privacy risk potential in major managed care PBM (fwd)

[Peter Marshall <techdiff@ix.netcom.com>]

Managed Care Matters - Vertical Integration From the Bottom

Robert McCarthy, PhD

[Drug Benefit Trends 11(1):10, 1999.]

The big news in managed care pharmacy is Rite Aid's declared intention of
purchasing PCS Health Systems. In this acquisition, the second- or
third-largest retail pharmacy chain (depending on whether you count stores
or sales per store) would purchase the largest (or is it now the
second-largest because it has been eclipsed by the leaping and bounding
Merck-Medco?) PBM, with 53 million covered lives and 300 million annual
prescriptions.

Call it vertical integration from the bottom of the prescription drug
distribution chain. Here the end point of the chain (ie, the community
pharmacy wherein the patient presents the script and gets the drugs)
acquires the middleman (ie, the PBM that vets the prescription and pays the
claim).

PCS's previous purchaser, Eli Lilly & Co., tried vertical integration from
the top down (ie, from the starting point, that of the manufacturer making
the drug, through the middleman PBM). But Lilly, notoriously, did not get
very much value from PCS. Kenneth Abramowitz, Senior Health Care Consultant
at Sanford C. Bernstein & Co. (New York City), summarized the popular
consensus in a recent quote: "Lilly got the worst [PBM] deal because PCS was
focused on pharmacy cards, claims processing, [and] retail networks, and had
the fewest value-added services like mail order and formularies."

Lilly paid $4.1 billion for PCS in 1994, seemingly throwing dollars to the
wind in an effort to play catch-up with Merck and SmithKline Beecham. The
latter 2 manufacturers had purchased, respectively, Medco Containment and
Diversified Pharmaceutical Services (DPS)-and for $1 billion to $2 billion
less. Merck is famously pleased with its PBM; since the acquisition in 1993,
Medco has increased its distribution of Merck products by 50%-or so found
the FTC during the course of a recent investigation. SmithKline, if not
quite that pleased, remains at least moderately overjoyed with what it has
gained from DPS.

 Copyright © 1994-1999 by Medscape Inc.