Express Scripts buying Medco for $29.1B

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The top two U.S. companies managing prescription drug benefits are uniting in a $29.1 billion deal they say will help achieve key goals of the health care overhaul: reining in costs and improving patients’ health.

Express Scripts Inc. announced an agreement Thursday to buy rival Medco Health Solutions Inc. Together, they would handle the prescriptions of about 135 million people, more than one in three Americans.

That will give them even more clout in demanding discounts from drugmakers, who are dealing with falling or stagnant revenue as an unprecedented number of blockbuster drugs taken daily by millions is getting cheaper generic competition.

Pharmacy benefit managers process mail-order prescriptions and handle bills for prescriptions filled at retail pharmacies, acting as middlemen between employers offering prescription drug benefits and drugmakers. They also hold down costs by extracting discounts and rebates from drugmakers, using tiered copayments that nudge patients to buy generics or the lowest-cost brand names, and reminding patients to take medicines as scheduled to limit costly complications.

Together, Express Scripts and Medco handled more than 1.7 billion prescriptions in 2010 and reported almost $110 billion in revenue, although Medco recently lost several contracts covering millions of people. They have razor-thin profit margins.

“The deal strategically makes sense because in this business, scale matters,” said Les Funtleyder, health care portfolio manager for Miller Tabak.

The combined company may be able to wring even lower prices from drugmakers. Their trade group, Pharmaceutical Research and Manufacturers of America, said it had no position on the deal.

It’s unclear whether patients, or just employers and health plans, will see the future savings. But patients likely will face stricter rules requiring more use of generics and of mail order services for drugs for chronic conditions, and more programs aimed at ensuring they’re on the best medicine for them.

Medco has six medical teams in areas including heart disease, diabetes and cancer that review patients’ medications, to prevent drug interactions and ensure patients are on the most effective therapy, sometimes even based on genetic factors.

Express Scripts has complementary programs that encourage patients to take cheaper drugs, such as requiring generics unless they opt out. Both companies earn bigger profits for processing generics than brand-name drugs, because that saves their customers millions.

Changes won’t happen soon, though, as drug benefit plans are covered under multiyear contracts.

The deal would double Express Script’s market share to 30 percent, leapfrogging ahead of rival CVS Caremark Corp., at 15 percent, said Atlantic Information Service, a health care information publisher.

That will reduce pharmacy choices for customers, said pharmacist Hamid Abbaspour, founder of the independent Dr. Aziz Pharmacy in Indianapolis.

Abbaspour, who does business with both Medco and Express Scripts, said their combination means independent drug stores might have tougher negotiations because the benefit managers have more leverage.

“We actually have to push to be part of their provider group,” he said. “Sometimes they come to us and say, ‘Take it or leave it,’ and at some point it could put a huge financial burden on us if we say, ‘We don’t accept this unfair contract.’”

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