The Way the Big PBMs “Compete” for Business Should Raise Serious Questions About Express Scripts-Medco Merger

By Zachary French

As the Federal Trade Commission (FTC), 28 state attorneys general and Congress evaluate the consequences of the proposed merger of Express Scripts and Medco, two of the “Big 3” Pharmacy Benefit Managers (PBMs), the regrettable saga of the California Public Employees Retirement System (CalPERS) should raise serious concerns about how the Big 3 PBMs currently compete for business.

This case should also raise grave concerns about the future since the proposed ESI/Medco merger will only exacerbate what is currently an unhealthy competitive environment. It is widely known that a festering controversy has surrounded CalPERS for several years regarding the award of its pharmacy benefit contract to Medco. In fact, Medco’s replacement and the current PBM for CalPERS, CVS Caremark, very recently settled a lawsuit and agreed to pay over $19 million to settle claims that they had previously defrauded CalPERS in a previous contract. The state of California will receive about $7 million of that settlement.

The fact that CVS-Caremark was the only viable choice after Medco and was selected amidst fraud allegations highlights the lack of true value-differentiated competition and transparency in the PBM marketplace and the inability of the smaller PBMs to provide products and services that meet CalPERS needs.

According to a special review conducted by Steptoe and Johnson, LLP and Navigant Consulting (the Report), there are serious issues associated with the awarding of the CalPERS PBM contract in 2005 to Medco, several years after Medco lost the bid to CVS Caremark. According to the report, in 2004, a former member of the CalPERS board of administration hosted a meeting with Medco CEO David Snow and the CalPERS chief executive at the time, and a public official. While the report does not go into detail on the conversations surrounding the awarding of the PBM contract, at the request of law enforcement officials, it does raise serious questions that must be addressed.

Soon after this meeting, Medco hired the same former member of the CalPers board of admistration and his firm at a cost of $4 million, even though this former official had no prior PBM consulting experience and Medco had already hired another firm to assist with obtaining the CalPERS contract. A little over a year later, Medco was awarded the CalPERS PBM contract.

The circumstances surrounding the awarding of this contract to Medco spurred on-going investigations by the California Attorney General’s office as well as the Security and Exchange Commission (SEC). Not surprisingly, in 2011 CalPERS declined to renew its contract with Medco. However, according to one CalPERS official cited in the Report, the plan was left with almost no viable alternatives since there were only two or three PBMs that could effectively administer a plan of CalPERS size and scope. In fact, CalPERS is the largest purchaser of public employee health benefits in the state of California and the second largest in the nation behind the federal government. The entity spends approximately $7 billion a year to provide care to active and retired state and local government employees and their families.

Ultimately in June 2011, it was announced that the CalPERS contract was awarded to CVS Caremark. Unfortunately, for the health plan and its members, this award also was not without controversy.

According to the LA Times, coincidental to the contract negotiations with CVS Caremark, CVS Caremark was involved in a lawsuit, based largely on whistleblower testimony, accusing CVS Caremark of defrauding CalPERS of tens of millions of dollars when they administered the drug plan from 2003-2006. As Kathy Feng, executive director of California Common Cause noted, the allegations against Medco and Caremark “point to the larger issue of how dysfunctional our healthcare system is that the two top bidders are engaged in alleged acts of bribery and fraud.”

The CalPERS horror story is a dire warning of the pitfalls that health plans and consumers face across the current PBM competitive landscape where one of the largest plan sponsors with a critical mass of members and purchasing power is forced to choose between two evils, either a company involved in a corruption investigation that directly impacted the health plan or one being sued for allegedly engaging in fraudulent practices when previously providing services to the health plan. It demonstrates the need for real and comprehensive PBM reform but it also should serve as a stark reminder of the folly of further reducing competition in the PBM market.

Congress can start the reform process by passing the Pharmacy Competition and Consumer Choice Act (H.R. 1971/S. 1058), bipartisan legislation that would require transparency on the part of PBMs, provide pharmacy choice for consumers through an “any willing provider” provision, and prevent PBMs from using identifiable consumer data to further their own bottom line.  Finally, the FTC should reject the proposed ESI/Medco merger because it presents a clear and present danger to competition and consumers.

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