Fortunately for American consumers, the FTC has consistently and publicly opposed the efforts of retail pharmacies to protect higher prices.

Mr. Balto claims that, “You don’t need a Ph.D. in economics to figure out the PBM market is broken.” Such a statement may be catchy, but it is also just wrong. Government research shows that PBMs save Americans tens of billions of dollars.  Yes, tens of billions of dollars of savings for all of us.
CBO estimated that PBMs reduce drug costs by roughly 30 percent – that alone is roughly $75 billion per year.  Similarly, GAO found that consumers save 27 to 53 percent on drugs when they purchase them through the mail-order services that Mr. Balto disparages, relative to the retail pharmacies. 

That doesn’t look like a broken market to me – that’s a market where consumers are benefiting from the services PBMs offer.

How do PBMs achieve these savings for consumers?  They use advanced technology platforms to make prescription management more efficient, which helps to drive higher use of low-cost generics and other drugs. PBMs also negotiate favorable drug prices from pharmaceutical manufacturers and retail pharmacies and dispense prescriptions via lower-cost channels, such as through mail-order pharmacies. 

They also use clinical programs to increase patient adherence to their drug therapy and to close other gaps in care.

In addition, contrary to Mr. Balto’s claims, the FTC itself examined PBM mail-order pharmacies and found they provide consumers and employers with tangible value.

The FTC’s report language is worth repeating verbatim: “[T]he prices for a common basket of prescription drugs dispensed by PBM-owned mail order pharmacies were typically lower than the prices charged by retail pharmacies. The study also found competition affords health plans substantial tools with which to safeguard their interests. Consumers benefit as a result.”  When retail pharmacy groups advocate state regulations that reduce the ability of PBMs to use low-cost mail-order pharmacies, the FTC has publicly and forcefully opposed such efforts for one simple reason: The position advocated by Mr. Balto would harm American consumers.
Mr. Balto’s criticism of the ownership of specialty pharmacies is similarly flawed; these arrangements are just like any “make or buy” decision by a business – i.e., a PBM can choose to own a specialty pharmacy, subcontract for those services from another firm, or do both.  We observe all three circumstances in this market. Some PBMs own a specialty pharmacy and some do not.  Even PBMs who own specialty pharmacies routinely include in their pharmacy networks the specialty pharmacies owned by competing PBMs. With the cost of specialty pharmacy drugs rising rapidly, we need greater PBM participation in this space, not less.

Mr. Balto doesn’t argue with the fact that the combined Express Scripts-Medco will be able to negotiate lower drug prices.  Rather, Mr. he argues “there is little reason to expect a dominant PBM to pass on savings to consumers.” 

First, there are more than 40 PBMs today, including large companies such as CVS Caremark and PBMs affiliated with major health insurers/plans, such as United Health, Aetna, CIGNA, and Kaiser.

Moreover, PBM contracts with, and competition for, plan sponsors impel PBMs to pass on the vast majority of the savings they negotiate with drug manufacturers and retail pharmacies.  In addition, the proposed Express Scripts-Medco merger will lower the merged firm’s costs, allowing it to compete more aggressively in the marketplace. Consumers will benefit from this too as it increases the incentive and ability of the merged firm to reduce prices, provide better products, and expand services in other ways. 

These facts are entirely consistent with textbook models taught to students in Economics 101 demonstrating that firms pass on a substantial share of any marginal cost savings (although the precise pass-through rate obviously depends on market-specific factors).
Given all of this, why are chain drug stores and some independent pharmacies so opposed to the proposed merger?  The answer is quite simple: Pharmacy profits increased dramatically from 2004 to 2009, reaching roughly $60 billion in 2009.  As a result of the proposed merger of Express Scripts and Medco and the larger discounts the combined firm will be able to receive from pharmacies, those profit levels will likely be very slightly lower (less than one percent lower).  But lower pharmacy profits and, at least as important, greater drug manufacturer discounts, will benefit consumers to the tune of billions of dollars over the upcoming years.
The choice is clear: adopt Mr. Balto’s perspective and pay more for drugs or embrace PBMs for their proven ability to save consumers tens of billions of dollars per year.  I pick the side of lower drug prices and consumers.
Mr. Orszag is a Senior Managing Director at Compass Lexecon, LLC, an economic consulting firm. He formerly served as an Economic Policy Adviser on President Clinton’s National Economic Council.  Mr. Orszag currently is serving as an economic consultant to Medco and Express Scripts.  The views and opinions expressed are solely those of the author and do not necessarily reflect the views and opinions of any of the organizations with which the author is or has previously been associated.