Consumers, Congress members, regulators, and anyone with a modicum of common sense must feel tremendous concern with the current rush to merge in healthcare markets.  Outside of consolidation among providers, which is essential to move into a sensible cost effective system of health care delivery, health care consolidation offers little, if any, demonstrated benefits.  Although there are claims of efficiencies, those efficiencies rarely benefit consumers in lower prices or better services.  Rather, consumers generally have fewer choices and receive poorer service. 

Congress and the antitrust cops must ramp up their efforts to intensely scrutinize the current rush to consolidate. On the pharmaceutical side, fortunately Teva dropped their proposed hostile grab for Mylan, after significant consumer opposition preserved a vital independent force in generic drug competition.  

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The current threat to pharmaceutical competition is to the Part D marketplace from CVS’ proposed acquisition of Omnicare, the largest long-term care pharmacy and an essential component to any Part D plan.  Part D is crucial for health care delivery for the elderly and disabled, serving over 37 million beneficiaries.  Without an efficient low cost Part D benefit, some of the most vulnerable consumers will be forced to pay more or go without vital medications. 

The reasons for concern about this transaction are straightforward.  

CVS is already a pharmaceutical distribution giant with over 25 percent of the retail/mail pharmacy market.  In many metropolitan markets, its share exceeds 40 percent.  It is the largest specialty drug firm with a 26 percent market share and it operates the second largest Part D plan, SilverScript.  But, the key concerns arise because of CVS’s ownership of Caremark - the second largest pharmaceutical benefit manager (PBM) and the largest PBM for Part D plans. 

PBMs are the gatekeeper for pharmacy distribution.  They form networks of pharmacies and negotiate rebates from manufacturers.  They process pharmacy benefit claims.  Although these are basically back office operations, they are phenomenally profitable, and the two largest PBMs, Express Scripts and Caremark, have seen their profits skyrocket in the past few years.  In 2013 alone, Caremark generated $126.8 billion in revenue while Express Scripts generated $104.6 billion.  Indeed, often the PBM will secure a much higher profit on an individual prescription than the pharmacy that actually offers real services – such as buying and dispensing the drug and providing health care advice. 

This deal is a problem because Omnicare is the largest long-term care pharmacy with over 45 percent share.  Omnicare does not need Rockefeller to educate them how to use that power.  In its 2012 challenge to Omnicare’s proposed acquisition of another long-term care pharmacy, the Federal Trade Commission found that Omnicare typically “threaten[s] to terminate its participation in the Part D sponsor's LTC Pharmacy network if the sponsor refuses its demand for higher rates” and, in situations in which the Part D sponsor refused, “ha[d] repeatedly threatened to bring the impasse to CMS's attention, placing CMS approval of the sponsor's entire Part D business at risk.”  Simply stated, Part D plans had to capitulate.

CVS does not own long-term care pharmacies.  Why does this merger make things worse? 

First, CVS owns a rival Part D plan.  So, it will have every incentive to raise the costs of Omnicare’s services to raise the costs of rival Part D plans.  Omnicare is King of the Hill, and other Part D plans may not be able to meet network access requirements without Omnicare. 

Second, prior to the proposed merger, Caremark is sort of an “honest broker” when it deals with long-term pharmacies.  It has no incentive to discriminate or favor one long-term care pharmacy over another.  Once it acquires Omnicare, it is clear that its incentives will be to benefit Omnicare.  And since it is a dominant PBM, it can win with that strategy. 

We do not need a Ph.D. in economics to predict that will occur.  In fact, the two major PBMs – Express Scripts and Caremark – have used this playbook well in the specialty pharmacy market.  Once they acquired specialty pharmacies, these companies increasingly forced consumers into only using the PBM’s specialty pharmacy.  As a recent New York Times article documented, these actions reduce consumer choice and threaten the health of these vulnerable patients. 

CVS can simply adopt the same kinds of exclusionary practices to limit the choices of Part D plans and reinforce Omnicare’s dominant position.  Omnicare is already the most expensive pharmacy used by Part D Plans in the long-term care space.  It is hard to believe that CVS is buying Omnicare to make it a less profitable. 

Finally, CVS can simply leverage its market power in adjacent markets – retail, specialty and long term care - to enhance its market power in each market.  As FTC Chairwoman Edith Ramirez, said in a February 24, 2015 speech at the joint FTC/DOJ “Examining Health Care Competition” workshop, the Commission “hear[s] growing concern that provider consolidation in non-overlapping product or geographic markets may also lead to higher prices."  These concerns over greater bargaining power were central to the DOJ opposition in Comcast/Time Warner and raise similar concerns here. 

All of this calls for intense scrutiny of this acquisition.  There is too much at stake for the millions of elderly and disabled Medicare beneficiaries.

Balto is a former policy director at the Federal Trade Commission.