PBM market retools after mega-merger

May 1, 2012

The face of pharmacy benefit management continues to change in the wake of the $29.1 billion merger.

NATIONAL REPORTS-The face of the pharmacy benefit management (PBM) marketplace continues to change in the wake of the $29.1 billion merger of Express Scripts Inc. and Medco Health Solutions. Just weeks after the Federal Trade Commission (FTC) gave the merger the green light, two more PBMs moved forward with plans to unite.

SXC Health Solutions Corp. and Catalyst Health Solutions Inc.-each with about 1% of the PBM market share according to 2010 industry surveys-announced a $4.4 million merger on April 18. If approved by FTC, the transaction will position them to gain new business, following the Express Scripts/Medco merger.

Edward Kaplan, senior vice president and national health practice leader at the Segal Company, believes the SXC/Catalyst merger will result in more large PBMs competing for market share, as opposed to the three big players that dominated the industry previously. Express Scripts, CVS Caremark and Medco, were the "big three," respectively, based on enrollment.

Although some are concerned about reduced competition, the shift is expected to give small and midsized companies a better chance to show what they can offer, says Joshua Golden, a pharmacy consultant with Pharmaceutical Strategies Group.

In response, payers need to start expanding requests for proposals beyond the new "big two," according to Ashish Kaura, vice president of Booz & Co.

"Some of the payers will be pleasantly surprised that the midsized PBMs can compete on certain dimensions," Kaura says.

Payers will want to develop a strategic view of what they want from their PBM deals and examine differentiators. Smaller PBMs can be more aggressive when it comes to care-management tools, and Kaura says benefit consultants are including more of them in the bidding process, "and these guys are beginning to win."

Brian Bullock, president and chief executive officer of the Burchfield Group, is seeing a similar trend.

While there is no immediate need for payers to worry about their contracts, they should anticipate the renewal or rebidding process. Some payers moved to midtier players in advance of the Medco merger, Bullock says. As a result, small firms could become more confident.

"The amount of movement has picked up a fair amount this year," he says. "The number of clients switching vendors is up. There is clearly an opportunity for midlevel players, but they have to get good at standardizing the way they incorporate new business into their environments."

POSITIVES FOR PAYERS

Bullock also has a sense that the merger could create price inflection, similar to what happened several years ago when CVS purchased Caremark.

"Price points moved favorably to the payer almost overnight," Bullock says. "The watch word here is stay vigilant; stay close to the people who know the industry."

Golden says the focus of payers evaluating PBMs is usually on price points, but it's not the only factor. Some clients do consider a PBM's philosophy, quality of service and accountability, and others may simply prefer to be the "bigger fish in a slightly smaller pond."

But on the price point, there remains the question of whether the PBMs will pass the price savings they're able to negotiate with pharmaceutical companies and retail networks down the line. Golden says there must be an incentive for those efficiencies to be passed down.

Larry Marsh, managing director at Barclays Capital, says the merged PBM will have no choice but to pass on savings if it intends to remain attractive to its investors.

"If all you're doing is trying to cut costs, and protect costs and margins but not grow business, it's not a good strategy," Marsh says.