You may never have heard of them before, but Express Scripts, Inc. (ESI) and Medco are two of the most important companies in the United States.  These two corporations are pharmacy benefit managers (PBMs), businesses that act as middlemen between the pharmaceutical companies and pharmacies (as well as between drug companies and sponsors of prescription drug plans, such as the government, other corporations and unions). Between the two of them, Express Scripts and Medco touch one out of every three prescriptions that are filled in America.  If you’ve ever gone to a pharmacy to fill a doctor’s script, the odds are pretty good that Express Scripts of Medco had a hand in delivering your meds.  Combined, the two companies manage prescription drug benefits for 115 million Americans.

Express Scripts and Medco happen to operate in a highly-concentrated market.  The two companies (post-merger) would account for over 80 percent of the PBM market, and they have only one other major competitor (CVS Caremark).  And now, these two companies want to merge, and barring action by the Federal Trade Commission (FTC), there will be an “ExpressCo” come 2012.

Of course, simply being a “big” company is not necessarily a bad thing.  Mergers often have beneficial results that enhance consumer welfare: lower prices, more innovation, reduced transaction costs, etc.  And both Express Scripts and Medco claim that their merged firm will bring about hefty savings to consumers.  But there’s plenty of reason to be skeptical.

First of all, going from three major players in an industry down to two automatically sets off bells, especially so in the murky PBM industry.  PBMs deal with sponsors, drug companies and pharmacies, and none of the “consumers” of a PBM’s products is ever quite aware of the prices that are being charged to everyone else.  This information asymmetry has already placed a lot of pricing power into the hands of Express Scripts and Medco; they are not “price takers” forced to compete in a perfectly free market.  Removing one more competitor from the market will only increase the incentive for PBMs to charge customers (who will never quite be the wiser) higher prices.

Another major concern is that, in addition to serving pharmacies, PBMs also run their own mail-order prescription programs. By expanding and enlarging Express Scripts and Medco into one company, it provides an opportunity for the new super-PBM to profitably force customers into their mail-order pharmacy business.  PBMs would directly compete with the pharmacies that they also work with.  Express Scripts and Medco claim that their merger will create a company with enough leverage to powerfully negotiate with the pharmacies for lower costs for consumers; but it also creates the potential for the new firm to undermine their competition by increasing their own pharmacy business.  The incentives just seem to line up against consumers. 

The merged company could lead to higher market prices.  Normally, if firms could try and increase prices or act anti-competitively and if there are few barriers to entry, new firms would quickly flummox the attempt.  Unfortunately, the PBM market seems fairly well walled off.  For instance, in the past decade, Express Scripts profits have increased by 400 percent.  Yet few firms have broken into the industry and taken a significant share of the expanding market; an indication that the PBM market may not be so easy to crack into.  As Senator Mike Lee (R-Utah) explained, in middleman industries like PBMs, “If there is competition, you would expect their profits to be low … Their profits are skyrocketing, which suggests that savings are not being passed on.”

Last week, the Senate Judiciary Committee on Antitrust held a hearing on the proposed merger, and the Antitrust Bureau at the Federal Trade Commission is reviewing the merger for possible competitive harms.  During that hearing, Senator Kohl made the statement to George Paz, ESI’s chief executive officer that it did not appear savings would be passed on and Paz conceded.  Kohl said, “But I heard you say just now that significantly increasing discounts over what you’re getting right now is really not why you’re doing this deal, and you’re not nearly as certain as some people might think that this deal will result in far more discounts from your suppliers.  There are other ways in which you hope this deal will pay off.”  And Paz responded, “That is correct.”

Based on what we already know, I hope that the FTC and the relevant oversight bodies continue to take a vigilant interest in this proposed merger.

Zac Morgan currently attending George Mason University School of Law and is a blogger for the American Consumer Institute.