Wed 04/18/2018 16:38 PM
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Event Driven Takeaways
 
  • Independent pharmacies have exercised significant countervailing buyer power as a result of their ability to act collectively through PSAOs, or pharmacy services administrative organizations. This clout has counteracted concerns related to PBMs’ monopsony powers in past merger reviews involving PBMs.
  • However, consolidation in the PBM market in recent years has seen PSAOs, and thereby independent pharmacies, lose ground. As PBMs accumulate additional clout by combining with insurers, the argument that independent pharmacies have countervailing buyer power through PSAOs may be faltering.
  • Industry specialists that spoke to Event Driven highlighted the possibility of PBM-insurer combinations having greater incentive to exclude PSAOs from their preferred networks; instead, the PBM-insurer combinations may increase their direct-to-pharmacy engagement, a development that would be financially less attractive for independent pharmacies.

The pending consolidation between PBMs and health insurers raises issues related to little-known middlemen - PSAOs, or pharmacy services administrative organizations - which are losing power in their efforts to insulate independent pharmacies from PBMs.

Independent pharmacies, which generally oppose the Aetna/CVS and Express Scripts/Cigna deals, rely on PSAOs as a counterbalance to the consolidated power of PBMs. Although PSAOs themselves are typically not profitable, a majority are owned by wholesalers which make money through other lines of business.

PSAOs “help to stem the bleeding” of independent pharmacies in their dealings with PBMs, said an industry source.

Unlike large chains such as CVS and Walgreens, small pharmacies do not have significant leverage in negotiating contracts with PBMs. As a result, PSAOs are seen as helpful in providing these small players with greater purchasing power vis-a-vis third-party payors such as health plans and PBMs.

The existence of PSAOs has worked in favor of PBM mergers in the past, allaying fears associated with potential buyer power of the combined PBM post-merger. For example, in the 2012 Express Scripts/Medco merger, pharmacy groups argued that Express Scripts would gain monopsony power over independent pharmacies because these independent pharmacies did not hold the negotiating power enjoyed by large chain pharmacies.

However, the fact that independent pharmacies exercised significant countervailing buyer power as a result of their ability to act collectively through PSAOs meant that the Federal Trade Commission rejected these concerns. The FTC concluded that the Express Scripts-Medco merger was “unlikely to lead to the exercise of monopsony power for the retail dispensing of prescription drugs.”

Yet consolidation in the PBM market in recent years has seen PSAOs, and thereby independent pharmacies, lose ground. For example, Express Scripts recently announced that Third Party Station, a large PSAO, would no longer be in Express Scripts’ networks and that participating pharmacies would need to contract directly with Express Scripts.

According to Bruce Semingson, president of pharmacy consulting firm Pharmacy Perspectives, when PBMs offer their services to plan sponsors, they usually build their pharmacy network on an anchor pharmacy chain with a small network of independent pharmacies thrown on top. Once a PBM has a contract with a chain pharmacy, there is little incentive to deal with PSAOs. The PBM would rather engage with a few independent pharmacies directly to meet their limited network requirements. “A PBM doesn’t have to pick up all the PSAO pharmacies. They want independents, but they don’t want them all,” said Semingson.

The industry trend toward direct-to-pharmacy contracting is increasing, according to Jesse Dresser, partner at the law firm Frier Levitt. “PBMs are already starting to put immense pressure on PSAOs, and even starting to question their utility/necessity,” he said.

The move toward direct engagement with independent pharmacies would offer greater flexibility to the PBMs. “PBM contract terms are often aggressive and involve lower profits for the independent pharmacies,” Semingson told Event Driven. Therefore, without the PSAO’s purchasing power, independent pharmacies are likely to find themselves financially vulnerable in a changing landscape.

In this context, as PBMs accumulate additional clout by combining with insurers, the argument that independent pharmacies have countervailing buyer power through PSAOs may be faltering.

Currently, it is well known that PBMs have a bias toward creating exclusive networks favoring their wholly-owned mail order/specialty pharmacies. However, plan sponsors (especially the big ones) have some degree of influence over the scope of the network and inclusion of certain pharmacies. “If PBM and plan merge, that ‘check and balance’ is no longer there,” said Dresser.

For example, in the Medicare Part D market, Aetna, CVS’s SilverScript, Cigna, and Express Scripts-Medco together control roughly 43 percent of the standalone Part D lives. Currently, the PBMs and the insurance companies compete with one another. Post-merger, the two combinations will be able to leverage their size to drive down reimbursement rates and network access.

According to Dresser, the post-merger entities will have more leverage to dictate terms and conditions, such as pricing or network participation standards, to PSAOs. “The PSAO in turn will have to decide whether to accept the ultra low rates, and whether to cut down on the pharmacies in its network that might not fit neatly into the ‘round peg’ of a ‘retail pharmacy,’” said Dresser.

A spokesperson for CVS told Event Driven that the company maintains “very constructive relationships with all seven of the PSAOs and there is no reason that will change following the Aetna transaction.” Of the pharmacies in the CVS network, roughly 40% are independent. “PSAOs, some of which are owned by large healthcare companies, help us to more efficiently manage our relationships with the thousands of independent pharmacies in our PBM pharmacy network,” the spokesperson said.

--Shrey Verma and Ryan Lynch
 
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