PBMs Step Up Acquisitions to Battle Maturity, Turmoil, and Controversy

The pharmaceutical benefits management (PBM) industry is a business in transition, with acquisitions and restructurings projected to be major engines in reshaping key players to handle inevitable changes in the nation’s health care system. Aside from being caught up in incessant controversies over health care costs, punctuated by allegations that they have failed to moderate drug pricing, PBMs also face economic and demographic trends that could force them to shift strategies and shake up operations. Perhaps the key development, experts say, is the slowing growth of “covered lives,” or the number of people enrolled in the benefit plans that PBMs administer with the intent of using high volumes to bring down drug costs. Barring the near-term federal initiation of prescription drug benefits under Medicare, the covered lives population is expected to flatten out soon. As a result, PBMs are forecast to simultaneously move on two fronts, extensively using acquisitions as featured mechanisms to: * Consolidate the basic benefits administration business to gain share and scale, and * Diversify into value-added, growth businesses, mail-order drug marketing, and specialty health care products distribution. “The problem going forward is that the business model doesn’t get disaggregated so that all they are is claims processors, while somebody else does the mail-order and somebody else does the formulary activity,” says Elgar Peerschke, VP and head of the North American health care practice at Bain & Co. Two important dealmaking moves of recent months are bellwethers of a speed-up in the PBM industry’s evolutionary pace. In the industry’s largest merger to date, Caremark Rx Inc. and AdvancePCS agreed to combine in a deal involving $6 billion in cash and Caremark stock. Not surprisingly, the big transaction, hammered out in early September, is under intense scrutiny by the FTC, and the decision may provide clues as to how much PBM consolidation antitrust regulators will allow. Additionally, Merck & Co. spun off the nation’s largest PBM, Medco Health Solutions Inc. It was the final disposition of a PBM by a pharmaceutical parent following divestitures by Eli Lilly & Co. and SmithKline Beecham in the late 1990s. Medco is the centerpiece of another key issue that may impact the future landscaping of the PBM field. The U.S. attorney for eastern Pennsylvania, joining a suit launched by two whistleblowers, has charged Medco with taking kickbacks from Merck and other companies for shifting patients to their products, ignoring safety rules at its mail-order centers, improperly changing records, and not complying with state laws requiring doctors to consult with physicians about some prescription medicines. Medco has denied the allegations. Besides the Medco situation, the inspector general of the Health and Human Services Department is investigating the PBM’s practices and performance. On balance, however, Peerschke sees a number of growth drivers for PBMs, including the opportunity to expand the basic business by handling claims under a Medicare drug benefits program. “That increases the number of covered lives that you have available,” he says. He believes that PBMs also have opportunities because of the continuing increase in drug prices that they can work to temper, “the large number of drugs coming off patent, which drives generic usage,” and the prospect of increasing “mail penetration in the book of business in general.” “If you have a mail-order house attached to your PBM, that business is extremely profitable, and generic mail-order is even more profitable,” Peerschke says. Consolidation began a few years ago when Express Scripts Inc. acquired ValueRx from Columbia HCA Healthcare Corp. in 1998 and Pharmaceutical Diversified Services from SmithKlineBeecham a year later. There may be opportunities to consolidate by acquiring smaller and regional operations and PBMs owned by insurers. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com