The FTC announced on 2 April that it had closed its pre-merger investigation of the proposed combination of Express Scripts, Inc. and MedCo Health Solutions, two of the three largest pharmacy benefit managers (PBMs), after an eight-month investigation. The Commission issued a statement explaining the closing, supported by Commissioners Jon Leibowitz, Thomas Rosch, and Edith Ramirez. Commissioner Julie Brill issued a dissenting statement. The Commission’s statement made clear that Commissioner Leibowitz and Commissioner Brill supported a remedy that would have prohibited the merged firm from engaging in exclusionary conduct that would hinder expansion by smaller firms, but neither Commissioner Rosch nor Commissioner Ramirez agreed, thus, creating a 2-2 deadlock.
The Commission majority voted to close its investigation because it found that, in spite of a combined market share of greater than 40 percent even using the broadest market definition the merger was not likely to constrain competition. The Commission found that the evidence gathered during the investigation, which included interviews of customers, competitors, retail and specialty pharmacies, pharmacy trade groups, pharmaceutical manufacturers, and benefit consultants, demonstrated that the presumptively anticompetitive market shares did not accurately predict the likely effect of the merger on competition and consumers.
The Commission statement provided insight into how the three Commissioners viewed two of the markets it considered. First, the Commission made clear that it did not believe that the transaction was likely to have anticompetitive effects on purchasers of PBM services in the market for the provision of full-service PBM services to healthcare benefit plan sponsors. In that market, the Commission found there was sufficient evidence that the merging firms were not each other’s closest competitors and that as many as 10 firms beyond the "Big 3" had been solicited to bid in the RFP processes of large employers. The Commission also indicated that it did not believe that the merger would lead to increased coordination in that market because pricing and bidding is complex and bid prices are not easily comparable even when bidders know each other’s bids. Second, the Commission found that the merger is unlikely to lead to monopsony power vis-à-vis negotiation of retail dispensing fees with retail pharmacies for three reasons: 1) the combined firm’s share of that market is below 30 percent; 2) there is little relationship between the size of a PBM and the reimbursement rate paid to the retail pharmacies; and 3) there is little evidence that reduced reimbursements for retail dispensing would curtail output or service.
Commissioner Brill disagreed. In her opinion, she explained that she believed the merger would create a duopoly for the provision of PBM services to large employers. Commissioner Brill’s opinion emphasized that combining two of the "Big 3" PBM firms substantially increased market concentration for that customer segment and created two firms with a combined 73 percent market share, with the next largest firm having less than 10 percent share and relying heavily on one of the largest two firms for a portion of its services. Brill cited the recent DOJ victory in H&R Block for the principle that evidence demonstrating that the merging firms are not closest competitors does not prevent a finding of unilateral effects.
This matter had been closely watched because PBMs touch so many aspects of the pharmaceutical industry, including specialty pharmacies, mail-order and retail distribution, pharmaceutical manufacturers, and employers purchasing pharmacy benefits coverage. The Commission majority concluded that with respect to each of these the merger was unlikely to harm the related competition or consumers. Commissioner Brill’s dissent called on the Commission to conduct a retrospective study of the industry in a few years to determine whether the Commission’s decision was the right one. Such a call to action serves as a warning that the Commission’s interest in the industry, and specifically in this merger, may not end with the consummation of the transaction. In fact, on 18 April SXC Health Solutions Corp. and Catalyst Health Solutions, Inc. announced an agreement to merge. If this trend continues, a retrospective study is likely to show substantially increased concentration among PBMs.
Prior to the FTC’s announcement, on 28 March the National Association of Chain Drug Stores and the National Community Pharmacists Association along with several independent and chain pharmacies filed suit in the Western District of Pennsylvania seekng preliminary and permanent injunctions to prevent the ESI/Medco transaction from closing. A day later, the same plaintiffs filed a motion for a temporary restraining order. The motion for a TRO was heard by Federal Judge Bissoon on 10 April and was subsequently denied. Judge Bissoon reasoned that between the time that ESI and Medco closed their transaction (before 8:30 a.m. on 2 April) and the TRO hearing, the merging parties had sufficiently integrated to the point that the requested TRO or hold separate could not prevent the harm that had already occurred. The decision potentially encourages merging parties to integrate quickly once closing conditions are met in order to make it more difficult for the government or private litigants to challenge consummated mergers.
