(From THE WALL STREET JOURNAL)
By John Jannarone
[Financial Analysis and Commentary]
They are the arteries of the prescription-drug network.
Pharmacy-benefit managers earn billions pumping orders between
drugstores, manufacturers and health-care providers. Can
competition undermine their vitality?
With the Senate pressing benefit managers for more transparency,
many fear the likes of Medco Health Solutions and Express Scripts
soon could be squeezed by the private sector. Last week, Walgreen
and Caterpillar said they would negotiate directly, rather than
using a benefit manager as a middleman, to set prices.
But the Caterpillar deal isn't as threatening as it looks.
Caterpillar will keep its benefit manager to handle rebate
negotiations. That reflects the manager's close ties with
manufacturers, which gives them leverage. Medco collected $4.45
billion in rebates from manufacturers last year, passing 82% of the
money on to health-care providers that bought drugs. That should
help benefit managers keep clients hooked.
Just as important, benefit managers have scale that ensures they
are able to manage prices. Caterpillar designs its own price list,
but most companies don't. With control of a price list, benefit
managers can save health-care providers money by pushing
manufacturers for rebates.
Benefit managers also can tweak price lists if rebates don't
justify a drug's expense. Express Scripts removed cholesterol drug
Lipitor from a list of preferred treatments in 2006, prompting the
Lipitor retail price to surge. But when patients switched to the
generic substitute Zocor, treatment costs fell by hundreds of
millions of dollars, according to Ross Muken of Deutsche Bank.
Benefit managers can't ignore Walgreen's ambitions. Medco
generates over a third of its revenue from mail-order
prescriptions, which often undercut pharmacy prices. If Walgreen
sets lower prices, Medco could lose mail business.
But Walgreen is the only major pharmacy chain likely to pose a
challenge. And consolidation should give managers more clout.
Express Scripts recently bought WellPoint's benefit manager, and
Aetna put its on the block. That makes large benefit managers
unlikely to skip a beat anytime soon.