Magazine Article | March 22, 2018

Vertical Mergers Of Rx Supply Chain Spark Antitrust Concerns

Source: Life Science Leader

By John McManus, The McManus Group

The recent announcement of two vertical mergers ­— the $52 billion acquisition of Express Scripts, the largest pharmacy benefit manager (PBM) in the country, by Cigna, and the $69 billion purchase of Aetna by CVS Health — raise significant antitrust concerns over how these megacompanies will impact patient access and pharmaceutical pricing.

The Justice Department is now reviewing the Aetna-CVS deal and is expected to do the same for the proposed Express Scripts and Cigna merger.

CVS is best known by consumers for its chain of pharmacies, but it derives most of its revenue and profit from its CVS Caremark PBM’s 90 million members. Aetna covers 45 million patients.

In both cases, the companies argue that the mergers will bring efficiencies that will ultimately help lower healthcare costs. Yet these vertical mergers, layered upon an already consolidated PBM market — about 72 percent of prescription drug claims were processed by three PBMs — with insurance companies present troubling questions for regulators and patients alike.

If the two mergers move forward, it would give these firms “an outsized role in formulary coverage decisions in Medicare Part D” since four plans would be in control of 86 percent of the stand-alone market, commented Juliette Cubanski of the Kaiser Family Foundation.

The National Community Pharmacists Association (NCPA) expressed alarm over the proposed deals. Douglas Hooey of NCPA said, “We’re seeing the growing balkanization of the healthcare industry, a world in which patients may be forced into a healthcare kingdom — the CVS-Aetna kingdom, the Cigna-Express Scripts kingdom, the UnitedHealth-OptumRx kingdom — where borders aren’t porous, and patients are stuck with what they get.”

The Obama Justice Department blocked several horizontal insurance company mergers: Aetna’s proposal to acquire Humana and Anthem’s bid for Cigna. But it is unclear how a Trump Justice Department would approach the latest proposed vertical mergers, which implicate different points in the pharmaceutical supply chain.

Industry experts suggest that the Express Scripts deal will likely be reviewed by the Justice Department’s antitrust division, rather than the Federal Trade Commission. That is the same division that blocked the Cigna-Anthem merger last year.

Vertical mergers raise far different issues than horizontal mergers. In the past, they have been allowed to proceed with certain stipulations governing how the companies could operate. But the Trump administration’s rejection of the vertical merger involving AT&T’s proposed $85 billion acquisition of Time Warner shows that it may not be interested in policing behavioral remedies that force regulators to monitor whether companies comply with required conditions. It is unclear whether that same approach would carry into these vertical healthcare mergers.

Certainly, there are policy concerns with such vertical mergers. Dr. Craig Garthwaite, an economist at the Kellogg School of Management, testified at a February House Judiciary Committee hearing on the CVS-Aetna merger, “Vertical integration involves a decision by firms to undertake an activity internally rather than take advantage of the external market. …This decision is often met with skepticism by economists because well-functioning economic markets are efficient in that they provide the appropriate incentives for a good or service to be produced by the lowest cost firm at the lowest possible price. … For this reason, economists are broadly skeptical of the ability of many vertical integration efforts to increase efficiency.”

But whether a merged company acts irrationally to bring items in-house is not the real public policy concern. More troubling, health plans will have to shop among the larger PBMs owned by their competitors.

Much of the concern regarding the recent mergers is the underlying opacity of PBM operations even while the PBMs are demanding and receiving substantially more rebate revenue from manufacturers and pharmacies. Garthwaite noted that pharmaceutical manufacturer rebates skyrocketed 108 percent from 2011 to 2016 — rising from $66 billion to $127 billion in those five years.

But these escalating rebates are driving inflated list prices to fund the rebates, and those higher list prices adversely impact consumers. Garthwaite commented, “While payors broadly care about the postrebate (i.e., net) price, and PBMs often point to these increasing rebates as evidence of their effectiveness, higher list prices can have more direct impacts on consumer out-of-pocket payments. Consumer cost-sharing (either spending on pharmaceutical products within the deductible portion of the insurance or a percentage coinsurance rate) is primarily based on the list rather than the net price. Thus, any inefficiencies that create incentives for high list prices (even if those list price increases are primarily offset by rebates) have clear impacts on consumer spending under most contracts.”

PBMs argue that they pass on these rebates as savings to their plan sponsors, which can help them moderate premiums. But the plan sponsors themselves often do not know how much revenue the PBM is reaping from manufacturers.

In a 2017 study, researchers at the USC Schaeffer Center said, “PBMs carefully guard information about the size of negotiated rebates and discounts, which may enhance their ability to negotiate lower prices, but also masks whether they are indeed lowering prices paid by patients and insurers as claimed.”

But that veil of secrecy was ripped off on March 15 when Axios, a popular online publication read by most Capitol Hill staff and Washington insiders, broke a story illuminating an Express Scripts contract template with an insurer showing that it includes terms and conditions with drug manufacturers to benefit its own interests, not patients.

Axios describes the leaked contract as follows:

  • “The primary function of a PBM is to negotiate rebates from drug companies. Most of those rebate dollars flow back to employers, not workers.
  • Express Scripts collects other rebate-like fees from drug companies that it does not have to pass along to employers.
  • The Express Scripts contract explicitly says ‘rebates do not include things like “administration fees” from drug manufacturers, “inflation payments,” and numerous other types of pharma revenue.’
  • The contract also says Express Scripts negotiates rebates ‘on its own behalf and for its own benefit, not on behalf of the sponsor.’
  • Employers can choose to have their agreements audited, but they have to get Express Scripts approval of what auditor is used.”

The Trump administration has suggested providing greater transparency of the rebates provided to Medicare Part D plan sponsors and requiring a portion of those rebates to be provided to the patient at the point of sale through a lower sales price. The urgency to move on these policies is heightened by the potential vertical mergers in the pharmaceutical supply chain and in the revelation of self-serving contracts that benefit a PBM at the expense of patients.

 John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.