The Federal Trade Commission has closed its investigation of Express Scripts, Inc.’s proposed acquisition of Medco Health Solutions. As a result of the evidence collected during an intensive eight-month investigation, we conclude that the proposed transaction is not likely to substantially lessen competition in violation of Section 7 of the Clayton Act.

This was not an easy decision. At the outset of the investigation, we were concerned that this proposed $29 billion merger between two of the country’s three largest pharmacy benefit managers (“PBMs”) might represent a three-to-two merger in the market for the provision of PBM services to large private employers and other plan sponsors. We also recognized that the merger could be viewed as presumptively anticompetitive because the PBM industry is concentrated and the market share of the merged entity would be more than 40%, even using the broadest market definition. Another question, raised by retail pharmacies and consumer groups, was whether the combined firm could exercise monopsony power, driving drug dispensing fees so low that they would threaten the important services offered by local pharmacies. Specialty pharmacies also expressed concern that the combined firm would engage in exclusionary conduct. …

I. The merger is unlikely to result in anticompetitive effects for PBM services to employers
The Commission analyzed the effects of the Express Scripts/Medco merger in the market for the provision of full-service PBM services to healthcare benefit plan sponsors, including public and private employers and unions. …

The market for the provision of full-service PBM services to healthcare benefit plan sponsors is moderately concentrated and consists of at least 10 significant competitors. Our staff’s investigation revealed that competition for accounts is intense, has driven down prices, and has resulted in declining PBM profit margins—particularly in the large customer segment. The transaction will reduce the number of significant competitors to nine (plus a fringe of several dozen smaller firms) and give the merged company a market share of just over 40%. …

A. Unilateral effects for PBM services are unlikely
One concern with a merger of direct competitors is that the elimination of a close competitor may allow the merged entity to unilaterally impose anticompetitive price increases on consumers. This merger is unlikely to have these effects. Indeed, the vast majority of customers believe that there would be adequate competition post-merger to ensure continued competitive pricing, and many believe that the merger will lead to lower prices for PBM services.

Analysis of bidding data produced by the parties and by large, national PBM consultants demonstrates that Medco and Express Scripts are not particularly close competitors, and that other PBMs often compete successfully for employers, including large employers. …

B. Coordinated effects for PBM services are unlikely

Another concern with horizontal mergers is that the reduction in the number of independent competitors may allow the remaining firms to collude, tacitly or otherwise, to the detriment of consumers. For many of the same reasons that the merger is unlikely to give Express Scripts unilateral anticompetitive power over price, the merger is unlikely to result in any coordinated anticompetitive effects.
Successful coordination usually requires that firms be able to reach agreements and monitor adherence to those agreements. The multifaceted and opaque nature of price competition in this market suggests that coordination on price would be difficult. Pricing terms for PBM services are complicated and difficult to compare because each contract includes numerous pricing components, including separate administrative fees, rebate pass-through, discounts, retail and mail-order pricing for branded and generic drugs, plan design, and ancillary services. Only after the bidding is concluded do PBMs learn, by debriefing the consultants, who they are bidding against; rarely do they even know how their proposal compared to that of the competition. …

II. The merger is unlikely to lead to the exercise of monopsony power for the retail dispensing of prescription drugs
The Commission also considered whether the proposed acquisition would confer monopsony power on the merged company when it negotiates dispensing fees with retail pharmacies. As a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices. Only in special circumstances does an increase in power in negotiating input prices adversely impact consumers. … The Commission examined this concern closely but found that the proposed transaction was unlikely to create or enhance monopsony power.

Most importantly, the proposed transaction would produce a firm with a smaller share of retail pharmacies’ sales—approximately 29%—than is ordinarily considered necessary for the exercise of monopsony power. … Furthermore, for contractual and competitive reasons, it is likely that a large portion of any of these cost savings obtained by the merged company would be passed through to the PBMs customers. Although retail pharmacies might be concerned about this outcome, a reduction in dispensing fees following the merger could benefit consumers by lowering healthcare costs.

III. The merger is not likely to result in anticompetitive effects with respect to specialty drugs
The specialty pharmacy market is substantially less concentrated than the overall market for PBM services to healthcare benefit plan sponsors. Several dozen specialty pharmacies currently operate in the United States. At the national level, those include, but are not limited to, Express Scripts, Medco, CVS Caremark, United, Cigna, Humana, Aetna, SXC, AmerisourceBergen, Diplomat Specialty Pharmacy, and Walgreens.

According to manufacturers of specialty drugs, they are the ones who are seeking limited and exclusive distribution arrangements today. Indeed, the decision to enter into an exclusive relationship is rare and largely a function of the size of the patient population for the particular drug or a drug’s special safety requirements. Manufacturers of exclusive distribution drugs stated that with small patient populations or certain safety concerns, they often prefer to consolidate distribution in one specialty pharmacy to achieve uniform quality service, ensure safety, and maximize the efficacy of the course of treatment. Overall, exclusive distribution arrangements represent only a tiny fraction of specialty drugs and account for a small portion of total drug expenditures. Manufacturers of specialty drugs are not concerned that the combined firm would be able to force them to enter into arrangements limiting the number of distributors. …

IV. Conclusion
While this transaction appears to result in a significant increase in industry concentration, nearly every other consideration weighs against an enforcement action to block the transaction.

Our investigation revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.

Excerpted from the Statement of the Federal Trade Commission Concerning the Proposed Acquisition of Medco Health Solutions by Express Scripts, Inc., FTC File No. 111-0210, April 2, 2012, accessed at http://ftc.gov/os/2012/04/120402expressmedcostatement.pdf