ESI-Medco not a done deal

So, who’s afraid of a bigger, badder Express Scripts-Medco?  Apparently not its competitors.

CVS Caremark president and CEO Larry Merlo isn’t worried about a combined ESI-Medco. “Assuming that the proposed transaction is completed, I am more confident than ever that CVS Caremark can and will effectively compete in this vibrant industry,” Merlo said to open his company’s Aug. 4 earnings call with analysts.

(THE NEWS: Merlo: CVS Caremark positioned to 'effectively compete' in PBM industry. For the full story, click here.)

CVS Caremark’s “suite of assets uniquely positions us to assist payers in controlling costs,” he added, “while enhancing member access and improving health outcomes. With the evolution of U.S. health care to more consumer-directed care, our multiple consumer touch points make us best positioned to promote cost-effective and healthy behaviors. And the success that we are having in both the 2011 and 2012 selling season clearly demonstrates that our model is resonating with payers.”

As Drug Store News has noted before, it could be almost a year from now before antitrust regulators give a green light to the deal — IF they ever do, that is. Factor in even just a minimum of six months for the two companies to come together, and it’s 18 months or more before the combined ESI-Medco could get its legs underneath itself by some estimates. That’s at least another PBM selling season away. And CVS Caremark isn’t the only one of ESI or Medco’s competitors to see an upside in that.

“The way I look at it, they’re going to take 18 months to clear the deck on the coming together of those organizations,” SXC Health Solutions chairman and CEO Mark Thierer told analysts during his company’s second quarter earnings call. “What they’ve done is they’ve effectively just short of doubled their mail-order footprint .… That’s one weapon in the arsenal of how you win in this marketplace. But what’s happening is sophisticated buyers [are] looking at total cost — they’re looking at the best channel for distribution to their members, and candidly, some of the mail-order leverage that existed in the years leading up to now has been arbitrage and competed away.”

And should the deal go through, Thierer said he still isn’t worried. “This merger creates significant opportunity for SXC to continue to offer our differentiated model to clients who prefer a more flexible, customized solution,” he noted at the top of the Aug. 4 call.

And as has been widely reported, Walgreens — which no longer competes in the PBM market on any level, having sold its business to Catalyst Health earlier this year — is maintaining its hard line against ESI, having backed out of its network weeks before this all started. Just one day prior to the announcement of the deal, Walgreens president of pharmacy, health and wellness Kermit Crawford made a direct appeal to plan sponsors and benefit consultants to either “select a PBM that includes Walgreens” or consider “direct arrangements with plans currently using Express Scripts, to the extent permitted by their contracts.” The July 21 letter also included an attached “template agreement that can be used to implement such direct arrangements where permitted,” for consideration.

But that doesn’t mean every stakeholder out there is walking around with a puffed up chest, just daring the deal to close.

Pharma companies will pay now to make sure they don’t get nickled and dimed later. And, then there’s retail pharmacy providers, groups including the National Association of Chain Drug Stores, the National Community Pharmacists Association and the Independent Specialty Pharmacy Coalition have all written letters to the FTC, officially voicing their opposition to the deal.

According to estimates, the new company would control about 40% of retail prescriptions processed, and almost half of the U.S. mail order pharmacy business.

But that’s not why the FTC might block the deal. “The real antitrust questions for the FTC will derive from potential market power issues facing customers of a PBM — the plan sponsors or third-party payers,” pharmacy economics and channel management consultant Adam Fein noted in his July 26 blog Drug Channels. “The key question: Will competition remain strong enough to ensure that a portion of any cost savings (from bargaining power or efficiencies) get passed through to plan sponsors?”

Fein noted, “complaints of ‘monopoly power’ are misguided,” adding that the combined ESI-Medco would not be a case of a monopoly, but rather an “oligopsony — a market in which there are many sellers but few buyers.”

Whatever you call it, it’s far from a slam-dunk. According to an online poll of 371 DrugStoreNews.com readers (as of Aug. 5), 56% said they expected the FTC to kibosh the ESI-Medco union.