with costs across
the entire health system and PBMs are the most advanced partners to
provide common-sense solutions.
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\8\ Express Scripts. 2010 Drug Trend Report.
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As much as 1 percent of prescription drug costs result from fraud,
waste, and abuse \9\. With Americans spending $307 billion just on
prescription drugs in 2010, this amounts to several billions of dollars
in unnecessary costs to our system. Our clients already rely on us to
help detect and prevent fraud, waste and abuse. Through advanced high-
tech programs and processing systems, we save clients millions of
dollars in wasteful pharmacy spending. Beyond saving money for our
clients and patients by preventing this wasteful, and in some cases
criminal behavior, our merger can bring new resources to bear for law
enforcement to address America's other drug problem--prescription drug
abuse.
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\9\ Pharmaceutical Care Management Association. White paper on
Fraud, Waste and Abuse. July 2011.
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Examples of fraud in the pharmacy marketplace are plentiful. A few
years ago, six pharmacists, a doctor, and five drug dealers in Texas
were convicted for conspiracy to divert more than 1.7 million tablets
of prescription pain killers for illicit sale and use. The $30 million
scheme involved pharmacists repeatedly refilling fraudulent
prescriptions that were dispensed to drug dealers. These criminal
enterprises have become so wide-spread, several states have enacted
anti-``pill mill'' legislation to detect and end this kind of
prescription drug abuse.
The combination of Express Scripts and Medco's systems will create
a new tool for law enforcement when investigating potentially criminal
prescribing or dispensing patterns. With data from more than 65,000
pharmacies across the country, doctor-shopping, polypharmacy, and other
instances of fraud can be stopped like never before.
expanded clinical offerings
Express Scripts and Medco both have significant clinical
capabilities to serve all of our patient groups. By combining these
offerings, we can pioneer new drug safety systems, create new resources
for public health, and continue to advance evidence-based medicine to
better serve our patients.
Express Scripts has been on the cutting edge of improving patient
safety. Through a combination of our P&T committee expertise, our vast
database of prescription drug utilization, and post-marketing
surveillance, Express Scripts identified serious safety concerns with
Vioxx more than six months before the FDA withdrew market approval. By
combining with Medco, we will have even more clinical data that can
create the largest and best real-time early warning drug safety system
in the world.
This combined clinical data is also useful to public health. As
various government agencies monitor epidemiology, or track supply chain
disruptions in the United States, our resources will provide
comprehensive data that have never before existed. The FDA, CDC, DEA
and FEMA could all benefit from the comprehensive warehouse of supply
chain data to track, distribute and respond to public health
emergencies.
We also intend to continue our focus on evidence-based medicine
that improves the safety and cost-effectiveness of prescription drugs.
The growing availability of generic alternatives has already created
enormous opportunities to better manage prescription drug spending.
advancing specialty pharmacy services
An Express Scripts-Medco merger will facilitate the advancement of
specialty pharmacy services for patients facing the challenges of
diseases like cancer, MS, leukemia, and hepatitis C among others.
Express Scripts is very proud of our specialty pharmacy capabilities.
We are committed to providing the best in class specialized care to
patients with chronic, complex diseases with medications that can cost
tens or even hundreds of thousands of dollars per year. Our specialty
pharmacy programs keep patients adherent to injectable and infusible
therapies, avoid more costly treatment settings, and improve the
livelihood of our patients. Our specialty pharmacies also partner with
drug makers, the Food and Drug Administration, and the Drug Enforcement
Agency because of the need for post-marketing surveillance. Narrow
distribution channels are necessary for drugs that are sometimes
schedule III controlled substances. Specialty pharmacy is a complex
market with competition both inside and outside of the pharmacy
benefit, including retail pharmacies across the nation.
we will protect american families from the rising cost
of prescription medicines
A combined Express Scripts and Medco will be well-positioned to
protect American families from the rising cost of prescription
medicines. The Federal Trade Commission, the country's only regulatory
agency tasked with both consumer protection and competition, is
reviewing the competitive effects of our merger. After its thorough
review, the FTC will make its determination as to whether the proposed
transaction passes muster under the antitrust laws.
The PBM marketplace is highly competitive and dozens of PBMs
compete for business in various payer streams providing coverage to
roughly 260 million Americans. This marketplace consists of large
group, small group, and individual insurance markets, Taft-Hartley
union plans, and an array of separate public programs, including
Medicare, Medicaid, Children's Health Insurance Program (CHIP),
TRICARE, state employee benefit plans, and the federal employees'
program (FEP). More than 20 different PBMs service the Fortune 500
employers and the advent of the Medicare Part D program has
dramatically increased the number of prescription drug benefit
offerors.
While a focus on historical market shares ignores the highly
complex and dynamic nature of the marketplace and how PBM business is
bid and won, by our estimates, the combined historical shares of the
companies would be approximately 30 percent. This range falls well
inside the parameters of mergers which have passed antitrust regulatory
review.
The benefits of this merger are numerous and will accrue to
patients, employers, clinicians, and payers alike by:
Generating greater cost savings for patients and plan
sponsors;
Closing gaps in care and achieving greater adherence
through behavioral approach and clinical strengths;
Providing leadership and resources required to drive
out waste and improve health outcomes;
Utilizing shared expertise to better manage the cost
and care associated with specialty drugs--the biggest driver of
costs in the drug supply chain; and
Responding to the national call for a more affordable
and accountable healthcare system.
In conclusion, our health care system is at a crossroads. Consumers
want the protection that comes from comprehensive coverage providing
high-quality, affordable care, including pharmacy benefits. Employers,
already struggling in a difficult economy, are seeking greater value
for their health care spending and are looking for a calm port amidst
the storm of rising costs and middling outcomes. Policymakers are
combing through our nation's accounting ledgers and finding Medicare
and Medicaid awash in red ink.
The proposed merger of Express Scripts and Medco will not resolve
all of the challenges facing our health care system, but it is an
affirmative step in the right direction. The merger of Express Scripts
and Medco will help make prescription drugs more affordable for
seniors, people with disabilities and working families. It will also
help small businesses and large employers better compete in a global
economy by helping to rein in their medical costs. Finally, a combined
Express Scripts and Medco will help deliver real savings to Medicare
and Medicaid beneficiaries and put our nation's fiscal footing on a
stronger foundation.
Thank you for the opportunity to testify today and to explain the
consumer benefits and enhanced competition that will arise with a
merged Express Scripts-Medco.
I look forward to answering any questions you may have.
__________
Mr. Goodlatte. And, without objection, the study you
referenced in your testimony will be made a part of the record.
[The information referred to follows:]
__________
Mr. Goodlatte. Mr. Snow, welcome. We are pleased to have
your testimony.
TESTIMONY OF DAVID B. SNOW, JR., CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, MEDCO HEALTH SOLUTIONS, INC.
Mr. Snow. Chairman Goodlatte, Ranking Member Watt, Members
of the Committee, thank you for this opportunity to discuss the
proposed merger of Medco Health Solutions and Express Scripts.
My name David Snow, and I am the chairman and CEO of Medco
Health Solutions. Medco is an industry leader in pharmacy that
employs over 3,000 skilled pharmacists. We develop innovative
solutions that deliver unique value to private and public
employers, health plans, labor unions, and government agencies
of all sizes, as well as individuals served by Medicare Part D
drug plans.
Everyone recognizes that the ever-rising cost of health
care in America is unsustainable. As the health care industry
necessarily focuses on reducing costs without compromising
patient care, we all face the irrefutable fact that we must do
more with less.
The services that PBMs provide are very much part of the
solution. By merging Medco with Express Scripts, we will
significantly accelerate our efforts to reduce overall costs in
the health care system and improve the quality and efficiency
of care delivery.
To understand the value of the combination of our two
companies, it is critical to recognize the dynamic marketplace
in which we operate. Our competitors include some 40 PBMs,
household names like Aetna, and Cigna, and CVS Caremark, and
others who may not be so well known but continue to make major
investments, like Prime Therapeutics, Catalyst, SXC, and
perhaps most significantly UnitedHealth Group, who has
announced its plans to take in house the 14 million lives
previously served by Medco in order to increase its investment
in its own PBM, Optum Rx.
As these few quick examples demonstrate, competition for
PBM services is intense and diverse, and new entry remains a
very real prospect. That competition will only be enhanced by
the Express Scripts-Medco merger.
It was within the context of this competitive marketplace
that the merger of our two companies was conceived. The essence
of the PBM business is to bring lower drug prices and higher-
quality care to patients, employers and taxpayers. The
combination of Medco and Express Scripts will accelerate our
efforts to achieve that goal in a number of ways. I will just
mention two: volume and improved clinical practices.
First, our combined entity will be able to lower drug and
patient-user costs by achieving even greater discounts from
drug manufacturers, thereby lowering costs to consumers and
employers. In fact, under the terms of our existing employer
contracts, the ones that we have in place today, $1 billion in
savings will be passed back to our clients, guaranteed.
And second, the merger will create synergies by combining
the best of our complementary patient-centered clinical care
programs. We are particularly proud of Medco's specially
trained pharmacists who use clinical protocols and in-depth
counseling to help chronically ill Americans to most
appropriately and safely manage their highly complex
conditions. The result? An estimated $900 million in savings
from reduced hospitalizations and associated costs last year.
But we have only scratched the surface. We as a Nation could
save a total of over $350 billion a year by addressing
medications that are underprescribed, misprescribed or simply
not taken as directed by their physician.
Taken together, the merger will help government, businesses
and the economy as they jointly confront the necessity to
decrease the cost of entitlement programs, thus reducing the
overall deficit and increasing job growth. As is the case with
the private sector, better management of costs within the
Medicare and Medicaid programs can achieve savings without the
need to reduce benefits. And at 12 percent of payroll, health
care is the most costly benefit expense for employers.
Improving outcomes while reducing costs is the definition of
doing more with less, and it will make our Nation's businesses
more competitive and successful.
We recognize that many have voiced concern about the impact
of an Express Scripts-Medco merger on retail pharmacies,
particularly on independent pharmacies. More than 85 percent of
Medco customer prescriptions are filled through our network of
over 60,000 retail pharmacies nationwide. There is nothing we
plan to do that will change this. As our written testimony
details, we are proud that our partnership with the community
pharmacist has provided technology and information that have
helped independent pharmacies protect and grow their business
in an environment that favors national chains and big box
retailers.
The examples I have provided today clearly demonstrate that
our health care system does best when many different companies
and different models are all working to improve patient health.
This diversity of approaches breeds innovation and
collaboration. It is a catalyst for experimentation and
progress, often leading to breakthrough solutions.
We all know the future belongs to those who deliver more
for less. Together Express Scripts and Medco will build a
strong, competitive company that helps millions of people to
live longer, healthier lives, while supporting the Nation's
goal of a sustainable, affordable health care system.
Mr. Chairman, Ranking Member Watt and Members of the
Committee, thank you for listening to my testimony, and I would
be happy to answer any questions you may have.
Mr. Goodlatte. Thank you, Mr. Snow.
[The prepared statement of Mr. Snow follows:]
Prepared Statement of David B. Snow, Jr., Chairman and
Chief Executive Officer, Medco Health Solutions, Inc.
i. introduction
Chairman Goodlatte, Ranking Member Watt and Members of the
Committee, thank you for this opportunity to discuss the proposed
merger of Medco Health Solutions and Express Scripts. My name is David
Snow, and I am the Chairman and CEO of Medco Health Solutions. Medco is
a leading health care company that has pioneered the world's most
advanced pharmacy. When we originally became a public company, our goal
was to leverage the power of pharmacy to redefine the way that health
care is delivered--to improve patient outcomes and lower costs. Today,
we define that mission in three words, ``making medicine smarter.''
We are an industry leader in developing innovative solutions that
deliver unique value to our clients and their members. We provide
clinically driven pharmacy services designed to improve the quality of
care and lower total health care costs for private and public
employers, health plans, labor unions and government agencies of all
sizes, as well as for individuals serviced by Medicare Part D
Prescription Drug Plans.
Everyone has recognized that the ever-rising costs of the health
care system in America are unsustainable. In 2010, U.S. spending for
prescription drugs alone was more than $300 billion and is expected to
reach more than $450 billion by 2019.\1\,\2\ As the health care
industry necessarily focuses on reducing costs; as the ``Super
Committee'' seeks to find health care savings without compromising
patient care; and as all participants in the system are faced with the
prospect of doing more with less, we believe that the services that
Medco provides are part of the solution. And now, by joining with
Express Scripts and combining the complementary expertise of the two
companies, we will be able to significantly accelerate efforts to
reduce overall costs in the health care system and improve the quality
and efficiency of care delivery.
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\1\ IMS Institute for Healthcare Informatics' study, ``The Use of
Medicines in the United States: Review of 2010,'' April 2011.
\2\ Centers for Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, 2010.
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ii. medco background
Our mission to make medicine smarter truly defines our company and
guides our business strategy. In 2011, Medco captured the number one
position in the Health Care: Pharmacy and Other Services sector on
Fortune's World's Most Admired Companies List for the fourth
consecutive year. In this sector, Medco ranked number one in all nine
attributes: innovation, use of corporate assets, social responsibility,
quality of management, financial soundness, quality of products and
services, people management, long-term investment and global
competitiveness.
Our services are designed not only to reduce drug costs, but also
to close gaps in pharmacy care. We reduce drug costs for our clients
and their members in a variety of ways including: maximizing the
substitution rate from expensive brand-name drugs to lower-cost
clinically equivalent generic drugs; driving competitive discounts and
rebates from brand-name and generic drug pharmaceutical manufacturers;
minimizing the cost and improving the accuracy of filling
prescriptions; and applying our sophisticated service innovations to
efficiently administer prescription dispensing through our mail order
pharmacies. By utilizing advanced clinical tools to encourage adherence
and drawing on real-time prescription drug and medical databases in a
truly wired fashion, we improve patient health and reduce total medical
spending levels.
Our business model requires collaboration with payors, retail
pharmacies, including independent pharmacies nationwide, physicians,
pharmaceutical manufacturers and CMS for Medicare and state Medicaid
agencies. We provide our services through our national networks of
retail pharmacies and our own mail order pharmacies, as well as through
our specialty pharmacies.
Our unique Medco Therapeutic Resource Centers conduct therapy
management programs using Medco Specialist Pharmacists who have
expertise in the medications used to treat the most prevalent and
costly chronic conditions. Our personalized medicine capabilities
through our Medco Research InstituteTM and genomics
counseling services foster the integration of genetic information into
everyday health care decision making. These services represent
innovative and successful models for the care of patients with chronic
and complex conditions.
iii. dynamic marketplace
The business of pharmacy benefit managers (PBMs) is defined by
robust competition, with more than 40 PBMs working hard to provide
differentiated value propositions for public and private payors. These
firms are a diverse group with very different business models and
varying degrees of vertical integration, some integrated with
pharmacies, others integrated with managed care organizations and
others entirely independent. Nine Fortune 500 companies operate their
own PBMs. Non-PBM participants like Wal-Mart and Target also contribute
meaningfully to the competitive landscape by offering low-price generic
prescriptions, as do other retail pharmacies that are providing steep
discounts on 90-day prescriptions.
Whatever customer group you might define, there are numerous PBMs
currently serving accounts and many more with the capability to do so.
This is because the core services offered by PBMs are similar
regardless of the size and nature of a client's business. For example,
in the context of the largest accounts, more than 10 PBMs currently
serve state accounts; at least 10 PBMs serve Fortune 50 companies.
Our competitors often are major industry participants with
household names like Aetna, Cigna and CVS Caremark. Other competitors
may not be so well-known but continue to make major investments to grow
and to better serve current and potential customers.
For example, Catalyst acquired Walgreens' PBM in June, more than
doubling its number of members and prescriptions. In a recent earnings
call, Catalyst's COO highlighted the company's recent success in
winning large, national employers during this selling season--and this
was even before the acquisition. Several of Catalyst's recent wins came
against Medco and Express Scripts for Fortune 500 firms. These wins
have allowed them to add big name companies like Ford Motor Company,
MGM Mirage International, Whirlpool and Waste Management to their
growing roster of Fortune 500 customers--a list that already included
companies like Nike, Sprint, Southwest Airlines and Lear Corporation.
Prime Therapeutics recently won from Medco the Blue Cross and Blue
Shield of North Carolina account with more than a billion dollars in
drug spending. Prime was originally formed by Blue Cross entities and
has expanded from the PBM inside the private label offering of the
Blues to becoming a major independent customer.
And just last month, another notable merger was announced: SXC
Health Solutions agreed to acquire PBM PTRx and mail order pharmacy
provider SaveDirectRx, again illustrating the constantly evolving
nature of the market. At one time SXC was thought of as more of a data
processor for PBMs and other health organizations. They have evolved
with the marketplace and now offer a full service PBM capable of
competing effectively. The company, which this year jumped to number
one on Fortune's 100 Fastest-Growing Companies list, has also captured
more than a billion dollars in drug spend with its Bravo Health
victory.
Perhaps nothing more clearly demonstrates the dynamic character of
the PBM business than the evolution of our soon-to-be former customer
UnitedHealth Group, now the largest single health carrier in the U.S.
UnitedHealth used to have its own PBM business but sold it in the early
1990's. They became a Medco customer in 2000, and over the years Medco
facilitated a private label PBM offering by UnitedHealth that had Medco
``inside'' running the PBM operation while UnitedHealth was the
``outside'' face to the customers. In 2005, as part of the PacifiCare
acquisition, United acquired Prescription Solutions, a stand-alone PBM.
United has steadily built up Prescription Solutions and rebranded it as
Optum Rx. This summer it was announced that they would not renew their
contract with Medco and would take in-house the 14 million lives
previously served by Medco. At the same time, UnitedHealth has publicly
highlighted its increased investment in Optum Rx and its intention to
serve accounts of all sizes. We now have another major competitor in
the marketplace, one that is widely regarded to be a significant force
in the market going forward. And, as noted by Optum Rx CEO Jacqueline
Kosecoff in a recent interview, the company is ``very interested in the
employer market and [is] getting very aggressive on bidding some very
large accounts.''
As you can tell from just these examples, Medco itself is all too
familiar with the intensity and diversity of competition for PBM
services. We compete against a wide variety of firms, generating a
number of wins, as well as some significant losses. New entry remains a
very real prospect in this business, one that ensures competition
remains strong. Against this backdrop, PBM clients will have plenty of
competitive choices post-merger, and the combined Express Scripts and
Medco will be fully subject to the competitive pressures that will
ensure value-based pricing and service. Taken together, these recent
activities demonstrate the dynamic, competitive nature of the PBM
marketplace and belie the notion that the combination of Medco and
Express Scripts represents a threat to client choice. The reality is
that the PBM business is extremely competitive and that competition
will only be enhanced rather than diminished by the Express Scripts-
Medco merger.
iv. benefits of the combination
It is within the context of this competitive marketplace that the
merger of our two companies was conceived and ultimately approved by
our management and respective boards of directors. The essence of the
PBM's business is to bring lower drug prices and higher quality care to
its clients. We compete with one another to provide that value, and as
competition becomes more intense in our industry, it drives innovation
aimed at doing even more to serve our patients. In the health care
industry today, we all share the same goal of reducing costs by
improving the quality and efficiency of care delivery.
The combination of Medco and Express Scripts makes strategic sense
for our clients and patients. Each company uses a fundamentally
different business model to address the needs of customers. Combining
the best attributes of those business models will give us an enhanced
capability to lower prices and improve quality care for our clients. We
will accomplish this in a number of ways.
First, our combined entity will be able to lower drug acquisition
costs by improving efficiency across the system and encouraging the
most appropriate channels of distribution based on patient needs. Our
clients and the consumers we mutually serve will benefit from these
savings. For example, Medco negotiates the terms of its agreements with
its clients in a fully transparent manner which, at the client's
discretion, directs us to pass through discounts and rebates that we
negotiate with pharmaceutical manufacturers. Under the terms of our
existing contracts alone, $1 billion in savings from the merger will be
passed back to our clients.
Second, the combined entity will allow us to further innovate our
robust technology platform so we can fully leverage the cost and
quality benefits of our fully wired system that seamlessly integrates
prescription management at both mail order and retail with our client
and member services. This will result in substantial cost savings
passed on directly to government, businesses and, ultimately,
consumers.
Third, our combined company will bring together advanced
capabilities to integrate prescription management, including
technological platforms to communicate with pharmacists and physicians
in real time, allowing not only efficient claims processing, but also
secure access to patient information and drug utilization reviews. Both
Medco and Express Scripts complement and enhance physicians' care using
advanced clinical services to deliver tailored treatments with the
highest levels of efficacy, value and speed. For instance, the Medco
Research Institute integrates genetic information into everyday health
care decision making--offering patients and providers actionable
information to drive more precise health care decisions. One Medco
Research Institute study conducted with the Mayo Clinic showed that a
simple genetic test reduces hospitalization rates by nearly one-third
for patients on warfarin, a widely-prescribed blood thinner. The
combined entity will deliver even greater value to the companies'
clients and their members by applying the best practices of both
companies.
Fourth, the merger will allow the companies to benefit from
economies of scale as the firms merge operations and implement each
other's best practices. Many aspects of core PBM operations can benefit
from economies of scale, including contracting, mail order pharmacy
operations, and designing and operating specialized clinical programs.
At a high level, our ability to put more volume through a combined
network will drive efficiencies that will reduce the unit cost of
medications for our patients and customers. Increased scale will also
allow the merged company to develop and apply new programs and
practices more broadly. And the expanded scale and expertise of the
combined firm will allow us to accelerate the research, development and
deployment of new and innovative solutions for improving adherence and
safety that have the potential go well beyond what each company could
accomplish on its own.
Finally, and perhaps most significantly, the Express Scripts-Medco
combination will allow the two companies to use their collective and
complementary expertise and capabilities, creating unique synergies to
close gaps in care, particularly for chronically ill patients. Even the
most effective treatments cannot help patients if they are not used
properly. Gaps in care related to medication non-adherence affect
millions of Americans; they cost dollars and lives. More than 75
percent of all health care costs in the United States are associated
with chronic and complex conditions, such as cancer, heart disease, and
asthma.\3\ In nearly 90 percent of these cases, prescription drugs are
considered a first line of defense.\4\ However, gaps in care, largely
caused by under-prescribed and mis-prescribed medications, as well as
patient non-adherence, result in substantial waste each year in the
form of unnecessary hospitalizations, emergency room visits, and
extended illnesses. Poor management of chronic and complex conditions
has lead to an estimated $350 billion in unnecessary health care costs
annually.\5\
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\3\ Medco Research Data, 2010.
\4\ Ibid.
\5\ RAND Corporation Study, 2005; Institute for Health and
Productivity Management; Medical Care. 2004 Mar; 42(3); 200-209.
---------------------------------------------------------------------------
To address the needs of patients with chronic and complex
conditions, Medco's Therapeutic Resource Centers (TRCs) engage members
and model behaviors to improve clinical outcomes and reduce costs. In
the Medco TRCs, more than 1,000 Medco specialist pharmacists--who have
additional training and certification in the medications used to treat
the most prevalent and serious chronic conditions and co-morbidities--
use clinical protocols to assess patients' prescription orders along
with barriers to adherence; they provide in-depth counseling to
patients as well as reminders to take their prescribed medications.
Through use of TRCs, Medco members have achieved significantly higher
adherence rates than patients receiving traditional pharmacy care for a
broad range of medication categories. We estimate that in 2010 alone,
TRCs closed more than 2.3 million clinical gaps in care with a
projected savings of approximately $900 million from reduced
hospitalizations, ER visits, and other medical expenses across a range
of chronic and complex conditions.\6\
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\6\ Medco 2010 Annual Report.
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At the same time, through its Consumerology initiative, Express
Scripts has applied advanced behavioral science to identify and change
common behaviors that prevent patients from adhering to their
prescription medications. Their research has also helped to increase
generic substitution and increase use of the most efficient and safest
delivery channels. Through this initiative, Express Scripts has also
increased adherence and achieved significant cost savings.\7\
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\7\ ESI 2010 Drug Trend Report.
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Combining Medco's expertise in advanced clinical pharmacy with
Express Scripts' expertise in behavioral science will create a new
entity that is uniquely able to provide significant progress toward
closing gaps in care, saving dollars and saving lives. By joining
together, millions of members served by both of our companies will reap
the benefits of these unique and complementary programs: increased
prescription adherence and reduced gaps in care, resulting in better
health outcomes and lower costs. And these benefits will help
businesses and the economy more broadly. At 12% of payroll, health care
is the most costly benefit expense for employers. Reducing the cost of
quality patient care will make all American business more competitive--
creating a healthier, more productive workforce, preserving existing
jobs and creating new jobs in the future.
v. independent pharmacies
We recognize that many have expressed concern about the impact of
an Express Scripts-Medco merger on retail pharmacies, particularly on
independents. The facts are that more than 85% of prescriptions filled
for Medco customers are filled through our networks of more than 60,000
retail pharmacies representing over 95% of all retail pharmacies
nationwide. In short, either as a stand-alone company or combined with
Express Scripts, Medco is dependent on the continued existence of
strong independent retail pharmacies. Even as our companies seek to
drive efficiency in the health care system, retail pharmacies will
always play a crucial, complementary role to PBMs.
Moreover, the services that PBMs provide have helped independent
pharmacies better care for their patients, including by helping to
close gaps in care, increase patient adherence and reduce adverse drug
interactions. The Express Scripts-Medco combination will combine both
companies' capabilities aimed at improving patient adherence, which
means that the millions of patients who use independent pharmacies will
be more likely to complete their full course of prescription treatment,
improving their overall health. The combination will also create
additional partnership opportunities that can help independent
pharmacies improve their customers' adherence while creating new
sources of value.
A program implemented by Medco is an example of the type of
mutually beneficial collaboration that could be expanded under the
merger. Medco's Cognitive Care Initiative, a twenty-six-week
collaboration with community pharmacies in Illinois, significantly
improved adherence and increased the value offered by participating
independent pharmacies. Community pharmacists were trained to provide
expert patient counseling on the importance of adherence and techniques
to improve it. The initiative identified 2,400 adherence gaps;
pharmacists in the program filled 48% more prescriptions after patient
counseling and closed 27% more adherence gaps.\8\ The success of the
pilot led to additional partnerships between Medco and community
pharmacists in New Mexico, North Carolina and Florida. We look forward
to continued collaboration on initiatives such as this in the days
ahead.
---------------------------------------------------------------------------
\8\ Medco Health Solutions Illinois Pilot Project.
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In recent years, even as PBMs have become increasingly important
participants in the health care system, independent pharmacies have
thrived. Between 2009 and 2010, the number of independent community
pharmacies grew by almost 400, to more than 23,000, representing a $93
billion industry. Last year, they filled nearly three times more
prescriptions than were filled through mail order delivery services
such as those offered by Express Scripts and Medco. And pharmacy
profits have doubled since 1999, with average profits per pharmacy of
close to $1 million.\9\ These data points confirm what our experience
tells us to be true: PBMs and independent pharmacies are complementary
businesses whose success can be mutually beneficial. It is our
expectation that a successful Express Scripts-Medco--far from being a
threat to independent pharmacies--will actually be a driver of improved
care for our mutual customers and improved economics for their
businesses.
---------------------------------------------------------------------------
\9\ Drug Channels, ``Owning a Pharmacy: Still Pretty Profitable,''
January 25, 2011 (Analysis of 2010 NCPA Digest Data).
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vi. conclusion
The data points I have discussed confirm what our market experience
has long told us: our health care system does best when many different
companies and different models are all working to improve patient
health. This diversity of approaches breeds innovation and
collaboration. It is a catalyst for experimentation and progress,
leading to incremental improvements and often to breakthrough
solutions.
Today, there is a sense of urgency among all these many
participants in our health care system. We all know the future belongs
to those who deliver more for less. The merger of Express Scripts and
Medco is part of that transformative process. Together, our companies
will focus on lowering the prices customers pay for their medicines and
improving their quality of care. And by delivering on that promise we
will build a strong, competitive company that helps millions of people
to live longer, healthier lives, while supporting the nation's goal of
a sustainable, affordable health care system.
__________
Mr. Goodlatte. Mr. Lech, welcome. We are pleased to have
you here today.
TESTIMONY OF JOSEPH LECH, R.Ph., OWNER, LECH'S PHARMACY, AND
MEMBER, NATIONAL COMMUNITY PHARMACISTS ASSOCIATION
Mr. Lech. Thank you.
Good afternoon, Chairman Goodlatte, Ranking Member Watt and
Members of the Subcommittee. Thank for conducting this hearing
and for the opportunity to share my view regarding the proposed
Express Scripts-Medco merger. My name is Joe Lech of
Tunkhannock, Pennsylvania. I am the owner of five independent
retail community pharmacies in rural northeast Pennsylvania,
and have been a practicing pharmacist for 30 years. I am a
member of the National Community Pharmacists Association, which
represents the pharmacists, owners, managers and employees of
more than 23,000 independent community pharmacies across the
United States. These pharmacies dispense nearly half of the
Nation's retail prescriptions.
I would also like to thank Congressman Marino, my
Congressman, for the active role he has taken in trying to
level the playing field between community pharmacies and
pharmacy benefit managers. In particular we thank him for
introducing the Save Our Independent Hometown Pharmacies Act,
which has been endorsed both by NCPA and NACDS, the group
representing chain pharmacies. Thank you.
As a health care provider, my primary concern is the health
and well-being of my patients, and access to prescription
medications is essential in maintaining the health of those
patients.
As you are aware, Pennsylvania, like many other States, was
recently devastated by flooding. Many people in the area where
I am from were evacuated from their homes with nothing more
than the clothes on their back. The morning after the rain
started, the road conditions were so bad that my usual 30-
minute commute to the pharmacy took almost 2 hours. As I
approached the pharmacy, I saw Mr. Slater, a longtime patron of
our pharmacy, standing in front. He and his wife had been
plucked from an upstairs window of their home and taken by boat
to safety. They were unable to retrieve his 16 medications and
her 8 that they need on a daily basis. I assured them I would
provide them with their prescriptions. But what would happen in
cases such as this if pharmacies like mine disappeared from the
community that they rely on? The fact is community pharmacies
are closing.
This is just one story. There are thousands just like mine
of community pharmacies stepping up to assist patients and
getting their much-needed prescription medications.
During the recent flooding, Congressman Marino's district
office staff got their feet wet, so to say, as they
participated with Lech's Pharmacy and Red Cross in prescription
and supply deliveries from our pharmacy. Our three pharmacies
were the only pharmacies open in the county for 2 days, and
they assisted in the delivery of prescriptions and supplies by
boat. The reason I am telling you this is because PBMs, or
middlemen, already have so much control over the marketplace
that it greatly concerns me about what will happen should this
merger occur.
Over my 30 years in pharmacy, I have seen the large
pharmacy benefit managers gobble up smaller PBMs to reduce
competition. The result is a highly concentrated, consolidated
marketplace. Currently there are three PBMs that overwhelmingly
dominate the national marketplace: Express Scripts, Medco and
CVS Caremark. As a health care provider, I am aware of the
consolidation within the health care industry, specifically
consolidation within the PBM industry, which I believe has and
will continue to negatively impact not only community
pharmacies, but, more importantly, the patients that we serve.
The recently announced proposal of a merger of Medco and
Express Scripts will exacerbate the problems pharmacies and
patients face with respect to PBMs. The merger of these two
PBMs would create a mega PBM with overwhelming power in markets
that are critical to controlling health care costs. I believe
the resulting merger will harm patients by reducing choice, by
decreasing access, and ultimately leading to higher
prescription drug costs paid by plan sponsors and consumers. In
fact, the proposed merger a tipping point in terms of PBM
market concentration. The merger will cause a substantial
reduction in both price and nonprice competition among PBMs. If
approved, this mega PBM will control over 40 percent of the
national prescription drug market.
The size of this consolidation is enhanced by the fact that
large and national health plans, insurance companies and
government-sponsored health plans are already largely limited
in their PBM choice. Postmerger, these large national customers
will have fewer drug benefit administration alternatives, which
will allow the merged PBM entity to dictate plan design and
benefit structures at the expense of purchasers.
The merger will force more into mail order. The merger will
create the largest mail-order operation, accounting for over 60
percent of all mail-order directed business in the U.S. The
merged firm will have the increased ability and incentive to
force consumers to utilize the mail-order portion of their
business.
A misconception put forth by the merging parties is that
this switch to mail order will lower drug costs for consumers.
Evidence demonstrates the opposite. Mail-order operations push
out more brand-name drugs and fewer generics than the retail
pharmacies, thereby lowering generic dispensing rates.
A dramatic consequence of more and more switch to mail is
in too many cases a pharmacy is unable to stay in business.
Pharmacy closures are felt particularly hard in rural areas,
where these community pharmacies function as health care
providers on the front lines when a disaster such as a
hurricane, a tornado, or, in my case, excessive flooding
strikes.
ESI and Medco neglect to tell you that this merger, if
approved, will cost our local economies jobs and tax revenues
due to the number of pharmacies that will likely be out of
business due to the shift of prescriptions to out-of-State
mail-order production. This merger will harm small business and
cost jobs, something our economy can least afford at this time.
In conclusion, I would add that I enjoy being a pharmacist,
I love what I do, and I believe I am making a difference to all
the patients who depend on my pharmacies. However, I am
concerned that this merger will reduce patient access,
ultimately leading to higher drug costs due to the reduction in
competition.
I thank you for the invitation, I welcome any questions,
and as part of the proceedings, I would like to enter this
document, which I believe all the Members have received in a
packet--but I would like to introduce this document called
Waste Not, Want Not, dealing with waste in prescriptions.
Mr. Goodlatte. Without objection, the report will be made a
part of the record, and thank you, Mr. Lech.
[The prepared statement of Mr. Lech follows:]
__________
[The information referred to follows:]
__________
Mr. Goodlatte. Mr. Wiesner, we are pleased to have you with
us today.
TESTIMONY OF DENNIS WIESNER, R.Ph., SENIOR DIRECTOR OF PRIVACY,
PHARMACY, AND GOVERNMENTAL AFFAIRS,
H-E-B GROCERY COMPANY, LP
Mr. Wiesner. Thank you. Mr. Chairman, and Members of the
Subcommittee. Thank you for the opportunity to testify. My name
is Dennis Wiesner. I am a pharmacist, and I have worked in
community pharmacies for over 40 years. I have grave concerns
about this proposed merger. It would be a tipping point in PBM
market consolidation, harming patients as well as government
and private health plans and employers.
Mr. Nadler. Mr. Chairman, can you ask the witness to speak
into the mic more?
Mr. Goodlatte. Is it turned on? Make sure the green light
is on.
Is that better?
Mr. Wiesner. There is only one stakeholder that would
benefit: the new mega PBM. Since the merger was announced, many
Members of Congress, consumer groups, State insurance
commissioners, State attorneys general and State legislators
have expressed concerns to the Federal Trade Commission. This
would be a merger of two of the big three PBMs. If approved,
nearly 135 million Americans would rely on this single PBM to
manage their prescription benefits. It would control over 40
percent of the national prescription volume, 60 percent of the
mail-order pharmacy market, and more than 50 percent of
specialty pharmacy sales.
Patients in particular will be harmed through reduced or no
choice of their pharmacy providers; decreased or limited access
to essential pharmacies services; a separation of their
prescription medication records that could result in potential
adverse patient health outcomes, disruption to normal timely
prescription service, and potentially decreased medication
adherence. Reducing patient choice and access will lead to
higher prescription costs, potential adverse patient outcomes,
and higher downstream health costs.
Do PBMs actually reduce health care costs? There is no
proof that they pass along the purported savings to health
plans, employers or consumers. In fact, the PBM industry has
been fraught with allegations of extensive deceptive and
fraudulent practices. In recent years cases brought by a
coalition of over 30 State attorneys general have resulted in
over $370 million in penalties. It has been found that PBMs
have accepted rebates from manufacturers in return for placing
higher-priced medications on prescription drug plan
formularies, switched customers to the higher-priced drugs, and
then benefited from both the rebate received and the higher-
priced drug payment without passing along the enrichment to the
health plan or employer.
PBMs already operate in an opaque manner. They are
middlemen in a unique position to dictate contract terms to
health plans and pharmacy providers. The new mega PBM would
have even greater ability to dictate one-sided, unfavorable
contract terms to pharmacies, health plans and employers,
ultimately harming consumers. This is one reason we oppose the
merger and we seek legislative relief on PBM practices.
Pharmacies that refuse their contract terms would be shut
out of the networks that provide pharmacy services to their
neighbors and huge portions of American consumers. In addition,
more consumers would be forced into using PBMs' own mail-order
facility as opposed to choosing their local pharmacy, depriving
consumer access to vital health care services and valuable
face-to-face counseling.
The Butt family founded H-E-B 106 years ago with a firm
commitment to serve all the citizens in all our communities.
That commitment is stronger today than ever. However, being
able to continue servicing the prescription and health care
needs of our customers and neighbors has been threatened by the
one-sided nature of pharmacy agreements with PBMs. We have seen
firsthand the unilateral nature of these contracts. They are
allowed to establish the basis of costs for the prescription
medications; they are allowed to change that basis of cost with
limited or no notice, especially for generic medication; and
they are allowed to second-guess or override a physician's
prescription order. Claims submitted to the PBM and approved
are routinely reviewed retroactively and payment recouped due
to inadequacies in the PBM claims adjudication system. My
company experiences these and other examples each and every
day.
Our internal health benefits team provides health care
services to over 140,000 individuals. They feel strongly that
this merger would limit competitive options and result in total
costs, especially administrative fees, increasing.
Pharmacists helped ensure that patients understand their
medications and take them as directed. Pharmacists collaborate
with doctors and other local health care providers to assist in
medication decisions. Community pharmacies also provide
critical, cost-effective services like immunizations, disease
state management and monitoring, health education, and
screening programs. Together all these services improve
patients' health and reduce out costs.
As I said, the situation with PBMs has worsened through
consolidation. Because of this, we support legislation to rein
in their more egregious actions, including H.R. 1971 and H.R.
1946.
In conclusion, PBMs already use a lack of transparency,
failing to pass through rebates from drug manufacturers to
consumers and other payers, inflating drug costs for health
plans and employers, and lowering payments to pharmacies for
their own personal financial gain. Patients appear to be an
afterthought. A mega PBM would have an increased ability to
engage in similar conduct to the detriment of consumers, payers
and pharmacy providers.
Thank you for your time.
Mr. Goodlatte. Thank you, Mr. Wiesner.
[The prepared statement of Mr. Wiesner follows:]
Prepared Statement of Dennis Wiesner, R.Ph., Senior Director of
Privacy, Pharmacy, and Governmental Affairs, H-E-B Grocery Company, LP
On behalf of the National Association of Chain Drug Stores (NACDS),
I am pleased to submit a statement for the hearing on ``The Proposed
Merger between Express Scripts and Medco.'' My name is Dennis Wiesner.
I am a pharmacist and have worked in numerous roles in community
pharmacy for over forty years. I am currently a Senior Director for H-
E-B with responsibilities for privacy, pharmacy and government affairs.
H-E-B is a private family owned regional food-drug retailer with over
300 stores in Texas, 222 of which have pharmacies. In addition, H-E-B
has extensive warehousing and manufacturing facilities and over 80,000
employees. Our stores provide services to over 20 million Texans each
year.
I am also Chairman of the NACDS Policy Council. NACDS represents
traditional drug stores, supermarkets, and mass merchants with
pharmacies--from regional chains with four stores to national
companies. Chains operate more than 40,000 pharmacies, and employ more
than 3.5 million employees, including 130,000 full-time pharmacists.
They fill over 2.6 billion prescriptions annually, which is more than
72 percent of annual prescriptions in the United States. The total
economic impact of all retail stores with pharmacies transcends their
$900 billion in annual sales. Every $1 spent in these stores creates a
ripple effect of $1.81 in other industries, for a total economic impact
of $1.76 trillion, equal to 12 percent of GDP.
This proposed merger poses significant anti-competitive threats to
numerous U.S. industries and markets. If allowed, this merger would
have grave consequences for consumers and the nation's community
pharmacies that serve them, as well as for health plans and employers
that utilize PBM services, specialty pharmacy services, and mail order
pharmacy services. NACDS opposes this merger and has urged FTC to block
it. Earlier this month, the FTC issued a ``Second Request'' to Express
Scripts and Medco to gather more data on the merger. According to media
reports, only 4% of similar proposed deals in 2010 were issued a Second
Request by the FTC. This merger has received the attention of not only
FTC and this Committee, but also numerous other Members of Congress,
numerous state Insurance Commissioners, state Attorneys General, and
state legislators, who have all asked FTC to give this proposed merger
a high level of scrutiny.
background on pbms
PBMs manage and administer the prescription drug benefits of more
than 210 million Americans. Employers and health plans contract with
PBMs to manage and administer prescription drug benefits (as opposed to
medical benefits) as part of overall health benefits. PBMs construct
and manage drug formularies and use these formularies to negotiate
discounts with pharmaceutical drug manufacturers. Manufacturers want to
include their drugs on a PBM's formulary, and in order to do so, they
provide discounts and rebates to the PBM, which are not always
disclosed or passed on to purchasers of PBM services (e.g., employers
and health plans). If the PBM can increase a manufacturer's market
share for certain drugs, the rebates and discounts are typically
adjusted accordingly to incentivize the PBM to increase the dispensing
of the manufacturer's drugs, even if the incentives increase the costs
to plans. The PBM consults with employers and health plans as to what
drugs they should place on their formulary, but often without full
transparency of the financial incentives. In other words, the PBM acts
as a ``double agent'' negotiating with drug manufacturers as well as
employers and health plans to create consumers' prescription drug plans
that benefit the PBM's profitability.
The PBM then contracts with community pharmacies to provide
prescription drugs and pharmacy services to the plans' beneficiaries.
The payment from a PBM to a pharmacy for dispensing a prescription drug
differs from the amount a PBM charges a plan for the same prescription
drug, to the benefit of the PBM. Plans sponsors are typically unaware
of this difference, commonly referred to as the ``spread.'' PBMs profit
not only from the spread, but also from additional administrative fees
charged to the plan for processing the claim. Many PBMs also own mail
order pharmacies that they encourage consumers to use instead of the
community pharmacies. In addition, Express Scripts and Medco each
separately own two of the largest specialty pharmacy companies in the
U.S.
As an industry, PBMs are virtually unregulated. They may have
tangential regulatory compliance for insurance related processes
through their relationships with health plans and employers. A handful
of states directly regulate some PBM functions, such as how they
conduct audits of pharmacies, and some state boards of pharmacy
regulate them to the extent that their activities can be construed as
practicing pharmacy. The vast majority of their remaining functions and
activities are unregulated, as there are no state or federal
authorities with direct jurisdiction over them.
overview of concerns
The proposed merger of Express Scripts and Medco would result in
unparalleled market concentration in an already extremely limited
marketplace. Because of several mergers and acquisitions over the past
decade, the number of PBMs has declined significantly since 2000 and
the concentration among the largest PBM providers has increased during
that time. The market for national prescription drug plans is currently
concentrated in just three PBMs. If the merger proceeds, there will be
a reduction in competition in already highly-concentrated markets,
including those involving PBM services, as well as mail order
distribution services and specialty pharmaceutical services.
The proposed merger would be a tipping point in terms of PBM
concentration that would have a considerable anti-competitive impact on
employers, health plans, federal employee benefit plans, and TRICARE,
along with their beneficiaries. The post-merger PBM marketplace would
have markedly reduced choice for all patients and consumers, as well as
governmental, employer and third-party payors.
reduced pbm competition
Express Scripts and Medco are two of the ``Big Three'' PBMs that
control 50-60% of the national overall prescription drug volume.\1\ If
approved, approximately 1/3 of all Americans (roughly 135 million
people) would rely on the new ``mega PBM'' to manage their prescription
benefits.\2\ This ``mega PBM'' alone would control over 40% of the
national prescription drug volume.\3\ Certain classes of customers such
as large, complex health plans would be left with only two choices for
PBM services, the merged entity and the one remaining large PBM.
Smaller regional PBMs would be unable to constrain anticompetitive
conduct because of their smaller size, geographic limitations, and lack
of ability to secure rebates.
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\1\ Atlantic Information Services (``AIS''), 2010 data; J.P.
Morgan, Healthcare Technology & Distribution, Gill's Guide to Rx
Channel--An Investor Handbook, May 10, 2011.
\2\ Bloomberg, Express Scripts-Medco Deal May Spur Purchases by
Rivals, July 22, 2011.
\3\ Atlantic Information Services (``AIS''), 2010 data; J.P.
Morgan, Healthcare Technology & Distribution, Gill's Guide to Rx
Channel--An Investor Handbook, May 10, 2011.
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This substantial reduction in competition will harm purchasers of
PBM services and the purchasers' beneficiaries by limiting consumer
choice, reducing transparency, reducing access to pharmacy services,
and increasing costs to the beneficiaries.
anti-competitive concentration in the pbm market
The proposed merger will lead to anticompetitive concentration in
the PBM market, resulting in market foreclosure practices that harm
purchasers of PBM services and consequently, consumers of pharmacy
services. Specifically, the merged PBM will have an incentive to use
its increased market power as both a seller and a purchaser of pharmacy
services to impose unfavorable contract terms on community pharmacies.
Consequently, this ``mega PBM'' would have the ability to raise prices
for health plans and patients, limit access to pharmacy patient care
and force patients to use the PBM's mail order pharmacies rather than
their trusted community pharmacies, driving up costs for employers,
health plans and other federal and state programs.
PBMs operate unregulated and in an opaque manner. They claim that
they save money by negotiating rebates and discounts from drug
manufacturers and negotiating lower reimbursement rates from
pharmacies. However, there is no proof that they pass along any of this
purported savings to health plans, employers or consumers. In fact, the
PBM industry has been fraught with allegations of extensive deceptive
and fraudulent practices. In recent years, cases brought by a coalition
of over 30 State Attorneys General have resulted in over $370 million
in penalties for deceptive and fraudulent conduct.\4\ It was found that
PBMs accepted rebates from manufacturers in return for placing higher
priced medications on prescription drug plans' formularies, switched
customers to the higher priced drugs that were paid for by the health
plan/employer, and benefitted from both the rebate received and the
higher priced drug payment without passing along the enrichment to the
health plan/employer. In essence, PBMs use lack of transparency to
negotiate higher rebates from drug manufacturers, higher drug prices
for health plans/employers, and lower payments to pharmacies, while
keeping the gains for themselves. We can expect a ``mega PBM'' to have
freer reign to engage in similar egregious conduct.
---------------------------------------------------------------------------
\4\ The American Antitrust Institute; ``Commentary: The FTC Should
Issue a Second Request on Express Scripts' Proposed Acquisition of
Wellpoint's PBM Business,'' May 11, 2009.
---------------------------------------------------------------------------
As middlemen, PBMs claim that their ability to negotiate with drug
manufacturers and pharmacies reduces overall prescription drug costs.
However, despite their claims, overall prescription drug spending
continues to steadily increase. Moreover, recent studies show that
PBMs' mail order pharmacies have lower generic dispensing rates than
retail community pharmacies.\5\ A ``mega PBM'' would be even more
likely to increase drug costs by shifting more patients to mail order,
which utilizes more expensive, brand name drugs. This increased cost
would be borne by health plans, employers, and ultimately consumers.
---------------------------------------------------------------------------
\5\ See 2010-2011 Prescription Drug Cost and Plan Benefit Design
Report at 28, available at http://www.benefitdesignreport.com/Portals/
0/2010-2011_BDR_R1.pdf.
---------------------------------------------------------------------------
concerns about specialty pharmacy and mail order services
Specialty pharmaceuticals are high cost drugs required by patients
undergoing intensive therapies for chronic, complex, relatively rare
and/or potentially life-threatening illnesses. Industry experts
anticipate that sales of specialty pharmaceuticals will account for an
increasing dollar share of all drugs consumed, estimated to be 27% of
all drug sales by 2015.\6\
---------------------------------------------------------------------------
\6\ See CVS Caremark Corp., 2010 Annual Report at http://
www.annualreports.com/HostedData/AnnualReports/PDFArchive/cvs2010.pdf
(citing ModernHealthcare.com).
---------------------------------------------------------------------------
The merger would combine two of the three largest suppliers of
specialty pharmacy services, creating an entity with more than 50%
share of all specialty pharmacy sales. CuraScript (owned by Express
Scripts) and Accredo (owned by Medco) are the two largest specialty
pharmacies in the U.S. Combined, these two entities account for an
estimated 52% of all specialty pharmaceuticals in the U.S.; this would
be enough power to stifle competition in the specialty pharmacy market
and command even higher prices. Both PBMs have attempted to
significantly increase prices of specialty pharmaceuticals in recent
years. We can expect an even greater effort to do this should the
merger be approved.
The merger will also create the largest mail-order pharmacy
accounting for close to 60% of all mail-order scripts processed in the
U.S.\7\ The merged company will have even more market power to reduce
patient access to community pharmacies and force consumers and
employers to use its own captive mail order operation. Although the
merging firms may claim that shifting prescriptions to mail order
prescriptions from retail community pharmacies will drive down drug
costs to consumers, their increased market power is likely to result in
an artificially high reduction in prescriptions filled through
community pharmacies, and increased costs for payors and beneficiaries.
---------------------------------------------------------------------------
\7\ AIS 2011 data.
---------------------------------------------------------------------------
The ability of PBMs to drive prescriptions to their own mail order
facilities is inherently anticompetitive. Congress has recognized the
potential for this type of abuse, and in Medicare, this type of ``self
dealing'' in the case of physicians is illegal. Moreover, PBMs
determine the income received by pharmacies (by setting pharmacies'
reimbursement rates) and then directly compete with pharmacies by
driving prescriptions to their own mail order facilities. Further
consolidation of PBMs and mail order pharmacies, in addition to the
lack of transparency in PBM operations, will further exacerbate these
conflicts. The result will be increased costs for public programs such
as Medicare, beneficiaries, private health plans and employers, and the
American taxpayer.
In addition, the merged entity's ability to shift patients to its
mail-order operations will have a direct and harmful impact on patient
care. It will allow the mega PBM to limit consumers' access to their
local pharmacies and the vital healthcare services and one-on-one
counseling they provide. In addition to dispensing prescriptions,
pharmacists counsel patients on a daily basis to ensure that they take
their medications as directed by their doctors. They also provide a
broad range of critical, cost-effective services such as immunizations,
counseling for diseases such as diabetes, and other health education
and screening programs. These high quality services increase the
therapeutic benefits of prescription drugs, which improve health
outcomes and lowers costs. There is simply no substitute for the in-
store, face-to-face services provided by pharmacists.
conclusion
NACDS thanks the Committee for consideration of our comments on the
proposed merger of Express Scripts and Medco. We are deeply concerned
about the anti-competitive impact the merger would have and are
extremely skeptical that the American public can trust a ``mega PBM''
to look out for the best interests of patients and payors, or to pass
any purported ``savings'' along to beneficiaries and other consumers.
These concerns are compounded by the fact that the PBM industry as a
whole is virtually unregulated.
__________
Mr. Goodlatte. And now we will hear from Mr. Gustafson.
Welcome.
TESTIMONY OF DAN E. GUSTAFSON, PARTNER,
GUSTAFSON GLUEK PLLC
Mr. Gustafson. Chairman Goodlatte, thank you for providing
me the opportunity to testify today. My name is Dan Gustafson,
and I practice antitrust law at Gustafson Gluek in Minneapolis.
I am also working with a group at the American Antitrust
Institute to evaluate the proposed merger.
Although our work is preliminary, we have identified
several potential concerns with regard to this merger, but
before I identify these concerns, let me emphasize first that
the time for careful evaluation of this merger is now. Although
antitrust enforcement can sometimes undo the effects of already
concentrated markets or anticompetitive conduct, preventing
such conduct before it occurs is far more effective antitrust
and public policy. For that reason we applaud the FTC's second
request for information as it continues to evaluate this merger
proposal.
PBMs play an important and ever-expanding role in our
health care system. They touch most American lives in their
role as managers of prescription drug benefits through their
pharmacy claims processing, formulary management and home-
delivery pharmacy services. They also negotiate discounts and
rebates on purchases from pharmaceutical companies.
The market for national PBM services is already
concentrated. CVS Caremark, Express Scripts and Medco control
more than 50 percent of the market when measured in terms of
prescriptions, and over 80 percent of the market when measured
in terms of large plan-sponsored contracts. A merged Express
Scripts-Medco company will overwhelmingly dominate the PBM
services market, covering nearly 150 million prescription drug
consumers and over 50 percent of the large plan sponsors. In
terms of covered lives, no other PBM would remotely approach
Express Scripts-Medco.
As a result of our evaluation of this merger, we raise
several concerns. First, will the merger reduce competition for
the provision of PBM services to large plan sponsors? Although
there are numerous smaller PBMs, many of these smaller entities
operate only in regions, some serve only a special niche
markets such as government services, and other offer a limited
menu of services in areas such as specialty drugs, mail order
or claims processing. The smaller PBMs lack the ability to
negotiate the same discounts and rebates from drug
manufacturers that large PBMs can obtain. As a result, regional
PBMs may be unable to constrain potential anticompetitive
conduct.
Second, will the proposed merger lead to increased prices
or reduced services in the distribution of specialty
pharmaceuticals? Significant concerns exist in the market for
the distribution of specialty drugs where Express Scripts and
Medco will own the two largest specialty pharmacy businesses.
The proposed merger will result in a company holding more than
a 50 percent share of the specialty pharmacy market segment.
Specialty pharmacies provide important service and treatments
to consumers with complex, chronic and often life-threatening
illnesses. They often help administer complex treatments, work
with physicians to monitor patient therapy, and play a role in
the medication compliance issues. Reduced competition in this
market segment could lead to increased costs and reduced
services to the consumers who depend on those treatments the
most.
Third, will the proposed merger increase the exercise of
buyer power to reduce the delivery of traditional
pharmaceutical services? We are concerned that the major PBMs
already possess the ability and incentive to exercise market
power over retail independent and chain pharmacies.
Reimbursements from the PBMs is a major source of their
revenue, and the proposed merger could enable the two remaining
large PBMs to push compensation to the retail pharmacies below
competitive levels, eliminating jobs and leading to reduced and
important services for their consumers.
This proposed merger would also create the largest mail-
order pharmacy in the United States, accounting for nearly 60
percent of all mail-order scripts, because large PBMs could
divert prescriptions to their own mail-order facilities instead
of to their retail traditional pharmacies. They could maximize
their own gains if they then select drugs on which they receive
superior rebates from manufacturers. The opportunity for
potentially anticompetitive self-dealing which harms consumers
may be enhanced by the creation of a dominant PBM in the mail-
order pharmacy market space and elimination of one of its only
two competitors.
Finally, we need to be careful to examine the claim
deficiencies to determine if the savings that are proposed are
specific to this merger and cannot otherwise be obtained by
means unrelated to the merger. A careful analysis made as to
whether and to what degree these claimed efficiencies will
actually be passed on to plans, and therefore consumers, is
important as well.
Past consolidation in this industry provides sufficient
data to evaluate the previous efficiency promises that have
been made. The recent spike in the profits of the largest PBMs
suggest less and not more competition and, as a result, higher
prices for plans and for consumers.
Thank you for providing me the opportunity to testify
today. I am happy to answer any questions that you may have.
Mr. Goodlatte. Thank you, Mr. Gustafson.
[The prepared statement of Mr. Gustafson follows:]
Prepared Statement of Dan E. Gustafson, Partner, Gustafson Gluek PLLC
i. introduction
Chairman Goodlatte, Ranking Member Watt, and members of the
Committee. Thank you for providing me the opportunity to testify before
you today regarding the proposed Express Scripts-Medco merger, two of
the largest pharmacy benefit managers (PBMs) in the United States. My
name is Dan Gustafson from Gustafson Gluek in Minneapolis, Minnesota. I
am an advisory board member of the American Antitrust Institute
(AAI)\1\ and part of an ad hoc working group of the AAI that is
investigating and analyzing the impact of this proposed merger.
---------------------------------------------------------------------------
\1\ The AAI is an independent Washington-based non-profit
organization addressing antitrust issues from a perspective of
increasing competition and ensuring that competition works to benefit
consumers through vigorous public and private antitrust enforcement.
AAI Website, About Us, http://www.antitrustinstitute.org/content/about-
us
---------------------------------------------------------------------------
ii. aai's role and antitrust enforcement
Our analysis has just begun and has been limited to considering
publicly available materials. At the conclusion of our evaluation, we
expect to author an antitrust white paper to recommend actions that the
AAI believes the FTC should take with respect to this proposed merger.
Although the working group has not yet reached any conclusions and
the AAI Board of Directors has not taken any position on the merger, I
appear before you today at their request to identify some areas of
concern that suggest further careful investigation and analysis is
warranted. We hope that this information will assist the Committee as
it considers this proposed merger.
It is important to note that now is the time to evaluate and
analyze this proposed merger. Although some post-merger antitrust
enforcement successfully corrects excessive market concentration or
other anticompetitive conduct, antitrust policy in this area should
focus on preventing anticompetitive conduct by foreclosing combinations
that incentivize or further anticompetitive conduct. Effective merger
review requires that regulatory agencies take appropriate steps at this
stage--before the merger happens--to ensure that competition and
consumer interests are protected.
With respect to this proposed merger, the FTC has already issued a
Second Request, and the AAI applauds its continuing investigation of
this matter. Although the FTC cleared the CVS Caremark merger without a
Second Request, previous decisions of the Commission indicate that it
believed the PBM industry to be competitive. Although the Commission
has issued some broad statements about the competitiveness of the
industry, we believe those statements should be reexamined in light of
recent enforcement actions by state attorneys general, increased
consolidation and the escalating profits of the major PBMs.
iii. industry background
PBMs play several roles in our healthcare system. They touch most
American lives in their role as managers of prescription drug benefits
for third-party payors. In this role, they integrate retail pharmacy
claims processing, formulary management, and home delivery pharmacy
services.\2\
---------------------------------------------------------------------------
\2\ Mark Meador, Squeezing the Middleman, 20 Annals of Health Law
77, 78-79 (2011).
---------------------------------------------------------------------------
In addition to adopting a pre-approved list of commonly prescribed
prescription medications, formulary management includes managing the
utilization of covered medications by balancing clinical effectiveness
with costs, traditionally through clinical programs developed and
maintained by plan doctors and pharmacists.\3\ Litigation by state
attorneys general in recent years has raised concerns that the
decisions made by large PBMs on these formulary issues may be
improperly influenced by discounts and rebates received from
manufacturers in exchange for placing higher priced medications on the
formulary, and exclusive contractual arrangements that may lead to
favorable treatment for higher priced drugs, irrespective of their
relative utility.\4\
---------------------------------------------------------------------------
\3\ Blue Cross Blue Shield of Massachusetts, Glossary, http://
www.bluecrossma.com/bluelinks-for-employers/glossary.html
\4\ AAI White Paper, The FTC Should Issue a Second Request on
Express Scripts' Proposed Acquisition of Wellpoint's PBM Business, May
11, 2009 (``AAI 5/11/09 White Paper''), at 4.
---------------------------------------------------------------------------
In recent years, many PBMs, including both Express Scripts and
Medco, have acquired major specialty pharmacy businesses and, as a
result, now also serve as distributors of specialty drugs. Although
there is no universally accepted definition for a ``specialty drug,''
it usually refers to medications for the treatment of serious, chronic
ailments that are expensive and often require special handling and
control, complex administration and careful monitoring.\5\
---------------------------------------------------------------------------
\5\ Testimony of David Balto on Health Industry Consolidation,
September 9, 2011 (``Balto 9/9/11 Testimony''), at 6; Change to Win,
CVS Caremark: An Alarming Merger, Two Years Later, November 2009, at 6;
AAI 5/11/09 White Paper, supra, at 9.
---------------------------------------------------------------------------
The large PBMs have also increasingly expanded into mail order
pharmacy businesses. These mail order pharmacies further the vertical
integration of large PBMs and compete directly with national, regional
and traditional local pharmacies.\6\ The PBMs with large mail order
operations often limit distribution of certain drugs solely through the
mail.\7\
---------------------------------------------------------------------------
\6\ Allison Dabbs Garrett & Robert Garis, Leveling the Playing
Field in the Pharmacy Benefit Management Industry, 42 Val. U. L. Rev.
33, 37, 66-68 (2007); AAI White Paper, Express Scripts' Proposed
Acquisition of Caremark: An Antitrust White Paper, February 14, 2007
(``AAI 2/14/07 White Paper''), at 2, 4, 7-8.
\7\ PBMs also offer additional services such as compliance programs
outcome research, drug therapy management programs, data analysis, and
distribution services. Garrett & Garis, supra, at 34-38; AAI 5/11/09
White Paper, supra, at 7.
---------------------------------------------------------------------------
iv. proposed merger between express scripts and medco
A. Market Concentration
Although it is premature to reach conclusions about the relevant
market definitions in an antitrust context, the AAI working group is
considering some market concentration issues that may raise potential
concerns. The market space for PBM services is already concentrated.
The top three PBMs, CVS Caremark, Express Scripts and Medco, control
approximately 50% of the market when measuring prescriptions filled or
controlled.\8\ If the market concentration is measured in terms of
contractual arrangements with large plan sponsors,\9\ the market is
even more concentrated, with the big three PBMs controlling over
80%.\10\
---------------------------------------------------------------------------
\8\ Guggenheim, ESRX/MHS Still Faces Tough Review--We Think This
Could Benefit WAG and CVS at 3, Sept. 6, 2011.
\9\ A plan sponsor is the employer insurance company, union or
other entity which purchases PBM services on behalf of its employees or
members.
\10\ AAI 5/11/09 White Paper, supra, at 1.
---------------------------------------------------------------------------
Concentration in this market already has occurred through mergers.
CVS Caremark is a result of a $21 billion merger of CVS and Caremark in
2007 that was cleared without a Second Request from the FTC.\11\ If
Express Scripts and Medco merge, three will become two. A merged
Express Scripts-Medco company will dominate the PBM services market
space covering more than 150 million prescription drug consumers and
50% of the large employer market.\12\ Combined with the next largest
PBM, CVS Caremark, the two would cover approximately 240 million
prescription drug consumers.\13\ In terms of covered lives, no other
PBM, post-merger, would remotely approach Express Scripts-Medco. Even
CVS Caremark would be a distant second.\14\
---------------------------------------------------------------------------
\11\ AAI 5/11/09 White Paper supra, at 2.
\12\ Balto 9/9/11 Testimony, supra, at 6.
\13\ Balto 9/9/11 Testimony, supra, at 6.
\14\ Numbers based on http://pbmi.com/PBMmarketshare1.asp.
---------------------------------------------------------------------------
The post-merger Express Scripts-Medco company may lessen the
competition between the top PBMs and smaller, regional PBMs and as a
direct result, may harm consumers, plans, employers, unions, and
pharmacies.
In the past, the FTC has defined this market as the provision of
PBM services to large plan sponsors.\15\ Although that market
definition is clearly relevant to the discussion of the proposed merger
today, it is not the only market segment that should be examined. We
also plan to consider the impact of PBM concentration on at least the
specialty, mail order, and retail independent and chain pharmacy market
segments.
---------------------------------------------------------------------------
\15\ In re Merck & Co., 127 F.T.C. 156 (1999); In re Eli Lilly &
Co., 120 F.T.C. 243 (1995).
---------------------------------------------------------------------------
There may be substantial concerns in the market space for
distribution of specialty drugs where Express Scripts and Medco own,
respectively, Curascript and Accredo, the two largest specialty
pharmacy businesses.\16\ Specialty pharmacies provide service and
treatments to consumers with complex, chronic, and often potentially
life-threatening illnesses, including HIV/AIDS, Crohn's Disease, and
some forms of cancer.
---------------------------------------------------------------------------
\16\ Balto 9/9/11 Testimony, supra, at 6.
---------------------------------------------------------------------------
Specialty pharmacies also often provide the most cost-effective use
of these expensive treatments, and reduced competition in this market
segment could lead to reduced service and increased costs to the
consumers who depend on specialty treatments and the broad counseling
services provided by independent specialty pharmacies. This market
segment has become increasingly concentrated and poses its own special
concerns. This proposed merger would leave the post-merger company with
more than a 50% share of the specialty pharmacy market segment, and may
threaten competition in this area.
The largest PBMs also own businesses that provide mail order
pharmacy operations. These mail order pharmacy operations provide a
significant source of revenue because the PBM controls both the claims
adjudication function and prescription dispensing function.\17\ Some
sources suggest that a merged Express Scripts-Medco company would
control almost 60% of the mail order market space.\18\ Although the
proposed merger parties may claim that shifting prescriptions to mail
order prescriptions from retail community pharmacies will lessen drug
costs for consumers, their increased market power in the mail order
segment may actually reduce pharmacy prescriptions and increase
costs.\19\
---------------------------------------------------------------------------
\17\ Garrett & Garis, supra, at 67.
\18\ Zachary French, Express Scripts and Medco Merge Mail Order,
Specialty Pharmacies, and of Less Importance, PBM Operations, July 22,
2011.
\19\ PBMs determine the income received by pharmacies (by setting
pharmacies' reimbursement rates) and then directly compete with
pharmacies by driving prescriptions to their own mail order facilities.
See Statement of the National Association of Chain Drug Stores for U.S.
House of Representatives Committee on Ways and Means, Subcommittee on
Health, Hearing on ``Health Care Industry Consolidation,'' September 9,
2011.
---------------------------------------------------------------------------
Concerns also have been raised over the past several years on the
lack of competition in the PBM market and deceptive conduct that harms
consumers. In the past six years, a coalition of over 30 state
attorneys general have brought cases against each of the big three PBMs
securing over $370 million in penalties and fines.\20\ Over the past
few years, the profits of the big three have soared over 400%.\21\
---------------------------------------------------------------------------
\20\ AAI 5/11/09 White Paper, supra, at 4.
\21\ National Community Pharmacists Association, Pharmacists Can
Help States Reduce Medicaid Costs, While Preserving Patient Choice,
June 16, 2011, http://www.ncpanet.org/index.php/news-releases/1016-
community-pharmacists-can-help-states-reduce-medicaid-costs-while-
preserving-patient-choice.
---------------------------------------------------------------------------
B. The Antitrust Concerns
There are several issues that the AAI working group will continue
to investigate and evaluate.
First, could the merger reduce competition for the provision of PBM
services to large plan sponsors?
Currently, CVS Caremark, Express Scripts, and Medco are, by far,
the three largest PBMs serving large plan sponsors. Over 40 of the
``Fortune 50'' largest corporations rely on these three PBMs for PBM
services.\22\ Because of their size and potential to offer exclusive
contracts, these big three PBMs have significantly greater purchasing
power than smaller PBMs for both brand and generic drugs. Their mail
order and specialty operations similarly enable them to provide a wider
range of services, and they have broader technological capability and
better claims processing. Not surprisingly when one of the big three
loses a large plan sponsor it is almost inevitably to another one of
the big three.\23\
---------------------------------------------------------------------------
\22\ Morgan Stanley Research, Healthcare Services & Distribution:
Fortune 50 and Respective PBMs, July 28, 2011.
\23\ AAI 5/11/09 White Paper, supra, at 5-7.
---------------------------------------------------------------------------
Although there are numerous smaller PBMs in the market space for
PBM services, smaller PBMs often face regional limitations, others
serve a special niche market, such as government entities, and others
do not have a full menu of services such as mail order, specialty
pharmacy and the lack of claims processing capabilities to service
national accounts. These smaller PBMs also face a limited ability to
secure discounts or rebates from PBM suppliers.\24\
---------------------------------------------------------------------------
\24\ AAI 5/11/09 White Paper, supra, at 7.
---------------------------------------------------------------------------
The Express Scripts-Medco merger reduces the number of viable
providers of PBM services to large plan sponsors from three to two and
may result in higher prices, less innovation, and increased barriers to
entry. As noted above, the three national PBMs have significant
advantages in national scope, drug purchasing, discounts and rebates,
mail order distribution, specialty pharmaceuticals and administrative
services. As a result, the remaining smaller, regional PBMs may be
unable to constrain potential anticompetitive conduct of the large
PBMs.\25\ A key consideration in that respect is how markets are
ultimately defined.
---------------------------------------------------------------------------
\25\ AAI 5/11/09 White Paper, supra, at 5-7.
---------------------------------------------------------------------------
Because PBMs enter contracts with large plan sponsors that
typically span several years, the ability to compete for such contracts
lessens as the bigger PBMs increase their base. These contracts are
renewed at a high rate.\26\ PBMs also enter contracts with government
entities--such as Medicare Part D, Tricare, and the Federal Employee
Health Benefit Plan--through a competitive bidding process. PBM
contracts with large plan and government plan sponsors are
exclusive.\27\
---------------------------------------------------------------------------
\26\ AAI 5/11/09 White Paper, supra, at 7.
\27\ Medscape News, The Medicare Prescription Drug Benefit: PBMs
and Supporting Institutions, http://www.medscape.com/viewarticle/
409818_3.
---------------------------------------------------------------------------
Second, would the merger pose a threat of coordinated interaction
by eliminating a major competitive firm from the market?
As the PBM services segment loses major participants, the risk of
coordinated interaction increases. The market is already dominated by a
small number of large firms and there are substantial barriers to
entry. Transparency issues make it difficult for plan sponsors to
determine whether they are receiving the full benefits from their
arrangement with the PBM. The lack of transparency and the length and
exclusivity of contracts hamper plan sponsors' ability to negotiate
meaningfully with PBMs.\28\
---------------------------------------------------------------------------
\28\ Garrett & Garis, supra, at 61-72; AAI 5/11/09 White Paper,
supra, at 5-7; Statement of National Association of Chain Drug Stores
for Hearing on ``Health Care Industry Consolidation,'' September 9,
2011 (``NACDS Statement''), at 4-6.
---------------------------------------------------------------------------
As one federal court has observed, ``Whether and how a PBM actually
saves an individual benefits provider [plan sponsor] customer money
with respect to the purchase of a particular prescription drug is
largely a mystery to the benefits provider.'' \29\ Even when a benefits
provider receives a shared rebate from the PBM, it may not make up for
the higher base price of the more expensive drugs that the PBM selects
based on manufacturer rebates or exclusive supply arrangement,
resulting in a net economic loss to the benefits provider. In the
current climate, PBMs ``introduce a layer of fog to the market that
prevents benefits providers from fully understanding how best to
minimize their net prescription drug costs.'' \30\ Further
consolidation could threaten to make this problem worse.
---------------------------------------------------------------------------
\29\ Pharm. Care Mgmt. Ass'n v. Rowe, Civ. No. 03-153, 2005 WL
757608, *2 (D. Me. Feb. 2, 2005), aff'd 429 F.3d 294 (1st Cir. 2005).
\30\ Pharm. Care Mgmt. Ass'n v. Rowe, Civ. No. 03-153, 2005 WL
757608, *2 (D. Me. Feb. 2, 2005), aff'd 429 F.3d 294 (1st Cir. 2005).
---------------------------------------------------------------------------
Third, could the proposed merger lead to increased prices in the
distribution of certain specialty pharmaceuticals?
Specialty pharmaceuticals, which are generally more costly than
traditional pharmaceuticals, are an increasingly important area of
concern for cost-conscious plan sponsors and a major source of revenue
for PBMs. The cost of specialty drugs in the aggregate is rising
rapidly--increasing by nearly 20 percent in 2010 and the cost of all
specialty drugs is expected to reach as high as 27.5 percent of the
cost of all medications covered by pharmacy benefits by 2013.\31\ By
2016, 8 of the top 10 prescription drugs are expected to be considered
specialty drugs.\32\
---------------------------------------------------------------------------
\31\ Express Scripts, 2010 Drug Trend Report: A Market and
Behavioral Analysis (April 2011), at 91.
\32\ Medco Health Solutions, 2011 Drug Trend Report (2011), at 35.
---------------------------------------------------------------------------
Specialty pharmacies manage the highly expensive treatments of the
most dynamic, complex, and serious illnesses and the service they
provide is both distinct and significant. Specialty pharmacies
traditionally educate patients on effective treatment utilization,
monitor side effects and partner with physicians to identify
ineffective medications and recommend treatment changes. Specialty
pharmacies also play an active role in providing continuity of patient
care to ensure that costs are minimized and health outcomes
improve.\33\
---------------------------------------------------------------------------
\33\ Change to Win, supra, at 6; Balto 9/9/11 Testimony, supra, at
6; NACDS Statement, supra, at 6-7.
---------------------------------------------------------------------------
This proposed merger needs to be investigated to see whether it
poses a threat to competition in this important area of primary care
because each of the major PBMs has acquired specialty pharmaceutical
companies in the recent years. Some critics have suggested that it is a
common business practice for these PBMs to prevent other pharmacies
from dispensing specialty drugs and to force patients to use the PBM's
mail order facility.\34\ These restricted networks disrupt the
continuity of care and degrade health outcomes by forcing patients to
switch away from their pharmacy of choice. The major PBMs also
regularly mandate that patients purchase large supplies of expensive
medication. Not uncommon in the treatment of these complex conditions,
many patients may find after purchasing that they are not responsive to
the drug, their treatment regimen needs to be adjusted or that they
cannot tolerate the drug. Having already purchased a large prescription
of non-refundable medication, even minor adjustments to improve the
effectiveness of treatment may result in thousands of dollars in wasted
medication in addition to the cost of the replacement drug that they
need.\35\
---------------------------------------------------------------------------
\34\ NACDS Statement, supra, at 6-7; Balto 9/9/11 Testimony, supra,
at 6.
\35\ Lehigh Valley Women's Journal, Administrators of
Pharmaceutical Industry ``Steering'' Profits to Themselves, and
Refusing to Give Patients a Choice, Sept. 14, 2011.
---------------------------------------------------------------------------
Because the proposed merger would give Express Scripts-Medco a much
larger role as a PBM, it will expand its control of patient data and
realize an increased ability to use this data to move patients to its
own pharmacy operations. This concern is real in light of CVS
Caremark's demonstrated ability to use data received in its PBM
capacity to boost sales of its CVS pharmacies.\36\ Because the
relationship with a clinical pharmacist has been repeatedly shown to
improve medication compliance and health outcomes, a market free of
anticompetitive conduct by PBMs to steer patients in-house would
support the services that most effectively promote the health of the
patient. This proposed merger, however, will likely limit patient
choice and lessen clinical service because of the favoritism that the
benefit manager exhibit towards its own mail-order operations.\37\
---------------------------------------------------------------------------
\36\ Change to Win, supra, at 6; Balto 9/9/11 Testimony, supra, at
6; NACDS Statement, supra, at 6-7.
\37\ Change to Win, CVS Caremark: An Alarming Merger, Two Years
Later (Nov. 2009).
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The proposed merger would create the largest mail order pharmacy in
the United States, accounting for nearly 60% of all mail order scripts
processed.\38\ PBMs can direct prescriptions to their own mail order
facilities instead of to competitors.\39\ PBMs channeling prescriptions
through their own mail order operations may maximize their own gains--
at increased price to the plan sponsor--by selecting drugs on which
they receive superior rebates from manufacturers.\40\ The opportunity
for this kind of potentially anticompetitive, self-dealing, which harms
consumers, will be enhanced by the creation of a dominant PBM in the
mail order pharmacy market and the elimination of one of its only two
real competitors.
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\38\ NACDS Statement, supra, at 7.
\39\ Meador, supra, at 84.
\40\ Garrett & Garis, supra, at 67.
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In addition to expanding its ownership of specialty pharmacies and
mail order operations, the major PBMs continue to expand exclusive
distribution arrangements with pharmaceutical manufacturers. Further
analysis is required to determine whether these acquisitions and
distribution alliances have led to decreased service and consumer
choice in providers, as well as substantial increases in the prices of
several specialty drugs.\41\ In the past, Express Scripts has imposed
substantial price increases after becoming the sole distributor of
certain drugs. For example, the price of H.P. Acthar Gel, a drug for
treating children with a rare form of epilepsy, jumped from $1,600 a
vial to $23,000 a vial after Express Scripts was given sole
distributorship rights.\42\
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\41\ Meador, supra, at 77-84.
\42\ AAI 5/11/09 White Paper, supra, at 9.
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By securing sole access to over 50 percent of the specialty market,
Express Scripts-Medco could have increased leverage to restrict network
access and enter into exclusivity arrangements with drug
manufacturers.\43\ The proposed merger thereby could increase the
potential for Express Scripts-Medco to engage in anticompetitive
conduct and threatens to increase specialty drug prices and limit
access to critical medications.
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\43\ Balto 9/9/11 Testimony, supra, at 6; Milt Freudenheim, The
Middleman's Markup, New York Times, April 19, 2008.
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Fourth, will the proposed merger increase the exercise of monopsony
power to reduce the local delivery of pharmaceutical services?
We should be concerned that the major PBMs may already possess the
ability and incentive to exercise market power over retail independent
and chain pharmacies because reimbursement from PBMs is a major source
of revenue for retail pharmacies.\44\ The proposed merger could enable
these major PBMs to push compensation to the retail pharmacies below
competitive levels, ultimately leading to lost jobs and diminished
service for their consumers.
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\44\ NACDS Statement, supra, at 3-7; Garrett & Garis, supra, at 46.
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An adverse impact on the delivery of pharmaceutical services at the
retail level should be sufficient by itself to raise serious concerns
and motivate the government regulators to closely scrutinize the
proposed merger. In recent years, federal and state regulatory agencies
have become more sensitive to the exercise of buyer power as raising a
potential antitrust concern. The Antitrust Division has brought cases
against both health insurers and agricultural processors based on the
impact on doctors and farmers respectively. In the recent George's
Foods enforcement action, the DOJ sued to enjoin a merger of two of the
three largest chicken processors in the Shenandoah Valley area, which
were ``the only competitive buyers for grower services'' in the area,
solely based on the impact on chicken farmers.\45\ Thus, the exercise
of such buyer power should be a primary focus of any further review.
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\45\ United States v. George's Foods, LLC, No. 5:11-cv-00043 (W.D.
Va.)
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C. Potential Efficiencies Must Also Be Investigated
There should also be careful consideration about whether the
proposed merger will lead to increased efficiencies that are specific
to this proposed merger and that cannot be achieved by means not
related to a merger. In the context of this proposed merger, any
efficiency claims should be supported by existing business documents
and demonstrable outcomes.
Cognizable efficiencies should not be associated with
anticompetitive reductions in output or service. For example, if
reducing excess capacity of mail order pharmacy services as the result
of the merger is a potential efficiency, the companies should
demonstrate that the existing mail order capacity has not historically
contributed to lower health care costs for plan sponsors and that
reduction in capacity would not also entail substantial job losses.\46\
Competition also has the ability to create efficiency, and the merging
entities must show that the same efficiencies cannot be realized
through existing, continued competition.\47\
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\46\ Barclays Capital, Medco-Express Scripts Antitrust: Part II,
Sept. 12, 2011, at 9.
\47\ FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 61-63 (D.D.C.
July 31, 1998).
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The FTC and this Committee should also work to make sure that any
suggested cost savings will result from scale efficiencies and not the
exercise of monopsony power and focus on whether, and to what extent,
these claimed cost savings will actually be passed on to the PBMs'
customers and, therefore, consumers. A fruitful area of investigation
may be to determine why profits of the PBMs have increased at such a
substantial rate during a time of industry consolidation which promised
increased efficiencies. Does this suggest that the merged firms will
retain a good portion of any future cost savings? Such profit retention
(as opposed to passing on such savings) is consistent with a market
place that exhibits less, not more, competition.
v. conclusion
Thank you for providing me the opportunity to present my views of
the proposed merger of Express Scripts and Medco. The proposed merger
raises serious concerns that call for further careful study and
evaluation, including the risks to competition in the PBM services to
large plan sponsors, specialty pharmacy operations, mail order pharmacy
operations and retail pharmacy markets, as well as to consumers and
patient health care. The AAI looks forward to providing you its white
paper once it has been completed.
__________
Mr. Goodlatte. Ms. Kanwit.
TESTIMONY OF STEPHANIE KANWIT, COUNSEL, MANATT, PHELPS &
PHILLIPS, LLP
Ms. Kanwit. Thank you, Mr. Chairman and Members of the
Subcommittee. I am honored to be asked to testify here today. I
am Stephanie Kanwit, and I want to note that I am not
testifying on behalf of either party to this merger, but, given
my antitrust and Federal Trade Commission backgrounds, have
been asked to testify about how the agency is likely to view
this merger based on both Federal merger law as well as its
previous and very extensive studies and letters relating to
PBMs.
I have great respect for the FTC's expertise here. And they
are very knowledgeable, the agency is very knowledgeable, about
what PBMs do for a living, all the entities they interface
with, and how competitive the market is. As Mr. Watt rightly
noted in his introduction, the FTC is going to subject this
merger to very close scrutiny.
And here is the ultimate question that the agency has to
answer in antitrust lingo: Will it substantially lessen
competition? And what that means is will there still be
aggressive competition in the PBM marketplace that will promote
lower prescription drugs prices for consumers and result in
higher quality and more access to prescription drugs? As.
The Federal merger guidelines make clear--they were just
enacted by the FTC and the Department of Justice last year--
antitrust merger law is about the impact of the merger on the
cost and quality for consumers. It is not concerned with the
impact on individual competitors in that particular market.
So here is how the FTC will be looking at this merger. It
is going to be looking at both hats that the PBMs wear. They
wear many hats, but it is these particular hats they will look
at.
First question: What is the impact on PBM customers? In a
nutshell my testimony outlines in detail multiple reports and
FTC investigations which have found the market competitive and
found that PBM customers out there have choices. The FTC has
repeatedly, in letters and studies, et cetera, talked about all
the multiple PBMs out there, how they are varied, how they sell
in a variety of geographic and product markets. And, in fact,
some are even buying groups of independent pharmacies.
It is a fluid market where entries and exits are frequent.
And, for example, I will just give you one example, recently
the large retailer, Walmart, has entered the PBM space. So the
bottom line is that the FTC has found, in a very extensive 2005
study where it subpoenaed PBMs for information, that customers
both large and small have multiple choices and frequently can
and do switch PBMs if they are unhappy with service or pricing,
and that they can negotiate contracts that benefit their
members and themselves at both prices and quality, whatever
they want in terms of price and quality.
The number second question in addition to customers the FTC
is going to ask is what is the impact on retail pharmacies?
Now, the representative retail pharmacies here today have been
very eloquent in condemning this merger, but I just want to
make two points, one practical and one legal. As you have heard
from some of the previous testimony, PBMs need retail
pharmacies and pharmacists. They need them. They have to assure
that their customers can fill prescriptions at various
locations. And I would just note access standards in programs
like TRICARE for the military and Part D Medicare, they are
very, very strict what they call network adequacy standards,
where, for example, in urban areas 90 percent of the
beneficiaries have to live within 2 miles of a retail pharmacy.
So it is important, as the FTC has found, for PBMs to have
extensive pharmacy, retail pharmacy, networks.
Legally you have also heard some discussion about whether
this is going to adversely affect retail pharmacists, but that
is not the test under antitrust law. Antitrust law, as I
mentioned, is concerned with competition in general, not
individual competitors. So the FTC is going to look, and this
is a long section of the merger guidelines, at whether it
brings efficiencies to the market and what are those
efficiencies.
I just cite in my testimony in detail a past PBM merger
case talking about how a merger is pro-competitive if it
results simply in a shift in purchases from an existing source
to a lower-cost, more efficient source rather than a reduction
in purchases. So, in other words, that is important. If you are
taking costs out of a system, a merger can be very pro-
competitive.
In conclusion, I just want to say the merger guidelines
make very clear that the FTC is supposed to look and see
whether a proposed merger is competitively harmful, but it is
also supposed to avoid interference with what the guidelines
call competitively beneficial mergers. That is right out of the
guidelines. So the FTC is going to look at this merger in light
of the prism of its previous conclusions in this area, and it
has found in many different studies that the market is
competitive.
Thank you for your time.
[The prepared statement of Ms. Kanwit follows:]
Prepared Statement of Stephanie Kanwit, Counsel, Manatt,
Phelps & Phillips
Thank you for inviting me to speak today. I am counsel to the law
firm of Manatt, Phelps & Phillips. I was formerly a Regional Director
of the Federal Trade Commission (FTC), and have written a textbook on
that agency. I have forty years of antitrust background as a litigator,
have served as head of litigation for a large health insurer as well as
general counsel of a health plan trade association, and teach a course
in health care competition at George Washington University graduate
school.
I would like to note that while my firm is an outside counsel, as
am I, for the trade association of pharmaceutical benefit managers
(PBMs), and occasionally provides legal services for Medco Health
Solutions, neither the firm nor I represent Express Scripts or Medco in
regard to this proposed merger. Nor have I spoken to or consulted with
any of the companies' personnel or their attorneys, or with any of the
government personnel involved in the evaluation of the proposed merger
in connection with the proposed transaction.
As a result, I am acting here as a witness at the invitation of the
Committee, am not appearing on behalf of any party, and have
purposefully avoided gaining specifics of the proposed merger except
through public sources. My testimony outlines generally what the FTC
has found in its extensive recent analyses of the competitiveness of
the PBM industry, as well as my sense of how the agency is likely to
view this proposed merger based on its previous rulings and studies.
More specifically, this testimony outlines:
(1) The role of the FTC in preventing unfair methods of
competition.
(2) The FTC's extensive analyses of the nature of the PBM
industry, including its multiple findings that the market is
highly competitive.
(3) How the FTC has characterized the functions of the PBM
industry and the characteristics of its participants, customers
and contractual partners.
(4) How the agency could be expected to evaluate the proposed
merger to determine if it ``substantially lessens
competition.''
(5) The precedent of the FTC's opinion finding no
anticompetitive effects of the 2004 AdvancePCS/Caremark merger,
and how the agency evaluates merger efficiencies.
i. introduction: the ftc's role in ensuring competitiveness in
health care markets:
Health care markets have always been a high priority for the
Commission. The agency's goal has been to ensure that these markets
operate competitively, and its reports, advocacy letters, and
investigations aim to carry out the mandate Congress gave it almost a
hundred years ago, in 1914: to prevent unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce.\1\
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\1\ FTC Act, 15 U.S.C. Sec. 45.
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The FTC's role, in a nutshell, is to protect the market from
anticompetitive conduct that prevents it from responding freely to the
demands of consumers. That is the key to antitrust law initiatives--
determining the impact on consumers, in terms of possible higher prices
and reduction in quality and choices. As former chair Timothy Muris of
the FTC has succinctly stated, ``Aggressive competition promotes lower
prices, higher quality, greater innovation, and enhanced access.'' \2\
The FTC and its sister enforcement agency, the Department of Justice
(DOJ), step in when they view private markets as operating improperly,
such as when competitors collude on prices, or divide customers and
markets, or when monopolists charge higher than competitive prices for
goods or services. Indeed, the Agencies have collaborated in issuing
reports such as the massive 2004 Healthcare Report examining the role
of health care competition in addressing the cost and quality
challenges facing our health care system.\3\
---------------------------------------------------------------------------
\2\ Timothy J. Muris, ``Everything Old is New Again: Health Care
and Competition in the 21st Century,'' Competition in Health Care
Forum, Nov. 7, 2002, at 6.
\3\ FTC and DOJ, ``Improving Health Care: A Dose of Competition''
(2004) (hereafter ``FTC/DOJ Report'')
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The result of what Prof. Muris calls ``aggressive competition,''
however, may not always be desirable for the particular competitors
involved.\4\ That's because competition law focuses on protecting
competition and the competitive process, rather than individual
competitors.\5\ Indeed, in their 2004 Report the enforcement agencies
pointed out that while ``competition can be ruthless,'' in the long run
the fact that it ``creates winners and losers can inspire health care
providers to do a better job for consumers.'' \6\
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\4\ Sage, W., Hyman, D., and Greenberg, W., ``Why Competition Law
Matters to Health Care Quality,'' 22 Health Affairs No. 2 at 31.
(March/April 2003).
\5\ See Brown Shoe v. United States, 370 U.S. 294, 320 (1962)
(Clayton Act illustrates ``congressional concern with the protection of
competition, not competitors, and its desire to restrain mergers only
to the extent that such combinations may tend to lessen competition.'')
\6\ FTC/DOJ Report, Executive Summary, at 4.
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Most pertinent here today is the FTC's merger work, including its
issuance last year in conjunction with the DOJ of new revised
Horizontal Merger Guidelines for the first time in more than 18 years.
Those Guidelines, discussed below, provide what the FTC calls ``more
transparency so that businesses and their counsel may better understand
the merger review process.'' \7\ The FTC uses the principles in those
Guidelines to review a wide variety of mergers in the health care
arena, not just PBM mergers, but also drug company mergers, as well as
mergers involving hospitals, insurers, and ancillary services like
dialysis clinics.
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\7\ Id. at Sec. 1.
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ii. the ftc's extensive analyses of pbms:
The proposed merger the Committee is focused on today involves
pharmacy benefit managers, or PBMs, and the FTC considers itself as an
expert in the area--and rightfully so. It has been extensively involved
in reports and advocacy letters regarding PBMs, including:
Its ground-breaking report on health care competition
issued in 2004 (in conjunction with the DOJ) contains an
extensive discussion of why the growth of PBMs constitutes ``an
important development in providing consumer access to
prescription drugs.'' \8\ The report devotes an entire chapter
to how PBMs operate, and covers such topics as drug
formularies, payment terms, industry overview, as well as data
on PBM cost savings.\9\
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\8\ ``Improving Health Care,'' ch. 7 at 9. See Kanwit, S, ``FTC
`Conflict of Interest Report': Implications for the Competitive
Marketplace in Prescription Drugs,'' American Bar Ass'n Antitrust
Bulletin (2005).
\9\ There is extensive literature on PBM cost savings, including
from the U.S. General Accountability Office (PBMs produced savings for
health plans participating in FEHBP from retail pharmacies averaging
about 18% lower than cash customers paid):``Effects of Using Pharmacy
Benefit Managers on Health Plans, Enrollees, and Pharmacies,'' Jan.
2003.
Its 2005 comprehensive ``Conflict of Interest'' PBM
Study, written at the behest of Congress under the 2003
legislation that instituted the Medicare prescription drug
program, which examined possible conflicts of interest that
might arise when PBMs owned mail-order pharmacies. The
Commission obtained extensive data, including agreements
between PBMs and their plan sponsors as well as between PBMs
and pharmaceutical manufacturers. The PBM Study found strong
evidence that such ownership of mail order pharmacies generally
did not disadvantage plan sponsors and that competition in the
industry afforded health benefit plans sufficient tools with
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which to safeguard their interests.
Multiple advocacy letters, where the FTC comments on
the anticompetitive implications for consumers of proposed
state legislation that interferes with PBMS' flexibility to
work with their customers to design drug benefits that lower
costs and expand access. For one example, it recently
recommended against enactment of a New York bill that would
limit a health plan's ability to steer beneficiaries to a lower
cost mail order vendor of drugs.\10\ For another example, it
has been in the forefront in opposing state attempts to pass
so-called ``transparency'' statutes (which mandate exhaustive
disclosures of proprietary information to PBM clients) as
counterproductive, because (1) PBM customers do not need the
mandated information to make purchasing decisions, and (2)
having that information publically available furthers possible
tacit collusion among pharmaceutical manufacturers with which
PBMs must bargain for lower drug prices.
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\10\ FTC Letter to Hon. James L. Seward, New York, Aug. 8, 2011.
The Commission's general concern in all these studies and reports,
again, is how well the market is working competitively for consumers to
keep drug prices low. The FTC has repeatedly cautioned against enacting
legislation resulting in higher prices for PBM services and
pharmaceuticals that can ``undermine the ability of some consumers to
obtain the pharmaceuticals and health insurance they need at a price
they can afford.'' \11\
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\11\ Letter to Assembly member Greg Aghazarian, California, Sept.
2, 2004, at 9; see also letter to Rep. Patrick T. McHenry, North
Carolina, July 15, 2004; letter to Delegate Terry Kilgore, Virginia
House of Delegates, Oct. 2, 2006.
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iii. how the ftc will look at the pbm market:
The FTC will view the potential merger at issue here against the
backdrop of this extensive history of analyzing the PBM marketplace,
and hence some of its previous analyses and findings are instructive
here in terms of (1) what the industry does, and (2) how competitive
the industry is.
What PBMs do: More than 215 million Americans (nearly 90% of all of
those with prescription drug coverage) get their benefits through PBMs,
according to the research firm Visante. Those benefits can be provided
through Federal programs (like Medicare, Medicaid, and the Federal
Employees Health Benefits Program, or FEHBP), and also through the
commercial market. The functions PBMs perform are many-faceted, as they
interface both ``up'' and ``down'' with all the myriad entities in the
drug distribution chain. In the words of the FTC, PBMs do the
following:
they interface with their clients, namely the health
plans, private and public employers, insurers, unions and other
entities that provide prescription drug benefits to their
employees or members;
they interface with retail pharmacies as they
assemble networks to allow consumers to fill prescriptions at
many locations;
they may set up mail-order operations for health plan
enrollees, often for maintenance medications;
they interface with pharmaceutical manufacturers as
they negotiate pricing, including preferred placement rebates
and administration fees.\12\
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\12\ FTC PBM Study, Executive Summary, at i through vi.
In addition, PBMs often provide ``quality-related'' services to
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their customers, including the following, again in the FTC's words:
they provide drug utilization reviews that include
analysis of physician prescribing patterns to identify
physicians prescribing high cost drugs when lower cost,
therapeutically equivalent alternatives are available.
they provide disease management services by offering
treatment information to and monitoring of patients with
certain chronic diseases.\13\
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\13\ FTC Letter to Terry Kilgore, VA House of Delegates, Oct. 2,
2006 at 4.
How competitive the market is: The FTC has consistently found that
the PBM industry is vigorously competitive, in that multiple PBMs
compete for contracts with plan sponsors.\14\ The agency's 2005 PBM
Study estimated that about 40-50 PBMs operate in the country.\15\
Another source, Atlantic Information Services, indicates that today
that number has risen to nearly 60 PBMs in the marketplace.\16\
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\14\ FTC Statement, In the Matter of Caremark Rx, Inc./AdvancePCS,
at 6.
\15\ FTC PBM Study, Exec. Summary, at v.
\16\ Atlantic Information Services, ``2000-2009 Survey Results:
Pharmacy Benefit Trends and Data,'' 2009.
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No single PBM or PBM model dominates the marketplace. The
Commission's former Chairman in the agency's FTC Study specifically
noted ``the variety of PBM services'' available to PBM customers,
including the wide variations in ownership structure.\17\ Some PBMs are
stand-alone independent PBMs (like Express Scripts), some are
affiliated with health insurers or health plans (like Aetna, CIGNA, and
Kaiser), and some consist of buying groups of independent pharmacies,
such as EPIC. CVS Caremark is a combination of a PBM and a retail drug
chain. Until recently, in fact, the large drug retailer Walgreens owned
a PBM business, which it sold to another PBM.
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\17\ FTC PBM Study, Press Statement of Chairman Deborah Platt
Majoras, Sept. 6, 2006.
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PBMs also vary greatly when it comes to the market they specialize
in--e.g., larger vs. smaller employers, or regional vs. national
markets. Significantly, although some PBMs operate only locally or
regionally, the FTC in the past has found them capable of competing
with the big national PBMs.\18\ Moreover, while some PBMs operate their
own mail order facilities, others contract that service out. Some PBMs
participate in the Federal Medicare prescription drug program known as
Part D as PDPs, including the two companies at issue here, while some
do not.
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\18\ FTC Letter to Rep. Patrick McHenry, regarding No. Carolina HB
1374 (July 15, 2005), at 8.
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To add more heterogeneity to the competitors operating in the
market, only some PBMs manage the important and fast-growing category
of specialty drugs, i.e., those used to treat serious and chronic
conditions like cancer, multiple sclerosis, hemophilia, and rheumatoid
arthritis; the drugs in this category are not only costly (tens of
thousands or even hundreds of thousands of dollars a year) but often
require special handling and administration.\19\ Competing with PBMs in
this market segment are entities such as health plans and stand-alone
specialty providers.
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\19\ ``Slowing the Impact: The Role of Specialty Pharmacy in
Managing Progressive and Chronic Diseases,'' UnitedHealth Group White
Paper, April 2011.
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iv. how will the ftc determine if the proposed merger will
``substantially lessen competition''?
Under the Federal premerger notification program established by the
Hart-Scott-Rodino Act, larger mergers are subject to the regulatory
approval process run by the FTC as well as the DOJ.
The starting point in determining how the FTC is likely to look at
this (or other) proposed mergers is the antitrust agencies' new joint
Horizontal Merger Guidelines, released in April, 2010.\20\ The
Guidelines emphasize that they are just that -guides -to assist the
analytical process. Their goal is to help answer the key question: will
the merger substantially lessen competition? That accords with the
underlying statute, Section 7 of the Clayton Act, which condemns
mergers and acquisitions where the effect ``may be substantially to
lessen competition, or to tend to create a monopoly.'' \21\ The Clayton
Act is enforced by both the DOJ and FTC.
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\20\ Horizontal Merger Guidelines, released April 20, 2010,
replacing the Guidelines issues in 1992, revised in 1997. The FTC's
Bureau of Competition has also issued a Statement on Negotiating Merger
Remedies, at www.ftc.gov./bc/bestpractices030401.shtm.
\21\ 15 U.S.C. Sec. 18.
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The Guidelines note that the Agencies wisely attempt ``to identify
and challenge competitively harmful mergers while avoiding unnecessary
interference with mergers that are either competitively beneficial or
neutral.'' How is that determination made? The process is always
steered by the facts particular to a given merger. Like antitrust law
in general, merger analysis is (in the words of the Guidelines) ``a
fact-specific process through which the Agencies, guided by their
extensive experience, apply a range of analytical tools to the
reasonably available and reliable evidence to evaluate competitive
concerns . . .''
The most important theme of the Guidelines is that ``mergers should
not be permitted to create, enhance, or entrench market power or to
facilitate its exercise.'' Reams have been written about what
constitutes ``market power,'' but the definition in the Guidelines is
relatively straightforward: ``A merger enhances market power if it is
likely to encourage one or more firms to raise prices, reduce output,
diminish innovation, or otherwise harm customers as a result of
diminished competitive constraints or incentives.''
While the Guidelines generally cover merger analysis in terms of
impact on pricing, they caution that enhanced market power ``can also
be manifested in non-price terms and conditions that adversely affect
customers . . . '' So the Agencies would look at a proposed merger
through the prism of whether it would be likely to (for example) reduce
the quality of the product, or the variety of product available, or
reduce product quality, or diminish innovation--all key to assessing
competitive impact.
What sources of evidence does the FTC look at? The Guidelines note
that information can come from (1) the merging parties in the form of
documents, testimony, or data ``describing industry conditions,'' (2)
customers, who can be asked about the likely impact of the merger, and
(3) other industry participants and observers, such as suppliers,
analysts, and rival firms in the market. All perspectives are
considered, whether evidence that the ``merger is likely to result in
efficiencies'' will be reviewed, as well as any evidence of possible
anticompetitive results, such as ``that the merging parties intend to
raise prices, reduce output or capacity, reduce product quality or
variety . . .'' \22\
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\22\ 2010 Guidelines at 4.
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What kinds of evidence is the FTC assessing? Broadly, ``any
reasonably available and reliable evidence'' may be reviewed to see if
a merger ``may substantially lessen competition.'' For example, the
Guidelines call for looking at evidence regarding ``direct comparisons
based on experience,'' i.e., the economic history and structure of the
PBM industry, such as ``recent mergers, entry, expansion, or exits in
the relevant market.'' \23\ The second type of evidence would include
``the merging parties' market shares in a relevant markets, the level
of concentration, and the change caused by the merger.'' In addition,
the Guidelines note that the Agencies will consider ``whether the
merging firms have been, or likely will become absent the merger,
substantial head-to-head competitors.''
---------------------------------------------------------------------------
\23\ 2010 Guidelines at 3.
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Applying the Merger Guidelines to PBMs:
Market share analysis generally:
When sellers exercise market power, it is called ``monopoly,'' and
when buyers exercise it, it is called ``monopsony.'' Both decrease
consumer welfare. PBMs can be viewed in a broad sense as both buyers
(of services and discounts from retail pharmacies to be included in a
plan's pharmacy network, for example) as well as sellers (of
administrative services to health plans and their other customers).
That dual role makes the analysis more complicated, but the same
principles apply to both.
Media accounts of mergers or proposed mergers often focus on the
concept of ``market share,'' implying that this measure is a certain
way to determine anticompetitive effects. What the antitrust agencies
care about is market power: do sellers (or buyers) in the market have
the ability to profitably maintain prices above (or below) competitive
levels for a significant period of time? Measuring market power is a
fact-intensive job. Absent direct evidence of anticompetitive effects
(higher prices, lower outputs, and lower quality), the analysis begins
with (1) identification of the relevant product and geographic markets,
and then (2) calculation of the shares of the market participants and
the concentration ratios. To identify concentration levels that might
require further regulatory scrutiny, the antitrust agencies
traditionally use the Herfindahl-Hirschman Index (HHI), calculated as
the sum of squared market shares.\24\ The antitrust agencies consider
both the post-merger level, as well as the increase resulting from the
merger, and regard a market in which the HHI is below 1500 as
unconcentrated, while above 2500 is deemed highly concentrated.
---------------------------------------------------------------------------
\24\ 2010 Merger Guidelines at 18.
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But it is a mistake to place too much weight on market
concentration in a highly fluid market like PBMs, where market shares
are not ``stable over time'' (in the words of the Guidelines.)\25\ As
the Agencies note, ``even a highly concentrated market can be very
competitive if market shares fluctuate substantially over short periods
of time in response to changes in competitive offerings.'' Conclusions
regarding ``concentration'' depend enormously on how market is defined,
whether broadly or narrowly. In addition, once the particular market is
determined the real issue becomes whether the firm has obtained or
maintained that power through improper means.
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\25\ 2010 Merger Guidelines at 18.
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Applying the Market Share Analysis to PBMs:
It is likely that the FTC will find the PBM market to be
unconcentrated, assuming it regards the product market as the national
provision of pharmacy benefit manager services. As outlined below, (1)
no single PBM's market share exceeds 12% based on 2009 data, and
customers have multiple choices; (2) the market is dynamic, meaning
that there are multiple entries and exits of market participants; and
(3) it appears that the market has become more competitive and more
heterogeneous over time.
To analyze competitive effects, the agency, in accord with classic
merger analysis, will first likely define the various markets in which
PBMs operate (e.g., small vs. large employer, government customers vs.
commercial business, mail-order vs. non-mail order, among others) and
analyze those customers' ``ability and willingness to substitute away
from one product to another in response to a price increase or a
corresponding non-price change such as a reduction in product quality
or service.'' \26\
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\26\ 2010 Guidelines at 7.
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While it is difficult to know definitively what market (or markets)
the FTC will choose to evaluate here, it may be multiple markets. In a
past (1999) evaluation involving a PBM, it found the market to be ``the
provision of [PBM] services by national full-service PBM firms.'' \27\
Because both the merging parties operate nationally, that is likely to
be designed as the geographic market. But in terms of product market,
the FTC may decide to look not just at the commercial market as a
whole, but also at the merging parties' shares of retail scripts vs.
mail scripts; or shares of the Medicare Part D market, where numerous
PDPs including UnitedHealth Group, CVS Caremark, Humana, Coventry,
CIGNA and others compete.\28\ Then the FTC must judge if the large
employer market is separate from the small employer market, and if so,
what the impact on those customers might be if the parties merged.
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\27\ Merck & Co., Inc., 127 F.T.C. 156 (1999). That case involved
the acquisition by a pharmaceutical manufacturer of a PBM.
\28\ Note that Express Scripts partners with health plans in the
Part D program, while Medco is a PDP itself, and has a broad portfolio
of Part D products.
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There are numerous sources of respected data for the FTC to peruse
regarding PBM market share, and it is likely the FTC will look at both
(1) the number of covered lives (i.e., members) each company has, as
well as (2) the total annual prescription volume of each PBM. Using
either measure, Atlantic Information Services (AIS) reports that no
single PBM dominates the market: under the ``covered lives'' measure,
the largest PBM in 2009 (CVS Caremark) had an 11.85% market share,
while Medco Health Solutions was assigned a 8.67% and Express Scripts a
7.95% share.\29\ Thus, no individual PBM's share exceeded 12% during
that time period.
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\29\ Atlantic Information Services, Inc., 2000-2009 Survey Results,
Pharmacy Benefit Trends & Data: Costs, Benefit Design, Utilization and
PBM Market Share, at 53.
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That 2009 data, however, must be tweaked in light of the fluidity
of the PBM marketplace. Players (and their market shares) have changed
since then, and are likely to continue to morph, a fact that the FTC
will undoubtedly take notice of. The FTC and its economists in the
Bureau of Economics will have up-to-the-minute data presenting a
complete picture of that market in all its complexity. For an important
example, the 2009 AIS data cited above will soon be outdated as to
Medco, since UnitedHealth announced this summer that it will take back
the PBM business it outsourced to Medco at the end of the year for its
own PBM, OptumRx. Two more examples: the AIS 2009 survey lists
Walgreens-OptionCare as having 10.85% of the PBM market, but Walgreens
has since sold that business,\30\ and it also lists WellPoint's NextRx
as having 5.07% of the market, but WellPoint sold that business in the
second half of 2009.
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\30\ Walgreens sold its PBM business to Catalyst Health Systems,
and WellPoint sold its PBM to Express Scripts.
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The possibility of new entrants is also critical: whether it is
relatively easy to enter into the market and compete with the merged
entity is also a factor for the FTC.\31\ Again demonstrating the
fluidity of the market, the large retailer Wal-Mart has recently
entered the PBM space, and introduced a preferred network model that
includes 400 employers and 20 PBMs and managed care organizations; it
also has a Part D network in conjunction with the health insurer
Humana.\32\ Moreover, ``Drug Benefit News'' and other industry sources
report continually on new initiatives and novel business models
undertaken by large PBMs as well as small PBMs, some affiliated with
health plans and some stand-alone, as well as retail pharmacies.
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\31\ ``A merger is not likely to enhance market power if entry into
the market is so easy that the merged firm and its remaining rivals . .
. could not profitability raise prices or otherwise reduce competition
. . . '' 2010 Guidelines at 27.
\32\ AISHealth.com, ``Drug Benefit News,'' Sept. 9, 2011.
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Impact of a merger on PBM customers:
The Merger Guidelines stress that what counts in assessing a
proposed merger is whether customers have alternatives both in terms of
price and/or quality.\33\ The FTC will look at the impact on both (1)
PBM clients, which include the health plans, private and public
employers, insurers, unions, and (2) the ultimate consumers of those
drugs, who will ultimately benefit if the merger brings efficiencies to
the marketplace.
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\33\ Id.
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It is likely, given what the FTC has previously found to be the
competitive nature of the market, that customers will have sufficient
alternatives to which they can turn should they find that the merger
has resulted in a price increase or a reduction in quality of service.
Plan sponsors can and regularly do change PBMs if they are dissatisfied
with performance and/or pricing.\34\ The FTC has found that PBM
customers are sophisticated purchasers, who often submit Requests for
Proposal (RFPs) to suppliers of PBM services to assure they have
options and an objective assessment of multiple alternatives. Often
clients rely on expert consultants to assist them throughout the RFP
process to assure their needs are met and their interests are
protected, including agreed-upon pricing based on the customer's unique
requirements, plan designs to encourage plan enrollees to use more
affordable medications, specific performance guarantees, and extensive
audit rights. Moreover, most PBM contracts are only for relatively
short periods (one, two or three years is common) so that plan sponsors
have the opportunity to switch PBMs if they are dissatisfied with
performance or pricing.
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\34\ For example, CalPERS (the California Public Employees'
Retirement System) announced in May, 2011 that it would not renew its
contract with Medco beyond 2011.
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As a result of the RFP process, the PBM customer can almost always
leverage its negotiating ability and have multiple PBMs competing for
its business. Sometimes those customers increase competition among PBMs
by bidding out separate aspects of PBM services (such as claims
processing or network access), instead of retaining a single PBM to
provide a comprehensive group of services. Moreover, critically for
competitive purposes, these PBMs have to compete for the business on
non-price dimensions as well, including benefit design, the extent of
the retail network, and the quality of mail-order service.
The FTC has historically been very confident of plan sponsors'
ability to negotiate flexible yet transparent contracts with PBMs that
suit the customers' particular needs. As the FTC noted in its PBM
Conflict of Interest study, ``health plans already are able to
negotiate contract terms -including diverse disclosure and audit
rights--that protect them from conflicts of interest.'' The agency has
emphasized the wide range of pricing models available to customers in
PBM contracts.\35\
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\35\ FTC Letter to Hon. James L. Seward, N.Y. Senate, March 31,
2009; FTC PBM Study at 57-58.
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v. evaluating a pbm merger for possible efficiencies:
the 2004 caremark/advancepcs example:
In 2004, the FTC investigated a proposed merger of two large PBMs
and found there was not likely to be anticompetitive impact either for
plan sponsors or for retail pharmacies. In fact, the merger was found
likely to generate efficiencies that helped the merged entity's ability
to compete and might result in lower drug prices for consumers.
The then-proposed acquisition of AdvancePCS by Caremark Rx., Inc.
involved (in the FTC's words) ``two of the largest providers of
prescription benefit management services in the United States.'' After
analysis, it found the following:
No anticompetitive impact for either small or large
employer customers, because they could turn to other
alternatives. The FTC concluded that (a) ``dozens of small,
often regionally-oriented PBMs provide sufficient service
offering to smaller employers (and will continue to do so post-
acquisition),'' and (b) ``large employers are not likely to
encounter anticompetitive effects'' given adequate competition
from full-service PBMs with national scope as well as
``significant additional competition from several health plans
and several retail pharmacy chains offering PBM services . .
.'' \36\
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\36\ Statement of the Federal Trade Comm. ``In the Matter of
Caremark Rx, Inc./AdvancePCS File No. 031 0239'' at 2, available at
http://www.ftc.gov/os/caselist/0310239/040211ftc
statement310239.pdf.
No anticompetitive impact on retail pharmacies:
Focusing on the merged entity's future negotiation of
dispensing fees with retail pharmacies, the FTC concluded that
the impact was not likely to be anticompetitive. While those
dispensing fees might be reduced as a result of the increased
bargaining power of the merged PBM, such increased bargaining
power can be ``procompetitive when it allows the buyer to
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reduce its costs and decrease prices to its customers.''
This second finding in the AdvancePCS investigation is important
here, because the FTC addressed the fact that PBMs in effect wear ``two
hats'' in the prescription drug marketplace. Viewed vis-a-vis retail
pharmacies, PBMs are ``buyers'' of their services. What the FTC found
is that it is procompetitive if a PBM merger results simply in a shift
in purchases from an existing source ``to a lower-cost, more efficient
source,'' rather than a reduction in purchases.\37\ And who are the
ultimate beneficiaries? The consumers of prescription drugs, since the
agency found it ``likely that some of the PBM's increased shares would
be passed through to PBM clients,'' given the highly competitive nature
of the industry.
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\37\ FTC Statement at 2, emphasis in original.
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Thus when PBMs contract with retail pharmacies, it does not
constitute an indicia of anticompetitive behavior if a merger results
in lower payments to pharmacies. As the FTC commented: ``Nor do
competition and consumers suffer when the increased bargaining power of
large buyers allows them to obtain lower input prices without
decreasing overall input purchases.'' \38\ The AdvancePCS merger
analysis highlights a second important point: as noted in the Merger
Guidelines, mergers can bring about efficiencies and enhance the merged
firm's ability and incentive to compete. The result may be ``lower
prices, improved quality, enhanced service, or new products.'' \39\
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\38\ FTC Statement at 2.
\39\ 2010 Guidelines at 29.
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While the Guidelines caution that these types of efficiency claims
cannot be ``vague'' or ``speculative,'' it is likely that the Agency
will find efficiencies here, when the merger is viewed in light of the
following:
the demand in the marketplace for PBM services,
the highly competitive nature of marketplace, and
the record of PBMs in driving down prescription drug
prices.
The evidence on the last point, the record of PBMs in driving down
drug prices, is impressive. Prescription drug spending (according to
government figures) grew only 3.5% in 2010, down from 5.3% in 2009.\40\
Much of the credit for that goes to PBMs as well as their customers,
who are seeking to control total health care costs, and adopting
measures such as promoting the cost-savings of generic medications as
well as other options such as larger copayment spreads and narrower
pharmacy networks.\41\
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\40\ Keehan, S. et al., ``National Health Spending Projections
Through 2020,'' 30:8 Health Affairs (Aug. 2011), citing figures from
CMS's Office of the Actuary.
\41\ ``Step therapy, generics, smart technology are among top 2012
benefit design tactics,'' ``Drug Benefit News,'' Aug. 15, 2011.
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vi. conclusion
The mission of the Federal Trade Commission in evaluating this
proposed merger is to decide if the merger will be competitively
harmful while at the same time ``avoiding unnecessary interference with
mergers that are either competitively beneficial or neutral.'' \42\ The
FTC is uniquely qualified to perform that evaluation -and in a
relatively short time--given its past extensive studies and reports on
the PBM marketplace.
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\42\ 2010 Guidelines at 1.
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Thank you for the opportunity to testify, and I am available to
answer any questions on my statement.
__________
Mr. Goodlatte. Thank you, Ms. Kanwit. We will now proceed
with questions for the witnesses. I will start with you, Mr.
Paz.
Isn't there a great benefit to patients in having a
personal relationship with a community pharmacist rather than a
detached relationship with a mail order pharmacy? For example,
how can Express Scripts' mail order drug adherence programs be
as effective in promoting proper use of prescription drugs as a
live, in person consultation with a pharmacist?
Mr. Paz. Thank you, Chairman. First of all, to follow on
with what Ms. Kanwit said, it is very important that we have
all levels of access to pharmaceuticals, both at the retail
level and at the mail order. If you think about somebody with a
severe health condition and they are in a local community, they
need to be able to get to that local pharmacist, and we do
support local retail pharmacies. The independents are very
important to us, as that is again part of the negotiation
between the large drugstore chains and the small drugstores. It
is very important to have them and to keep all the prices
competitive. So we don't selectively choose one versus the
other. Most of our clients, who are very sophisticated, want
access. We supply access.
With respect to the actual pharmacist--I am sorry?
Mr. Goodlatte. I just want to interrupt and ask you if your
resistance to Walgreens' promoting 90-day prescriptions to its
retail customers, is that at least partly motivated by your
desire to fill these prescriptions through your own mail order
pharmacy?
Mr. Paz. No, sir. The 90-day prescriptions are set by plan
design. We do not govern the client's plan design. We show them
the cost. Mail order is much cheaper. It makes sense. We can
fill over 100,000 prescriptions a day with Six Sigma quality;
in other words, less than two defects per million error rates,
which is very, very, very low. The cost of producing an error
in prescription is very high.
So what ends up happening is the plan ultimately decides
what their cost structure wants to be. A company that is in
economic trouble will be much more confined and want higher
levels of mail order. Those clients that don't have economic
issues, they may be less forceful in these areas.
For example, setting copay levels. The more the company has
to save on its drug costs, the higher the copays. Express
Scripts nor Medco nor CVS Caremark set those levels. The plan
sets those levels. We administer those on behalf of our plans.
Ninety day retail at Walgreens----
Mr. Goodlatte. Mr. Paz, I am going to have to interrupt
because I have got a bunch of questions to ask a bunch of
people and only have 5 minutes to do it in.
Mr. Paz. Well, let me just finish by just telling you that
we do not want to stand in front of the community pharmacist
serving their member. Many, many pharmacists----
Mr. Goodlatte. Let me direct that question to Mr. Snow. You
testified that PBMs are dependent on the continued existence of
strong independent retail pharmacies and that PBMs engage in
``mutually beneficial collaboration with independent
pharmacies.''
If the PBM-pharmacy relationship is mutually beneficial,
why is there so much tension, criticism and distrust of PBMs
among pharmacists?
Mr. Snow. That is a very good question, and there are a
number of factors that go into that, and I understand the
plight of the independent pharmacists. If you look at the
competitive landscape today, new retail pharmacies continue to
open each and every year. They are independent pharmacies, they
are chain pharmacies, they are grocery store pharmacies. The
numbers of pharmacies in this country continue to grow. When I
walked down the street in my hometown 10 years ago, there was
one pharmacy that served my community.
Mr. Goodlatte. But why is the tension there? Why when I
visit one of these community pharmacies do I hear an earful
about you?
Mr. Snow. Here is why, because now there are two chain
stores within 100 yards of that independent pharmacy. So you
have intense--and every grocery store since 10 years ago has
opened their own pharmacies as well. So you have enormous
competition for that foot traffic. Patients are making choices.
There is this competition for foot traffic. It is a very
competitive environment, and it does put stress on the
economics of an independent pharmacy.
Mr. Goodlatte. Let me ask you a question about competition
at the PBM level. What is the largest contract that Medco has
bid for and lost in recent years that went to anyone other than
Express Scripts or CVS Caremark?
Mr. Snow. Let me think. I won't name the account, but it is
a well-known account that was about $1.5 billion, and it went
to one of those companies I mentioned in the second tier in
terms of Catalyst Rx.
Mr. Goodlatte. How long ago was that?
Mr. Snow. That was I think 18 months ago, 2 years ago,
approximately.
Mr. Goodlatte. Thank you. Well, my time has expired. I will
now recognize the gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I think Ms. Kanwit's
testimony demonstrates how technical and precise this analysis
will have to be and illustrates the point that I made in my
opening statement. But we are here, and let me see if I can ask
a few questions to try to clarify my own thinking.
Mr. Snow, I understand that Medco, the special niche that
Medco has in North Carolina is in the specialty drug area, is
that correct?
Mr. Snow. We are in North Carolina. We have many, many
clients in North Carolina, but we are a full service PBM. We
don't have a special niche.
Mr. Watt. You said--you are denying what some people have
told us?
Mr. Snow. I do not have a special niche in specialty
pharmacy in North Carolina.
Mr. Watt. If you do and Mr. Gustafson's testimony is
correct that this combination will give more than 50 percent
control over the specialty market, would that be a relevant
consideration as far as you are concerned?
Mr. Snow. Yeah, it would be. But the facts on this are in
the PBM space broadly there are 40 competitors today. In the
specialty space there are hundreds of competitors. And
honestly, if you look at the specialty space, you need to look
at the disease level.
Mr. Watt. I am not looking for a treatise on the way the
industry works.
Ms. Kanwit, let me just pull out the specialty drug area
here. Assume that the combination of these two companies ends
up with more than 50 percent of the specialty drug market. How
is that likely to play itself out before the FTC?
Ms. Kanwit. Well, number one, we have to decide--the FTC
has to look at it, Mr. Watt, as the submarket, in other words,
if that is an actual market for antitrust purposes there and
that 50 percent is relevant.
Secondly, as I caution in my testimony, market shares per
se don't really mean very much. What really is interesting is
how much market power the companies can exercise.
Mr. Watt. You are saying a company that has 50 percent of
the market doesn't have more market power than somebody that
has 5 percent of the market?
Ms. Kanwit. Well, here is my point. Specialty drugs are a
whole different kettle of fish and as I understand it,
manufacturers of specialty drugs drive the distribution
process. It is a different process than it is, say, with
Lipitor or just a regular brand name drug.
Mr. Watt. Is that more a mail order----
Ms. Kanwit. Well, it can be, if they are maintenance drugs.
There are very specific administration issues related to
speciality drugs which as you know are for cancer and multiple
sclerosis and hemophilia, et cetera.
Mr. Watt. So the bottom line is the FTC may segment this
whole analysis on specialty drugs and analyze that as a
separate impact situation?
Ms. Kanwit. It may. It may choose to do so.
Mr. Watt. Okay. All right. Efficiency, Mr. Paz and Mr.
Snow, you have made some claims about it. How do we know that
the results of those efficiencies are being passed along to
customers?
Mr. Paz. Well, I will start, and, David, you can certainly
chime in. If you look back at Express Scripts' history, it is
one of acquisitions. We have done many transactions. If you
also look at our contract with the Department of Defense, we
are proud to serve our men and women in uniform and their
families. Over the course of those acquisitions, if you look at
the pricing, the pricing has stepped down through every one of
our acquisitions. We have saved the Department of Defense over
half a billion dollars over our contract term.
Mr. Watt. That is fair. Let me just ask this question, Mr.
Snow and Mr. Paz. You all have been competitors for a number of
years. What benefits have there been from your being
competitors that will go away as a result of the merger?
Mr. Paz. Well, I don't----
Mr. Watt. I am just being honest now. This is not a trick
question.
Mr. Paz. I don't see the benefits going away. Actually, Mr.
Snow's company, Medco, has a different approach to the
administration of the drug benefit than my company. I think
they are both very good. But together, combining the best of
both companies I believe takes us to a whole new level of
clinical expertise and the ability to drive more costs and
improve health outcomes----
Mr. Watt. What do you say on that, Mr. Snow? My time is up,
but I would like to get your view on it.
Mr. Snow. The reason the companies hire us, Mr. Watt, is
they----
Mr. Watt. That is not what I asked you, but if you want to
answer a different question than the one I asked. I am asking
what benefits were there from the competition between the two
companies that will go away as a result of the merger?
Mr. Snow. As Mr. Paz said, we honestly see no benefits
going away. We only see benefits added.
Mr. Watt. Okay. My time has expired. Thank you. I yield
back, Mr. Chairman.
Mr. Goodlatte. The Chair now recognizes the gentlewoman
from Florida, Mrs. Adams, for 5 minutes.
Mrs. Adams. Thank you, Mr. Chair.
Mr. Paz, we all know that health care costs are on the rise
and a lot of us here and my constituents back home want to know
what can be done to further lower the costs of prescriptions,
both in the commercial market and Medicare and Medicaid
markets?
Mr. Paz. One of the most important things we can do,
Congresswoman, is to eliminate fraud, waste and abuse. It is
the biggest issue we face. Everything from, and Florida is a
great example, we have helped the law enforcement agencies by
turning over pharmacies that were pill-mills, if you will,
where we could see undue uses of C2--of, you know, of
controlled substances, I am sorry, I am used to the industry
jargon, but controlled substances. And getting people to stay
on their medication and getting them on the right medication
and looking for gaps in care are incredibly important for
eliminating costs in the equation.
Mrs. Adams. So what we are here to talk about is
competition today, so I am curious as to how many PBMs
typically compete with Express Scripts when you bid on a
contract and how often do you win, how often do you lose on
those contracts?
Mr. Paz. Right. From a competitive perspective, most
clients enter into 3-year contracts. When they go out for bid,
they usually invite anywhere from seven to eight to nine
different companies to bid that contract. They usually take it
down to two or three, which become the finalists.
When you look at the purchasers of our product, these are
very sophisticated buyers. They understand--the big, big
Fortune 500, the big health plans, they hire people who know
prescription drugs and have been in our industry, are
pharmacists by education or have a medical background. They
also hire consultants, and the consultants are the ones that
also help them. They often come out of our industry as well. It
is an incredibly competitive process bought by very
sophisticated buyers.
Mr. Snow. Congresswoman, can I add something please?
Mrs. Adams. Sure.
Mr. Snow. It is an important fact that for the Fortune 50,
there are 10 different PBMs right now serving the Fortune 50,
to give you a sense of how competitive our market is.
Mrs. Adams. So would you agree that health care costs, it
is waste, fraud and abuse, or would you believe that it is
competition that could add to the lowering of the cost?
Mr. Snow. I actually would focus on something else. George
said our companies are different, and I think when you pull
them together, you get more. But I honestly believe, and it
involves all pharmacists, is we as a country need to focus on
the better management of patients with diabetes and other
chronic diseases, because they spend 96 percent of the drug
money, 75 percent of the medical money in this country.
It is estimated we waste $350 billion a year each and every
year because of the poor management of chronic and complex
disease. Using a wired health care system, seeing gaps in care,
helping pharmacists when they are seeing a patient know there
is a gap in care, closing those gaps in care, get in enormous
amounts of money that help our system.
We in fact in your State are doing a project with retail
pharmacies where we push information about the patient and all
the drugs they are taking from all the pharmacies they go to so
that they can see up against national-based, evidence-based
protocols what that patient's gaps in care are so they have an
opportunity to close those gaps in care. And we have worked
with States to help the retail pharmacies get reimbursed for
that cognitive time and patient, because that is where--it
isn't what retail pharmacies cost. They are an important part
of our system. It is really how we are wasteful in the way we
deliver total health care, and we need better systems to
support the patient in that care. That is what Medco has been
all about, and that is really what we want to continue to do.
Mrs. Adams. Did you want to add something to that? You
looked like you were thinking about what he was saying.
Mr. Lech. Oh, yes. I have been chomping at the bit.
Mrs. Adams. I could tell.
Mr. Lech. I think we are confusing matters here. It is the
pharmacies--the pharmacists who have gone to school to become
pharmacists. It is not a PBM. It is not all this technology
they talk about that makes that difference. Yes, we need the
things that PBMs do. We need that data integration. We need
those reports about those DEA kind of situations. But we have
got it twisted by the way these gentleman to my right are
describing it.
Somewhere in their testimony they mentioned that a pharmacy
is complementary to the PBM industry. Well, I will tell you
what. As a professional, as a pharmacist, they have got that
totally backward. They are the complement to us. It is our
profession, it is our art, it is our science, that in a sense
they are getting in the way of. They have become burdensome and
they have become fat, to use that word. And I believe the
reason why they are fat is because of the profits that they are
extracting by the eloquent way they have been able to self-
aggrandize themselves and do this great marketing thing and
release a study the day of the hearing that is funded by them.
So, rather than go on and on and on about that, I think we
need to put things into perspective and put the power into the
pharmacist's hands. We have that technology now. We might not
have everything he is talking about, but we have computer
systems that bring up interactions. And they say there is 100.
The only ones I seem to get are the ones refilled too soon. We
don't get these clinical edits, we can get them from our
software. I get them from the online that I subscribe to for my
clinical use, and my pharmacy and every pharmacist does that.
And we also--we need one--it would be ideal if a person had
one pharmacy and one pharmacist. To have all this data, yeah,
people travel and all that kind of stuff. But I think we need
to get a health care system that directs persons to a pharmacy
home, just as they do a medical home. When a doctor writes a
prescription, that is the beginning of my job. You go to a
doctor and you get a diagnosis and you get an examination and
you get some lab tests that you want, his job is done in that
sense. My job starts. And these guys are there to complement me
in doing that and not get in my way.
Mrs. Adams. Thank you. My time has expired. I yield back.
Mr. Goodlatte. I thank the gentlewoman. The gentleman from
Michigan, Mr. Conyers, is recognized for 5 minutes.
Mr. Conyers. Thanks, Chairman.
Mr. Snow, how has the health care bill complicated or made
more convenient your life as a pharmacist?
Mr. Snow. I would tell you that the health care bill has
not necessarily complicated my life, other than the fact that
underneath the policy Congress passed the rules are not yet
written. So it is very difficult to manage my company and my
23,000 employees and set direction for that company when I
don't know what the administrative rules are underneath the
policy, because many of the things that were promulgated are
not effective until 2014 and 2015. That is hard.
But I will say, I am a big believer that the things we are
trying to do as part of health care reform are important.
Chairman Goodlatte mentioned a comment I made on the
announcement that in fact health care reform is driving many
mergers. It is happening with physicians and hospitals.
Hospitals are being bought by health plans. Health plans are
buying physician practices. I am not saying these are bad
things. I am saying that what is happening in our environment
is people know that this combination in scale drives enormous
efficiency that drives costs out of the system, which is really
at the root of what health care reform is all about.
Mr. Conyers. Who wants to add their view to this
discussion? Okay, then I will call on somebody.
Mr. Lech. Driving inefficiencies out of the system is very
important and we need to work together in doing that.
Mr. Conyers. Well, Mr. Snow, you support the bill and its
objectives?
Mr. Snow. I support many elements of the bill, and I would
also say that the bill is a first step along an evolutionary
path. We are going to need to do an awful lot more to finish
the reform effort.
Mr. Conyers. Mr. Lech, have you ever heard of universal
health coverage?
Mr. Lech. Certainly, Congressman.
Mr. Conyers. Okay. How does that figure into your plans for
health care for all Americans as an independent pharmacist?
Mr. Lech. If universal health care coverage means that
every American has health care, then I am 100 percent in favor
of it.
Mr. Conyers. Does everybody agree with that?
You know, I don't get many volunteers for my questions. I
am wondering, are you trying to--see, we have a fundamental
philosophy here in the lawmaking process. My good friend the
Chairman thinks that this was an ill-conceived effort in health
care.
Do you, Ms. Kanwit?
Ms. Kanwit. Yes, Mr. Conyers. I think portions of the bill
are very, very beneficial. For example, I am watching closely
the portion on accountable care organizations, the Medicare
demonstration project, to see if that can drive costs out of
the system and get more value into the health care system.
Mr. Conyers. Do you think the bill is unconstitutional, Mr.
Paz?
Mr. Paz. Sir, I am not a lawyer. I will tell you that I
think part of the bill, again, is good. I think we are one of
the richest countries in the Nation and people should have
access to health care. I think that we did not do enough to
address the cost side. I see it in my business every day, a lot
of waste and spend. The $300 billion that Mr. Snow was
discussing, we see it every day. We didn't address that, sir.
Mr. Conyers. Boy. Did you guys meet before this hearing?
No, I know you didn't. But what I am trying to find out--that
is right, you are under oath, too, so you have got to tell me
the truth.
Where does this issue of pharmacy practice--we have got
three people for this bill, we have got three people against
the bill. How does the ObamaCare health care plan affect your
business?
Mr. Snow. May I volunteer?
Mr. Conyers. Yes.
Mr. Snow. The way I think about the President's health plan
bill and Congress' bill is that health care reform is a three-
legged stool; it is access, cost and quality. We have done a
good job beginning the process of trying to get universal
access. It is fundamentally important. However, we as a nation
need to finance that access.
To Mr. Paz's point, I agree with him, we need to do more on
the cost-quality equation side to pay for the access. So I
think that is where more evolution will occur, and I think that
is where the public-private partnership between health care
providers and government is going to bring the best result. I
think it is underway. It is just going to continue to evolve.
You are already seeing some of the policies evolving as we work
with them and we learn that there is even a better way. That is
expected.
Mr. Conyers. Can I get a half a minute more, Chairman
Goodlatte?
Mr. Goodlatte. Without objection, the gentleman is
recognized for an additional minute.
Mr. Conyers. How does all this saving from fraud, waste and
abuse, how will that be affected by whether or not this merger
is approved?
Mr. Paz. Under this merger, one of--our continuing focus is
to bring the best of both of our tools together to look for
those gaps in care, to find out where prescriptions aren't
being properly written, and contact the doctors, work with the
pharmacists, work with the local pharmacies to make sure that
in fact we can take that waste out of the system.
Many diabetics today are not getting drugs for hypertension
and lowering their cholesterol. It is a proven fact those are
better for them. We are not doing it today. Identifying that--
--
Mr. Conyers. You know, you are the first--if somebody else
agrees with you on the panel, I have never heard a pharmacist
to call up doctors to tell them that they prescribe the wrong
thing.
Mr. Lech. Oh, it happens all the time, practically daily.
Mr. Conyers. Oh, really?
Mr. Wiesner. That is a daily occurrence, sir.
Mr. Conyers. All right, let me recognize my friend over
here.
Mr. Gustafson. Congressman, I wanted to answer the question
about fraud and abuse. I would suggest that the best thing that
will combat the fraud, waste and abuse would be more vigorous
competition. If these companies are forced to fine tune their
operations in order to lower their costs so they can lower
their bids to the customers that they seek to obtain contracts
from, that alone will generate the best cost savings through
saving fraud, waste and abuse.
And I was going to respond to Congressman Watt when he
asked what would be missing if these two companies combined.
What we will be missing is a national bidder in each of these
accounts. When they have national accounts that they put out to
bid every 3 years, what will be missing from the competitive
landscape is a company that is capable of making a bid on those
contracts.
Mr. Lech. In regard to fraud, waste and abuse, if I could
reference the document I mention, Waste Not-Want Not, it goes
on to show at least the waste part of it. I think we need to
differentiate between fraud, waste and abuse. They are
oftentimes lumped together.
Fraud is fraud. If it is criminal, it is criminal. That is
pretty black and white. That has got to be dealt with in that
way. Waste can be underuse, overuse, excessive prescribing.
Abuse could be narcotics that are taken too much, the dosages
that are right for the patient or wrong for the patient. But if
you look at those pictures, these are things that I see, these
are things that every pharmacist sees, where patients bring in
bags of things that they have automatically been shipped from
the drug mail order firms.
Long ago when I first started testifying when I was a young
buck, I testified in Pennsylvania in Erie with then State
Senator Peterson, and the mail order companies at that time
considered a drug called Accutane which now is in a REMS
program, a program that you really need to be careful who gets
it and how they take it and what happens to it after they get
it.
They regarded, and it was Express Scripts, they regarded
Accutane as a maintenance medicine. 180 doses were being
dispensed and a teenager was taking these for maybe a week. All
this extra medicine with a medicine that could cause--was known
to cause fatal birth defects. So this is pretty telling I
believe as far as the waste that happens. I think they could do
a better job of fine tuning that.
Maybe a way they can do that is allow the pharmacist which
knows which patient maybe can use a 90-day supply because of
their ability to manage their own medicine; which medicines
because of cost or danger might be drugs that shouldn't be 90-
day supplied, to me a pretty commonsense thing. Let's take it a
patient at a time and a drug at a time, and not lump it all
into maintenance drugs. I think there is a problem with that
because it is profit driven.
Mr. Goodlatte. The time of the gentleman has expired. The
gentleman from Pennsylvania, Mr. Marino, is recognized for 5
minutes.
Mr. Marino. Thank you, Chairman.
Mr. Lech, how would my legislation be a positive impact on
independent pharmacies, if it would be?
Mr. Lech. I believe it would be because the ability for--an
independent pharmacy with one or two or not many locations is
at a disadvantage when compared to other folks that may be able
to negotiate certain prices, may or may not be able to
negotiate prices. It would give us the ability to have access
provided for the patients, which I think the Federal Trade
Commission needs to consider. I understand from the testimony
they are. I would suggest that a way that that could be done is
to get out of the office and into the pharmacy and actually go
see face-to-face what happens in those pharmacies.
But it would give us the ability to have a fair, level
playing field. We are not asking to be paid more money, paid
more money. We just want to be able to compete. And there are
non-price issues also that can be addressed.
Mr. Marino. I want to get a couple more questions in here.
Mr. Paz, Mr. Snow, respectively, do you agree that that
statement that Mr. Lech just made?
Mr. Paz. Again, Congressman, I am not a lawyer, but I don't
believe that allowing anybody in our--in American business to
collude makes sense. Effectively it allows a whole bunch of
people to come together and negotiate price against----
Mr. Marino. Well, isn't that what you are doing? Isn't that
what you do with a group of large chains who have more stores,
they get a cheaper price?
Mr. Paz. Well, first of all, they don't necessarily get a
cheaper price.
Mr. Marino. Okay. Now, are you telling me that the volume
business that you do, I am an independent individual owning a
pharmacy, and let's just say X, Y and Z owns 100 stores. You
are telling me that I am going to get drugs generally speaking
at the same price as X, Y and Z pharmacy?
Mr. Paz. What I am telling you, Congressman, is that what
determines price is the amount of competition in a given area.
We have stores in Alaska, North Dakota and other areas that get
paid much, much more than any other pharmacy. Where there is a
lot of competition, competition sets price, as it should, in
our country.
Mr. Marino. Okay, I understand that. You are dodging my
question.
Mr. Paz. I am not, sir.
Mr. Marino. Are you telling me that as an independent, I am
going to get the same price as somebody owning 100 stores in my
region?
Mr. Paz. What I am telling you is that if you have 100
stores in a given region and there is a lot of competition, the
plan design ultimately determines how many pharmacies----
Mr. Marino. Okay, what if there are 100 stores with one
company and there are three independent pharmacies. Are the
independent pharmacies going to get the same price as the 100
stores?
Mr. Paz. I can't answer the question blanket because it is
not the same answer across the board.
Mr. Marino. You know something else? As an 18-year
prosecutor, you are dodging my question and you do not want to
answer it.
Mr. Snow, do you want to answer it?
Mr. Snow. Sure, I would like to. Thank you. At Medco, we
recognize the plight of the retail pharmacist who is an
independent, does not have the scale, does not have the
purchasing power of some of the bigger chains. It is not
uncommon for our independent retailers to have higher
reimbursement rates in our network than the larger companies
who have the ability to negotiate a cheaper price, number one.
Number two, one of the things that is in place today, and
you may be aware of it but I just want to say it for the
records, there are group purchasing organizations that many
individual retailers join so that they can get purchasing scale
relative to buying their drugs, buying the things that they put
into their store, so that they can at least begin to create
critical mass to drive the kind of price that their competitors
do.
Mr. Marino. Okay, sir. I understand your answer. Thank you.
Do either of you, Mr. Paz or Mr. Snow, do you disagree with my
legislation?
Mr. Snow. I would say, sir, that as Mr. Paz said, I am not
a lawyer. I would----
Mr. Marino. Gentleman, stop with ``I am not a lawyer.''
Mr. Snow. I would like the independent retailers to
survive. I would like them to have the right footing in a way
that doesn't violate antitrust. So whatever the lawyers and the
FTC and Congress decides, I think what you are trying to do for
the retail pharmacist is the right thing to do. How to do it, I
am not as sure, but that is not my job. I agree with what you
are trying to do.
Mr. Marino. Thank you. Do either of you own--your companies
own retail pharmacies? Mr. Paz?
Mr. Paz. No, we do not.
Mr. Marino. Mr. Snow?
Mr. Snow. No, we do not.
Mr. Marino. Do you own mail order businesses related to
pharmaceuticals?
Mr. Paz. Yes, we do.
Mr. Snow. We are a mail order pharmacy.
Mr. Marino. And am I correct in assuming that you do direct
your customers to purchase from your mail ordering, as opposed
to independent pharmacies?
Mr. Paz. If the client wants it. Again, I am not trying to
dodge your questions, Congressman, but let me fully answer that
question.
Mr. Marino. Thank you.
Mr. Paz. Some clients do not allow mail order. Some clients
want mail order. It is a plan design decision that we
administer for our clients. Mail order costs less than retail
pharmacies. There is better economics of scale. We can deliver
cheaper. So if a client directs us to, then we use mail order.
If they don't, we don't.
Mr. Marino. Chairman, could I have 30 seconds, please?
Mr. Watt. I ask unanimous consent that he have 2 additional
minutes.
Mr. Goodlatte. Without objection, the very generous motion
of the gentleman from North Carolina is agreed to.
Mr. Marino. Thank you, sir.
Gentleman, you are saying that this merger--and my
legislation, I think you are aware of this, has nothing to do
really with the merger or no merger. Do you understand that? My
legislation is to give the independents--be able to form a
group to purchase stronger in a power situation where several
individuals as opposed to one is purchasing drugs from any
company.
But are you saying that with this merger, and I am going to
put you both on the spot right now, that you are guaranteeing
that you are going to be selling drugs to the consumer at a
cheaper price than you are selling it now?
Mr. Snow. Total drug costs with our book, not drug by drug,
total drug costs will go down. It absolutely will go down. And
that really depends on our customer's design, what patient gets
and what the payer retains. So we have Fortune 500 companies.
As George said, they all specify plan design.
Mr. Marino. Okay, let me back up here a moment. I get your
answer. I get your answer. I do, sir. I understand it. I have
limited time here. But you said total cost. Now, coming from
the business sector, I know what total cost means. It can mean
anything from it is going to be cheaper to maintain the
building, I am going to be able to hire somebody at less of a
cost.
If I purchase drugs from you, if you are merged tomorrow,
am I going to get them cheaper tomorrow than I will today from
you independently?
Mr. Snow. Yes, you will. And can I just explain my answer?
Mr. Marino. Please. Go ahead.
Mr. Snow. Okay. The reason I said it the way I said it is
that there are certain drugs where there is no other drug
competing against it. It is a single type of drug in the class,
meaning you have no leverage to gets the price down. Many of
the biotech drugs are that way. But where there is competition
and you have leverage, you can get better drug pricing, you can
get better procurement prices for drugs. Absolutely.
Mr. Goodlatte. The time of the gentleman has expired.
Mr. Marino. Thank you so much. Thank you, gentlemen.
Mr. Goodlatte. The Chair recognizes the gentlewoman from
California, Ms. Chu, for 5 minutes.
Ms. Chu. Thank you, Mr. Chair.
I am hearing from my community pharmacists who are very
concerned about this merger creating even more buying power for
PBMs. They are expressing concern that the large PBMs will
leverage their market share to force pharmacies into even more
unfavorable contract terms and that they will have to make the
decision to choose between inefficient reimbursement rates or
exclusion from the PBM networks, and that they don't have the
bargaining power to negotiate better contract terms so they
oftentimes find themselves agreeing to more unfavorable terms.
Mr. Lech, could you comment on that?
Mr. Lech. Well, I didn't get into the practice of pharmacy
to eventually think that I would be forced out, whether it
would be by a decision of myself or someone else that made that
decision. The last thing I want to do is stop providing what I
do to my patients and my customers and my consumers. And when
the time comes, I would like to transfer that perhaps to my
sons, who are both--one is a pharmacist and one is about to
become a pharmacist, or to someone else if my sons don't want
to do that.
But if there came a time when because of onerous
restrictions, whether it be price or non-price, and when I say
non-price, there are many dozens of things that could be
included in that, I can't deny that there may come a time when
the decision to say I can't do it anymore happens. And it would
be certainly not what I wanted to do, but what I had to do from
a business perspective.
Ms. Chu. How much business does your pharmacy do with PBMs?
Mr. Lech. With PBMs. Third party we call that, probably 90.
These particular PBMs, if the merger were to happen, it would
be over 50. That counts Medicare part D and all the different
components of the claims process.
Ms. Chu. Mr. Wiesner, would you want to comment on this
issue about the contract terms?
Mr. Wiesner. Sure. Just to go to your last question,
currently about 90 percent of our prescription volume is paid
for by a third party. The two gentlemen, their particular group
combined together, would be one-third of our entire volume.
From the standpoint when we are talking about unilateral
contracts and things of that nature, it puts us in a very
precarious position. We are in that position because that is
one-third of my customer base. So if I am presented with what I
would deem to be an onerous contract, I don't have much wiggle
room. And we are reaching very quickly a tipping point as it
relates to our cost to dispense products, which hasn't really
been discussed today but there have been quite a few studies,
and the ability for us to at least receive that much as an
equitable reimbursement for our activities.
So I think not only my company, but many companies have
kind of reached a point in the entire process where we are
having to take a step back and understand, is this a viable
activity we can continue to engage in? We want to take care of
our neighbors and our community, but we have some real concerns
along that regard.
One last comment. There is a little bit of a difference in
my world. There is a lot of talk about rebates from
manufacturers and getting greater discounts with rebates from
manufacturers. And what we are talking about are brand products
for which there is not a generic. In my world, because these
gentlemen may get a rebate, that does not mean my cost to
obtain that product is going down. So there is two different
scenarios when you are talking about product cost.
Ms. Chu. I see. I would also like to ask about the
transparency. The merger of Express Scripts and Medco would
result in one PBM controlling one-third or 135 million of all
American prescriptions, and so transparency will be a major
concern for a company that will be handling such a large
amount. And a concern for PBM transparency was recently raised
in a March 2011 Office of the Inspector General report which
cited concerns about the lack of transparency with regard to
PBM rebates in the Medicare part D program.
So Mr. Gustafson, I would like to know about wouldn't the
natural assumption be that this concern would grow if this
merger is approved and won't the level of transparency decrease
post-merger because employers and health plans would have fewer
options and thus not be in a position to demand greater
transparency?
Mr. Gustafson. I think that is right, Congresswoman. I
think one of the things that competition does in this
marketplace, in any marketplace, is it forces the seller to be
more transparent because the consumer has more choices, or in
this case the plan sponsor or whoever the customer is in that
instance. So I think that concentration in this market will
allow the participants who remain to be less transparent, and I
think that is bad for the competition levels and it is bad
ultimately for the consumers.
Ms. Chu. Okay. Thank you.
Mr. Goodlatte. I thank the gentlewoman. The gentleman from
New York, Mr. Nadler, is recognized for 5 minutes.
Mr. Nadler. I thank the Chairman.
Mr. Gustafson, Mr. Watt discussed the issue of product
markets. What do you see as the relevant product markets for
antitrust purposes that should be analyzed as part of this
merger and in which product markets would concentration under
the merger cause the most concern and could divestitures in any
of these market alleviate those concerns?
Mr. Gustafson. Congressman, I think that there is--probably
the FTC will ultimately decide that there is more than one
market here. There certainly seems to be markets that--at this
stage of our investigation that large plan sponsors is probably
a market, the specialty drugs may very well be a market. So I
think that there is--mail order may be a market. Probably not,
but it is possibly a different marketplace. But ultimately I
think there is more than one market.
The question about whether divestitures would be a solution
to this merger, it is probably too early to tell, but there are
certainly some things that you could consider in terms of
divestiture that would be useful. One is the speciality drug
companies that these two merger partners own. Another would be
the mail order businesses that they own or part of the mail
order businesses, because both of those instances would lessen
their grip on the national accounts.
Mr. Nadler. Thank you.
Mr. Snow, you testified that the merger would give the new
combined company greater power to negotiate prices with drug
companies and therefore would result in lower drug prices.
Mr. Snow. Correct.
Mr. Nadler. Would you say the same principle would apply if
we were to say that Medicare could negotiate drug prices with
the pharmaceutical companies and if we let them negotiate the
prices, instead of prohibiting them by law, the market power of
Medicare would cause a great reduction in drug prices for
Medicare?
Mr. Snow. Scale does drive better pricing. It does.
Mr. Nadler. So Medicare would have tremendous volume
pricing power if the law were changed to enable them to
negotiate and use their pricing power to negotiate cheaper drug
prices instead of prohibiting them?
Mr. Snow. Technically, yes. I would also tell you though
that it is not uncommon for PBMs in the private sector to bump
up against Medicaid best price when they could have done better
had the government not set that floor. So it is a double-edged
sword.
Mr. Nadler. I didn't follow that.
Mr. Snow. So there is already today Medicaid best price
legislation that says that no one can negotiate a price that is
better than Medicaid.
Mr. Nadler. That is lower?
Mr. Snow. Yes. So they by definition must always have best
price.
Mr. Nadler. And the best price is what Medicaid pays?
Mr. Snow. Yes, it is what Medicaid pays and it is what the
government has negotiated with that manufacturer on Medicaid.
And all I am saying is that Medicaid best price legislation has
become a floor below which we can't negotiate.
Mr. Nadler. But we prohibit Medicaid from negotiating that
price, do we not?
Mr. Snow. Medicaid demands. It is the same issue. They
demand that they get best price, which means the manufacturer
says you can't do better than that. If government negotiates,
manufacturers will say, well, you know, I am going to have to
keep the prices high because I can't afford to do this, and
they basically create artificial--artificial floors below which
you can't negotiate.
Mr. Nadler. I don't understand what you are saying at all.
Let's go back to basics for a moment. I really just don't
understand what you are saying, and I am generally not that
incomprehending--uncomprehending.
We had a major political argument that said Medicare, I am
not familiar with the data on Medicaid, but Medicare should or
should not be able to negotiate prices, and Medicare should
negotiate prices because with their volume pricing they can get
better prices. That is the argument.
You are saying that if your two companies merge because you
have greater market power you are able to negotiate lower
prices, which seems to be the same argument. And you said a
moment ago that that would be a valid argument, that scale does
matter. Now you are telling me that Medicaid has--do they
negotiate the price?
Mr. Snow. No. They have what is called Medicaid best price.
Mr. Nadler. So in other words, they can't be negotiate the
price. So that is a separate--they should be able to negotiate
the price, would follow from your logic, to get better prices.
Mr. Snow. Government as a whole with their scale should.
Mr. Nadler. Fine. That was my question. We could save a lot
of money if government could use its scale to negotiate prices,
as your two companies could save money by combining and using
your power of scale to negotiate prices. Thank you.
Now, my next question, let me ask Mr. Lech, I was going to
ask this question and maybe it was what Mr. Marino was
referring to before, I don't know. But small pharmacies I
understand are not allowed to combine--actually, Mr. Snow,
small pharmacies are not allowed to combine to negotiate
because that is a violation of antitrust. Now, it seems to me
that maybe we should allow them to do that. Maybe that is what
Mr. Marino is referring to in his legislation, to allow them to
get together, because then they could get presumably a better
situation.
But you said a few moments ago, Mr. Snow, that--I think it
was you that said it, that small pharmacies get together now in
co-ops sort of----
Mr. Snow. They do, in group purchasing organizations.
Mr. Nadler. And that does not violate the antitrust laws?
Mr. Snow. No.
Mr. Lech. But it doesn't achieve the negotiations that you
are referring to, because it is not binding on any of the
pharmacies, and the PSAOs, I guess in a perfect world what Mr.
Snow said would be true, that they are able to negotiate better
prices. The reality is it is not what is seen to happen.
Mr. Nadler. Well, let me ask Mr. Snow one last question
because I see my time has expired. It went very fast.
Given the greater concentration that would result if this
merger went through, would you think it would be fair and right
to allow an antitrust exemption for independent pharmacies so
they could have a reasonable basis for negotiating with you?
Mr. Snow. I personally don't believe they need it because
of us, because as I have mentioned earlier and George has
mentioned earlier as well, we need retail pharmacies. They are
an essential part of what we do.
Mr. Nadler. But in terms of enabling them to survive----
Mr. Snow. If you want natural competition to occur, you
have to believe the companies are not going to do something
that is not in their best interests. We need these retail
pharmacies. As I mentioned in my oral testimony, 85 percent of
all the prescriptions we do for all of our members come from
retail pharmacies.
Mr. Nadler. That is very nice, but it is not responsive to
my question. My question really is, obviously you want to get
the best price you can from the pharmaceutical companies and
you want to sell the drug to the pharmacies, not for the lowest
price possible from their point of view. They want the lowest
price. You are the middleman, right?
Mr. Paz. Sir, we are not wholesalers, sir. The retail
pharmacies buy their own drugs and then we reimburse them for
what they buy. We are not the wholesaler. We only buy drugs
direct that go through our mail order.
Mr. Nadler. Yes, sir.
Mr. Lech. That reverts back to the beginning of this
conversation when Congressman Conyers asked who are these
people and where do they fit in. We welcome--I wish to be able
to wrap my arms around the PBM industry and speak with local
purchasers of prescription insurance and talk to them as if I
could trust everything that they are saying and promoting and
marketing to be true. But in the 30 years that I have been
practicing, it has gone the other way. And that is why we need
legislation like Congressman Marino has introduced.
I would recommend that you read the legislation first. What
it does is it offers an exemption, but the exemption is
defined. It defines a marketplace. It is not a county-wide or
region-wide or every independent pharmacy.
Mr. Goodlatte. Mr. Lech, I hate to interrupt you, but the
gentleman's time has long expired.
Mr. Nadler. I thank the Chairman for his indulgence.
Mr. Goodlatte. The gentleman from Florida, Mr. Deutch, is
recognized for 5 minutes.
Mr. Deutch. Thank you, Mr. Chairman.
Mr. Chairman, as I brought up in a letter to the FTC
Chairman, I have heard some real concerns from constituents in
my district that the acquisition could result in diminished
competition, could have a negative impact on healthcare costs,
or could jeopardize the overall quality of patient care, and I
would like to focus on two of those, if I may. The first is
cost.
Mr. Snow, if I understood you correctly, you said that, or
if you could elaborate, there would be $1 billion passed back
to consumers. I would like to understand that. And then, Mr.
Gustafson, after Mr. Snow explains, if you could respond,
because I think what you said earlier in your testimony was
that past consolidation suggests that there will be higher
prices for consumers.
Mr. Snow, could you speak first?
Mr. Snow. Absolutely. Thank you. So we have contracts with
clients today that have 100 percent pass-through of our
pricing, of our rebates. So when a merger like this occurs, you
actually combine the best-of-breed contracting that we
currently have as independent companies today. When you just
look at best-of-breed contracts between the two companies post-
merger, it results in $1 billion of savings that by definition
under our existing contracts with our clients they get
immediate benefit for. It goes right back. And when I say
client, it is our employer customers and our health plan
customers and our State government customers.
Mr. Deutch. So Mr. Gustafson, could you help me make some
sense of this, because ultimately I am concerned about the I am
fact it is going to have on consumers.
Mr. Gustafson. What I had testified about was that when
they claim the $1 billion in efficiencies, we need to make sure
we document it, because we have had a lot of consolidation in
this industry where promises have been made. We have a data
set. We can go back and look. When CVS and Caremark merged,
they made promises about efficiencies, and when----
Mr. Deutch. I am sorry, Mr. Gustafson. What kind of
promises were made and what was the result?
Mr. Gustafson. Well, I am not familiar with the specifics
of the promises as I sit here, but I know the mergers were
defended on the basis that they would provide cost savings
which would be passed on. And the data that I have seen
suggests that the profits of these companies are soaring, which
suggests that they are not passing it on, which suggests that
they are taking whatever savings they get and putting them
through to their bottom line.
Mr. Deutch. I appreciate that. I would like, Mr. Lech, if I
could turn to you for a moment. In your testimony you talked
about the gradual shift of smaller and medium-sized PBMs being
bought out by larger ones and you mentioned that the reduced
competition hurts smaller pharmacies like yours.
Can you speak specifically--can you help us understand what
that looks like for your customers? Those negotiations with
PBMs that have changed, what impact has it had on the
customers, on the consumers?
Mr. Lech. Well, the reason it will have a negative effect
is basically because it is a take it or leave it contract. The
statement was made earlier that, you know, we are very
business-minded, savvy people, and if we get a contract that
doesn't look good, we are going to say no. Well, that is hard
to do. It is not hard to do business-wise, but hard to do in a
humane kind of way, to say ``Congressman, I can't fill your
prescriptions anymore.'' So access to the pharmacy of their
choice and I believe also ultimately the price and the cost.
What we have seen in all these claims of we are going to
reduce costs, we are doing to reduce costs, the prescription
prices keep going up. The sponsors of the plans keep paying
more. The consumers are paying higher copays. The pharmacies
are being paid less. So where is the money going?
I would refer back to Mr. Gustafson's recent answer about
those profits are going into the corporate.
Mr. Deutch. I am sorry, can you just walk through that
piece step-by-step? The payments to the pharmacies, the copays,
can you just take me through that a little slower?
Mr. Lech. Sure. Year after year we hear claims that the
cost of medicine is going to go down, and we are hearing it
again, and it was a guarantee I believe I heard, that the price
will go down if this merger takes place.
Well, first of all, I can't see how that is going to
happen. But as time goes by, year by year, prices continue to
go up. So that money is going somewhere, okay, maybe to the
manufacturers because of the cost. But look at all the players
and what they do.
There is the plan sponsors, let's say the corporate
employers of the world--of the country. Their cost to insure
their folks for prescriptions are going up. The out-of-pocket
expenses in the way of copays are rising for the consumer. The
rates being paid to the providers are less. So where is the
increased profit going?
Mr. Deutch. And, finally, Mr. Lech, that has all happened
during a period of consolidation?
Mr. Lech. It happened as consolidation has taken place. I
don't know how to directly attribute it.
Mr. Deutch. Thank you, Mr. Lech. Unfortunately, I am out of
time. Thank you, Mr. Chairman. I yield back.
Mr. Paz. Could I answer some factual points here?
Mr. Goodlatte. We are going to allow some of the panelists
to ask some additional questions, so we will give him the
opportunity to do that if he chooses to.
At this time we will do a second round here. I am going to
ask a couple of questions myself and yield to Mr. Watt. And
while I do that, I will ask Mr. Marino to take the chair since
I am going to have to go to another meeting myself, and then he
can ask his questions and yield to any other Members who have
questions they would like to ask. And I have two.
First, one to Mr. Lech. Community pharmacies have long
complained about allegedly unfair practices by PBMs, and PBMs
have long had significant influence in the prescription drug
markets. Why will this merger make these alleged problems
worse, in your view?
Mr. Lech. Well, the take ``take it or leave it'' contracts
can make it less people that I have to say take it or leave it
to. It now is becoming a bigger percentage of my business,
which makes it harder for me to negotiate. It gives me less
leverage. And again, I would love to believe that when they say
they want to work with me and they need me, I have not seen
that. It is just talk. So as the company gets bigger, the
ability for me as a provider, as a health care--as a pharmacy,
it becomes less of an opportunity or less of an actuality that
I will be able to--discerning against the bigger party.
Mr. Goodlatte. Mr. Paz, do you want to respond to that
based upon your----
Mr. Paz. Yes, please.
If you go back and look at the releases that have come out
of the Department of Defense as one case in point, we have
heard testimony that, in fact, our efficiencies through mergers
and acquisitions hasn't been felt by our plan sponsors. The
prices that we put forth in our Department of Defense contract,
we have actually exceeded those. We delivered higher savings
than was originally promised under the Department of Defense--
--
Mr. Goodlatte. What about the small pharmacies like Mr.
Lech?
Mr. Paz. Again, I go back to the same statement, sir. They
are a critical component of our offering. We do not want to see
Mr.--Mr. Lech go out of business, nor will we put him in that
position.
What he fails to mention is that we have access standards
under both Federal law and under client contracts which require
a certain area you have to go to be able to find a pharmacy for
the health and well-being of our members. We comply with all of
those rules. Under the Federal standards and underneath, you
know, our client contracts, he is an important component of our
offering.
Mr. Goodlatte. Mr. Lech?
Mr. Lech. What Mr. Paz fails to tell you is that the
Department of Defense is a special entity, because through the
mail they are given larger discounts. Those discounts have not
passed on as much to me as an independent pharmacy. So the
economies of scale are different with the Department of Defense
because their contracting ability is greater than your average
corporate purchaser.
Mr. Paz. The savings, though, is discussed----
Mr. Goodlatte. I can't go back and forth too many times.
Mr. Gustafson, you testified that the Express Scripts-Medco
merger reduces the number of viable providers of PBM services
to large plan sponsors from three to two. Why aren't Catalyst,
Optum Rx and Prime Therapeutics, which already handled plans
for Fortune 50 companies, viable providers of PBM services to
large plan sponsors? Catalyst has won contracts for such large
employers as Ford Motor Company, Nike, Sprint, Waste Management
and Southwest Airlines.
Mr. Gustafson. They are not as big, and when these two
combine, they are going to be bigger yet. And when they take
that combination, they are going to be able to extract more
discounts on the side of the pharmaceutical companies, they are
going to be able to direct more to the mail order, they are
going to have a bigger control of the specialty pharmacy
products. All of that is going to make them more powerful vis--
vis the other PBMs.
Optum Rx is a good example because they suffer from another
potential problem. UnitedHealth Care, their underlying parent,
I guess it is, is a competitor of other plan sponsors. And so
there has been a fair amount written about the reluctance of
Cigna or Aetna or someone like that to use a PBM like Optum Rx
because of the potential issues with respect to data access,
things like that.
But I think the question that we ought to address in this
is how big is big enough? I mean, if we were talking about a
merger of----
Mr. Goodlatte. Under the antitrust law that is not the
issue that we address. The issue that you address is do they
have market power that would preclude others from being able to
enter the marketplace and offer competitive plans that would
maintain the competition that is, in the view of--certainly in
my view--in view of the law as it is written, is a desirable
thing to have?
Mr. Gustafson. Sure. I agree with that. What I was
suggesting was how big is big enough with respect to the
efficiencies they claim they can garner by getting together and
being bigger? At some point, you know, there are no more
efficiencies that can be gained by getting bigger. They only
become able to extract the power that they have----
Mr. Goodlatte. Well, that is the underlying issue, not how
large they have to be and still maintain their efficiency.
But let me yield to the gentleman from North Carolina Mr.
Watt and see if he has any additional questions.
Mr. Watt. Well, I have got all kinds of questions. I am not
sure what they have to do with the merger, but I am just trying
to be a little bit clearer on how this industry fits together.
Somebody help me if I am leaving out somebody. You have got
pharmaceutical companies, you have got plans. Those are the
insurers, right, or self-employed--self-insured employers,
right?
Mr. Lech. Payers.
Mr. Watt. Payers. You have got independent pharmacies. That
is Mr. Lech. You have got chain pharmacies. That is Mr. Wiesner
and CVS and Rite Aid and----
Mr. Snow. Walgreens.
Mr. Watt. Walgreens. You have got PBMs, and you have got
customers.
Mr. Snow. You also have big box pharmacies. Walmart,
Target, Costco.
Mr. Watt. Retail stores.
Mr. Snow. Grocery stores.
Mr. Watt. Somebody explain to me quickly how all of these
things fit together. I mean, or does it vary from case to case?
I know that the pharmacy companies, pharmaceuticals, make the
drugs, right? I mean, they got the patents.
Mr. Snow. Uh-huh.
Mr. Watt. The plans insure people. They cover them. They
pay somebody for the drugs. And so between them and the
customers, we have independent pharmacies, chain pharmacies,
PBMs, retail big box stores.
Mr. Lech. You missed a layer, kind of. You have the
manufacturers, you have the payers, you have the pharmacies,
and you have the consumers. In between----
Mr. Watt. Well, there are some layers here that--within the
pharmacies, independent pharmacies, chain pharmacies, retail
stores, PBMs. And I don't know how PBMs relate to independent
pharmacies, chain pharmacies, retail stores. Somebody explain
to me the role that PBMs plays in this.
Mr. Paz. Congressman, I would be happy to do that. The PBM
is a consultant to the plan's sponsor. Companies are constantly
looking at their costs, and they are offering other drugs.
There are drug manufacturers that make the drugs, and there are
pharmacies that dispense the drugs. There are doctors who write
for the prescription.
Mr. Watt. I forgot about the doctors.
Mr. Paz. It is a very complicated process. We can even get
even a little more if we want to throw wholesalers in there
that sell to the pharmacies, but we will leave them out for
now.
So what our job is to do, our main job, is to help a plan
sponsor meet the needs that it has to meet the health care
requirements for its employee base. So, for example, a company
that is in dire economic straits that has to cut out costs has
to take some fairly tough measures in order to----
Mr. Watt. So you work for the plans?
Mr. Paz. We work for the plans.
Mr. Watt. You are not in the space except that you own
specialty pharmacies and mail order.
Well, maybe I should ask this question: Well, would this
merger still be viable if FTC required divestiture of your mail
order and specialty drug--I mean, would this still be a
desirable merger?
Mr. Paz. It depends to what degree that takes place.
Mr. Watt. All of it. I mean, you say you work for----
Mr. Paz. Right.
Mr. Watt. I don't have any agenda here. When I used to
practice law, I say this quite often in this Committee--when I
practiced law, I never asked a question that I didn't know the
answer to. I have the freedom now to ask questions that I don't
know the answer to. I don't know the answer to this.
Mr. Paz. Mail order is a very important component to our
offering. It helps us drives down costs for those clients that
need that type of offering. There is also----
Mr. Watt. This would not be a desirable merger if the FTC
says you have got to get rid of your mail order.
Mr. Paz. That is correct, Congressman.
Mr. Watt. And would it be a desirable merger if the FTC
says you have to get rid of your--what is the other thing?
Mr. Paz. Specialty.
Mr. Watt. Specialty.
Mr. Paz. It would not, sir.
Mr. Watt. That wasn't a trick question. I wasn't trying to
trip anybody up. I was just trying to figure out how all this
fit together.
Mr. Paz. Thank you.
Mr. Watt. I think I understand it better, unless somebody
got some other just angle that I need to understand.
Mr. Wiesner. Not really a different angle, just a couple of
comments to piggyback on some of your comments.
When you are referring to a chain pharmacy, NACDS, of
course, the National Association of Chain Drug Pharmacies has a
large membership. Overwhelmingly that membership consists of
very small regional chains. So they are not the large national
chains that people think about.
Mr. Watt. You are not CVS and Walgreens.
Mr. Wiesner. They are members of NACDS, but if you look at
my company, we are a regional chain located in one State. I
believe in your State, there is a small chain that is located
only in your State.
Mr. Watt. Who is that?
Mr. Wiesner. Kerr Drugs. So if you think of it in that
terms, we are faced many, many times with the exact same
challenges that Mr. Lech and independent pharmacies are. We do
not necessarily have that large scale, but we are an important
part of those communities in that particular regard.
Mr. Watt. My time has expired. Is it Carr, or is it Kerr,
K-E-R-R?
Mr. Wiesner. K-E-R-R.
Mr. Watt. They pronounce it Kerr?
Mr. Wiesner. Yes.
Mr. Watt. I thought I had seen it K-E-R-R, but then you
said Kerr. I never associated that with K-E-R-R.
Mr. Wiesner. Is it possible to make one last comment?
Mr. Marino. [presiding.] Surely.
Mr. Wiesner. Sure. I think it is really important to
understand the different channels for drug distribution. We are
talking a lot about retail pharmacy, we are talking about mail-
order pharmacy. We are also talking about specialty drugs.
Specialty we need to really keep on the radar screen for
costs. The new products that are coming forth in the future,
the vast majority of those are going to be specialty drugs.
They may or may not be available in your community pharmacies.
So that is an important ingredient to the success of any PBM as
to how they manage the specialty program, and it is also a
great revenue source. So I don't want specialty drugs to go
unnoticed in this particular conversation.
And each of those different channels, whether they be
retail community pharmacy, mail order which they own, or
specialty which they own, exist under different contractual
agreements. So what I receive at my level versus theirs is
different.
Mr. Watt. Stop.
May I ask one?
Mr. Marino. Take all the time you need, Mr. Watt.
Mr. Watt. I know he wants all the time he wants. There is
an ulterior motive here, but that is all right. That is good.
We all understand.
Ms. Kanwit, FTC has the authority, I presume, under the
statute to require divestiture, right?
Ms. Kanwit. They have remedies, sir. They have a guideline,
not only merger guidelines, but a remedies guideline, along
with the Department of Justice, and so they can look at some
divestiture issues in an appropriate context. But it is very
detailed about when they can look and what the implications of
divestiture might be for the merged entity, yes.
Mr. Watt. Mr. Gustafson, what is your take on the
divestiture question I raised before? And then I am going stop
and yield back.
Mr. Gustafson. I think it is certainly something that the
FTC should look at. I mean, what makes this potential
combination a concern is the fact that they do have the mail-
order operations and the specialty pharmaceuticals, because it
increases the leverage they have in the marketplace. And so I
think it is certainly an option that the FTC ought to explore.
But I think that you heard that they are not interested in this
merger if they have to be divested of those services.
Mr. Watt. Can they explore it, Ms. Kanwit?
Ms. Kanwit. I have a response to that. Specialty is really
critical, as you just heard Mr. Paz and Mr. Snow comment. I
mean Teva just came out with a multiple sclerosis drug which
would cost upwards of 42-, $45,000 a year. We are talking very,
very expensive drugs. One of things PBMs do that the FTC has
found is drive down costs by negotiating with pharmaceutical
companies. So if you want a PBM to go and negotiate for lower
costs, you certainly want them negotiating on things like
specialty drugs, which, by the way, many of which are coming
down the pipeline right now and are really going to be critical
in the decade coming ahead.
Mr. Watt. Can they do that as an independent PBM as opposed
to an owner of a specialty drug?
Ms. Kanwit. There are PBMs out there that do nothing but
specialty, specialty companies.
Mr. Watt. I yield back. The more questions I ask, the more
questions I have. So I am going to stop.
Mr. Marino. Thank you, Mr. Watt.
I am going yield myself a couple minutes. Mr. Wiesner, what
type of transparency would you as a pharmacist like to see
concerning clarity for PBMs?
Mr. Wiesner. Transparency is a large issue. If we look back
on past history and past behavior, as I indicated in my
testimony, there have been lots of allegations. Lots of State
attorney generals that have brought charges against various
PBMs. And that all stems from the fact that they are not
transparent in their explanation of what their true costs are.
They are not transparent in the rebate process. They basically
have two contracts. One is with the buyer, the payer of their
services; the other is with provider, the retail pharmacy. In
each of those cases, those are all hidden costs in their
particular organization.
The allegation, of course--or not allegation. The
assumption is that they are driving down costs. If they are
driving down costs, as a gentleman said a little bit earlier,
they would be able to return $1 billion based on 100 percent
transparency.
I guess my question is why can't we have 100 transparency
at all times? Why do we have to have 80 percent at times and
100 percent at others.
Mr. Snow. Could I respond to that?
Mr. Marino. Sure.
Mr. Snow. I offer clients when we go to market, they have
choices. They can get the price discounts and we keep portions
of rebate, or they get 100 percent of rebate. It is equal to
the same net cost to them. It is their choice.
In our business, benefit design, contract structure is 100
percent always our client's choice. And by the way, everything
they choose is auditable, so there is transparency. Some of the
things that are being talked about are history from a long time
ago that has since been rectified because of the actions that
occurred 10 years ago.
Mr. Marino. Mr. Snow, would I as a consumer have that
ability to obtain that information and to explore that
transparency?
Mr. Snow. At a consumer level, what we do today, we have
taken this very far, we have smartphone technology. You can
download the app for free where you, in fact, can, with your
technology, look at the cost of your drugs, at the various
locations of those drugs; you can look at the cheaper
alternatives; you can discuss it with your doctor at the time
of prescribing. We show them their copay, their coinsurance,
what the net savings would be on an annual basis if they ask
their physician to use an equivalent drug that was generic.
We are making every step we possibly can to lever
technology to create a well-informed consumer, because we
believe that also helps the health care system reform itself
if, in fact, the consumers become a prudent buyer of care. We
are committed to that.
Mr. Marino. I have a question concerning--and I am going to
be fair on this. Mr. Snow, I think it was you that said you
wanted--did you enter a document into the record, a report of
some nature, or was it Mr. Paz?
Could you explain to me what that document is and who
prepared it?
Mr. Paz. Yes. It is a document that basically looks at the
cost of drugs, and if, in fact, for every 1 percent of waste we
can take out of the system, we can--it equates to 20,000----
Mr. Marino. Who prepared it?
Mr. Paz. A group called PCMA, the Pharmaceutical Care
Management Association.
Mr. Marino. Is that in any way linked with your
organizations, or is it a representative?
Mr. Paz. We belong to that just like they belong to NACDS.
Mr. Marino. Okay. Now, Mr. Lech, being fair, you entered
something into the record, correct? What was that?
Mr. Lech. I entered in pictures that were sent in, actual
pictures, of medications that were in consumers' houses, of
medication that was sent to them at times not requested.
Mr. Marino. Okay. Who prepared that report?
Mr. Lech. The pictures were put together by NCPA from their
members, but the information came from consumers.
Mr. Marino. Okay. Thank you.
Mr. Paz, as a consumer, would I have a choice in purchasing
from PBMs, your company that is consolidated, specialty drugs
and mail-order drugs from where they are purchased from or
where they are sent from? Do I have that choice, or is it your
mail-order company that I have to purchase those drugs from?
Mr. Paz. In the majority of the cases, there are a few that
you would you would not have a choice, but the majority of the
cases, you would have that choice.
Mr. Marino. Is that offered to the consumer?
Mr. Paz. Yes. The consumer decides which pharmacy to go to.
The consumer decides whether or not they want to use mail
order. That is all a consumer choice.
Mr. Marino. Thank you.
0Mr. Lech, your hand has gone up there.
Mr. Lech. You know what the option is if they don't use a
mail order?
Mr. Marino. What is that?
Mr. Lech. They will pay full price.
Mr. Paz. No, sir, that is not correct. They pay a copay.
They pay a copay at Mr. Lech's pharmacy, or they pay a copay at
my pharmacy, mail order. There is no difference.
Mr. Marino. I don't want to get into a debate here, but it
is noted.
I have no further questions. Mr. Watt?
Mr. Watt. I have no further questions.
Mr. Marino. No further questions. I see no one else sitting
here.
Lady and gentlemen, I want to thank you very much for being
here. I was a little longer than we anticipated.
I have some housekeeping to take care of. Without
objection, all Members will have 5 legislate days to submit to
the Chair additional written questions for the witnesses, which
we will forward and ask the witnesses to respond as promptly as
they can do so that their answers may be made a part of the
record.
Without objection, all Members will have 5 legislative days
to submit any additional materials for inclusion in the record.
With that, again I thank the witnesses, and the hearing is
adjourned.
[Whereupon, at 5:56 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record