The Solution Can Sometimes Be Worse than the Problem

(Published in THE HILL’s Congressional Blog on January 6, 2012 as

“FTC should block proposed Express Scripts-Medco merger” 

The perfect example of the law of unintended consequences can be found in the 7 million acres from Texas to Washington DC that is covered by Kudzu vines.  During the dustbowl days of the Great Depression, one of the biggest challenges facing the country was soil erosion.  In an attempt to address this problem, the Soil Conservation Service advocated the widespread planting of kudzu, an imported vine that would cover the ground quickly, preventing further soil loss.

However, while the kudzu did help stop the soil erosion, it also created another problem altogether.  Kudzu vines, which can grow up to one foot per day during the warm season, spread throughout much of the Deep South and currently inflict up to $500 million in damages annually to forests alone.

Today, another unintended consequence is happening in the healthcare industry.  Although most people have never heard of pharmacy benefit managers (PBMs), they are making health care decisions that affect the lives of well over 100 million Americans.  PBMs were initially hired by companies to manage prescription drug plans and control costs.  The entities that were originally hired to help manage prescription plans are now extracting so much profit and distorting the markets so thoroughly that they have become the kudzu of the healthcare industry.

PBMs not only manage a company’s drug plan, they also negotiate directly with pharmacies and drug manufacturers, creating conflicts of interest.  In addition to being paid by the company to manage their plan, the PBM also profits from the gap it creates between what a company is willing to pay for a prescription and what the pharmacy is willing to accept.  The PBM’s goal of getting the best deal possible for the company it represents directly conflicts with its desire to create an added profit stream from the margin it creates. 

PBMs have other profit streams as well, including promising drug manufacturers high volumes of sales in return for discounts and rebates.  As a result, a PBM can favor one manufacturer’s generic drug over another because it maximizes its own profits, instead of minimizing the prescription plan costs of the companies it supposedly represents.  These deals are made without the knowledge of either the represented companies or the pharmacies supplying the drugs.  PBMs are able to profit from the spreads it creates between drug companies and pharmacies while also being paid to manage the plan.  There is no transparency. Large PBMs also fill mail-order prescriptions so there is a natural inclination for PBMs to promote and encourage mail-order prescription plans, a form of “self-dealing.” 

These various revenue streams are lucrative and PBMs have seen profits soar.  But rather than these profits encouraging increased market entry and competition, the industry is consolidating, as evidenced by the announced merger of the two largest and most profitable PBMs — Express Scripts and Medco.  If the Federal Trade Commission (FTC) approves this merger, the merged company will manage the pharmacy plans of roughly 120 million Americans.  This will further increase the already highly concentrated PBM industry, as well as further increasing profits and leading to anti-competitive risks.   

In much the same way that Kudzu was brought in to solve a problem yet created a crisis, PBMs were brought in to control costs but have gained excessive market power, thereby posing anti-competitive risks and higher prices for consumers.  Oversight needs to review the industry’s market power, self-dealing, conflicts of interest and lack of transparency – all of which will be exacerbated if the FTC does not block the planned merger. 

Steve Pociask is the president of The American Consumer Institute Center for Citizen Research.  The Institute is a nonprofit educational and research institute.