FTC Approves Express Scripts’ Acquisition of Medco

Economists Ink: A Brief Analysis of Policy and Litigation


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EI Senior Economist Allison I. Holt, an empirical microeconomist, specializes in quantitative analysis and assessment of damages in antitrust and class action matters.

The FTC recently decided not to challenge the acquisition of Medco Health Solutions (Medco), the third largest pharmacy benefit management provider (PBM), by Express Scripts, Inc. (ESI), the largest PBM. In the FTC’s view, this merger would be unlikely to significantly reduce competition in the market for PBM services, even though the newly merged entity would have a market share of more than 40%.

The FTC found that the merger was unlikely to have unilateral or coordinated anticompetitive effects in the sale of PBM services. Anticompetitive effects were unlikely because the merged firm would face at least ten significant competitors. While there would be only two large PBMs in the market after the merger, larger PBMs do not have a significant cost advantage, and small PBMs have successfully competed with the large PBMs. Moreover, health plans could stop using PBMs and provide PBM services on their own. Unilateral effects were unlikely also because Medco and ESI were not each other’s closest competitors; each competed more closely with CVS Caremark (CVS). Coordinated anticompetitive effects were unlikely not only because of the large number of competitors and the possibility that health plans would self-supply PBM services but also because the pricing in the market was far too complicated to allow comparisons of contracts or easier monitoring of prices. Thus, price coordination would be extremely difficult. Moreover, PBMs’ different incentive structures made customer allocation highly unlikely.

Finally, the FTC found no evidence that the merger would result in monopsony power in the retail dispensing of prescription drugs. The merged firm would have only a 29% share of retail pharmacy sales. Furthermore, the FTC did not find a strong correlation between PBM size and the rate of reimbursement to retail pharmacies, which indicated that large PBMs were unable to exercise monopsony power.

The merger was controversial. Trade groups and pharmacies filed law suits seeking to block the merger, but they were denied a preliminary injunction. Moreover, Commissioner Julie Brill dissented from the majority FTC opinion. She stated that the merger would essentially create a duopoly comprising the newly merged firm and CVS. The other PBMs would be nothing more than fringe competitors. In her view, diversion ratios suggested the possibility of unilateral anticompetitive effects, and the high post-merger concentration levels established “a prima facie case of coordinated effects.” Moreover, she contended that there were significant barriers to entry in the PBM market, as shown by the absence of successful entrants in recent years.