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68–401 PDF 2011

THE PROPOSED MERGER BETWEEN EXPRESS 

SCRIPTS AND MEDCO 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTELLECTUAL PROPERTY, 

COMPETITION, AND THE INTERNET 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 20, 2011 

Serial No. 112–58 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

[Vacant] 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

[Vacant] 

SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET

BOB GOODLATTE, Virginia, Chairman 

BEN QUAYLE, Arizona, Vice-Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

SANDY ADAMS, Florida 

[Vacant] 

MELVIN L. WATT, North Carolina 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

[Vacant] 

BLAINE MERRITT, Chief Counsel 

STEPHANIE MOORE, Minority Counsel 

(III) 

C O N T E N T S 

SEPTEMBER 20, 2011 

Page 

OPENING STATEMENTS 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Subcommittee on Intellectual Property, Competition, and the Internet .................................................................................... 1 

The Honorable Melvin L. Watt, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Intellectual 

Property, Competition, and the Internet ............................................................ 3 

The Honorable Tom Marino, a Representative in Congress from the State 

of Pennsylvania, and Member, Subcommittee on Intellectual Property, Competition, and the Internet .................................................................................... 4 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, Ranking Member, Committee on the Judiciary, and 

Member, Subcommittee on Intellectual Property, Competition, and the 

Internet ................................................................................................................. 6 

WITNESSES 

George Paz, Chairman and Chief Executive Officer, Express Scripts, Inc. 

Oral Testimony ..................................................................................................... 15 

Prepared Statement ............................................................................................. 17 

David B. Snow, Jr., Chairman and Chief Executive Officer, Medco Health 

Solutions, Inc. 

Oral Testimony ..................................................................................................... 42 

Prepared Statement ............................................................................................. 43 

Joseph Lech, R.Ph., Owner, Lech’s Pharmacy, Member, National Community 

Pharmacists Association 

Oral Testimony ..................................................................................................... 48 

Prepared Statement ............................................................................................. 51 

Dennis Wiesner, R.Ph., Senior Director of Privacy, Pharmacy, and Governmental Affairs, H-E-B Grocery Company, LP 

Oral Testimony ..................................................................................................... 79 

Prepared Statement ............................................................................................. 81 

Dan E. Gustafson, Partner, Gustafson Gluek PLLC 

Oral Testimony ..................................................................................................... 84 

Prepared Statement ............................................................................................. 86 

Stephanie Kanwit, Counsel, Manatt, Phelps & Phillips, LLP 

Oral Testimony ..................................................................................................... 92 

Prepared Statement ............................................................................................. 93 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Letter from Matthew E. Baker, Chairman, Health Committee, Pennsylvania 

House of Representatives submitted by the Honorable Tom Marino, a Representative in Congress from the State of Pennsylvania, and Member, Subcommittee on Intellectual Property, Competition, and the Internet ............... 6 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Ranking Member, Committee 

on the Judiciary, and Member, Subcommittee on Intellectual Property, 

Competition, and the Internet ............................................................................ 8 

Page

IV 

Pharmaceutical Care Management Association (PCMA) study submitted by 

George Paz, Chairman and Chief Executive Officer, Express Scripts, Inc. .... 23 

National Community Pharmacists Association (NCPA) document submitted 

by Joseph Lech, R.Ph., Owner, Lech’s Pharmacy, Member, National Community Pharmacists Association ......................................................................... 55 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Responses to Post-Hearing Questions from George Paz, Chairman and Chief 

Executive Officer, Express Scripts, Inc. ............................................................. 128 

Prepared Statement of Adam J. Fein, President, Pembroke Consulting, Inc. ... 131 

(1) 

THE PROPOSED MERGER BETWEEN EXPRESS 

SCRIPTS AND MEDCO 

TUESDAY, SEPTEMBER 20, 2011 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to call, at 3:37 p.m., in room 

2141, Rayburn House Office Building, the Honorable Bob Goodlatte 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Goodlatte, Coble, Chabot, Issa, 

Chaffetz, Marino, Adams, Watt, Conyers, Chu, Deutch and Nadler. 

Staff Present: (Majority) Holt Lackey, Counsel; Olivia Lee, Clerk; 

and (Minority) Stephanie Moore, Subcommittee Chief Counsel. 

Mr. GOODLATTE. Good afternoon. The Subcommittee will come to 

order. I have an opening statement. This hearing will examine the proposed $29.1 billion acquisition 

of Medco Health Solutions by Express Scripts. Express Scripts and 

Medco are both pharmacy benefit managers, or PBMs. PBMs are 

probably among the least known and least understood big businesses in America. Essentially PBMs act as middlemen between 

health insurance plans that offer prescription drug benefits and the 

pharmaceutical companies and pharmacists who manufacture and 

dispense prescription drugs to the plan’s beneficiaries. But just because most Americans may not have heard of PBMs does not mean 

that they are anything less than enormous businesses with a significant impact on prices and competition in the market for prescription drugs in America. 

When a person with health insurance fills a prescription, it is 

likely that a PBM was involved in setting the copay, determining 

the pharmacist’s compensation, negotiating rebates and discounts 

with the drug manufacturer, and billing the health insurance plan 

for the drugs. For a growing number of prescriptions, the PBM also 

acts as the pharmacist. PBMs now control a majority of the mailorder pharmacy business. 

PBM’s position in the center of the American prescription drug 

market has proven very lucrative. In 2010, Express Scripts and 

Medco earned a combined profit of about $2.5 billion, with revenue 

over $100 billion. The proposed merger we examine today would 

combine two of the three largest PBMs and create a company that 

would be involved in about a third of all prescription drugs sales 

in America. 

2 

The combined company would control about 60 percent of the 

mail-order pharmacy market and a majority of the specialty pharmacy market. The combined company would be the incumbent 

holding the PBM contract for a majority of the companies on the 

Fortune 50. This consolidation would come in a market that has already come under considerable scrutiny for alleged abuses of market power. Small pharmacists have long complained that PBMs leverage market power to force pharmacies into unfavorable and unfair contracts. 

My colleague Mr. Marino of Pennsylvania has led efforts to even 

bargaining power between PBMs and pharmacies and introduced 

H.R. 1946, the Preserving Our Own Hometown Pharmacies Act, to 

empower small pharmacies to negotiate with PBMs on more even 

terms. 

In addition to pharmacies, PBMs enter contracts with essentially 

every major player in the supply and payment system for prescription drugs. A PBM with too much market power could demand ever 

larger rebates and discounts from drug companies, capturing more 

of their profits and perhaps leading to a decrease in competition 

and innovation to bring new drugs to market. 

A PBM exercising unlawful market power could decrease the reimbursement rates for pharmacies filling prescription drugs to levels that make traditional pharmacies unprofitable and push more 

pharmacy business to the PBMs’ own mail-order pharmacy business. 

And a PBM unchecked by competition could potentially raise the 

prices that it charges employers and other health insurance plan 

sponsors for administering their prescription drug benefits. If this 

merger leads to a decrease in the supply of prescription drugs and 

pharmacy services or raises their prices, then America’s prescription drug consumers will bear the burden. 

It is by no means clear that today’s merger will have any of these 

negative effects. The merging parties argue that far from raising 

prescription drug prices, PBMs are essential to controlling medical 

costs by negotiating the best possible deal for health insurance 

plans and the consumers who are covered by those plans. 

There is evidence that PBMs actually do save health care costs, 

and that PBM mergers can help PBMs realize efficiencies and 

skills that empower them to save even more money for their clients. One study released just yesterday estimates that PBMs would 

save their clients almost $2 trillion of health care costs over the 

next decade. 

Another fact to consider is that nearly every major plan sponsor 

who is responsible for administering a health insurance plan hires 

a PBM to administer the prescription drug benefit under that plan. 

If PBMs did not save money for plan sponsors, then presumably 

plan sponsors would not continue to engage them. 

This hearing will examine all of the issues surrounding this 

merger. I look forward to hearing from our expert witness panel 

today. But I would like to conclude my opening remarks by raising 

a larger concern that goes beyond the details of this merger and 

has to do with our health care economy as a whole. 

In the investor call announcing this merger, both Express Scripts 

CEO George Paz and Medco CEO David Snow, who are here today 

3 

as witnesses, mention the President’s health care reform as a 

major factor motivating the merger. Mr. Snow said that, quote, ‘‘I 

believe you are going to see all sorts of combinations across the 

spectrum of health care as everyone realigns to the new imperatives related to health care reform and the demands the government is making,’’ end quote. I am concerned that Mr. Snow may 

have been right. In the 18 months since the President’s health care 

bill became law, we have seen a wave of mergers in various levels 

of the health care economy. I am concerned that this wave of mergers may be a symptom of a deeper dysfunction in our health care 

economy created by the ill-conceived health care bill. 

I hope that today’s hearing sheds light on the continuing debate 

in Congress over whether last year’s government takeover of health 

care will have the effect of favoring regulation over free market, 

government mandates over competition, and big businesses over 

small. 

At this time it is my pleasure to yield to the Ranking Member 

of the Subcommittee, the gentleman from North Carolina, Mr. 

Watt. 

Mr. WATT. Thank you, Mr. Chairman. And it will come as no surprise to the Chairman my attitude about hearings about mergers. 

I have expressed them before, and I want to try to be consistent 

on this occasion. 

To be clear, the Committee on the Judiciary has jurisdiction over 

all laws related to antitrust. Federal antitrust laws concern the 

functioning of the marketplace and competition and are enforceable 

by the Antitrust Division of the Department of Justice, the Federal 

Trade Commission and private persons. 

The proposed merger between pharmacy benefit managers Express Scripts and Medco Health Solutions is currently under examination by the Federal Trade Commission, which recently requested additional information from the companies, signaling that 

the FTC is paying attention to us knitting, and that the deal has 

raised antitrust concerns with the regulators. 

The FTC’s so-called second request demonstrates that the merger 

will receive close scrutiny, and that the agency stands ready to fulfill its mission to prevent anticompetitive mergers and business 

practices in the marketplace. 

In aid of this investigation, the FTC has the authority to compel 

detailed, confidential information to which we as legislators simply 

do not have access, making it far more likely that an appropriate 

determination will be made based on the facts and not on political 

pressure. 

It should come as no surprise that I believe, as I indicated in 

prior hearings before the Committee, that our oversight function is 

best reserved to address legitimate concerns; for example, agency 

impropriety, incompetence or inexplicable inaction, or if, as is more 

likely in this budget-cutting fiscal environment, the agency is so 

understaffed or underfunded that it is ill-equipped to discharge its 

responsibilities at all. Fortunately no such claims have yet been 

raised with respect to this merger. 

In the area of pharmacy benefit managers, this Committee in 

prior sessions of Congress has considered whether a limited antitrust exemption is appropriate to permit independent community 

4 

pharmacies to collectively negotiate the terms and conditions of insurance contracts in order to produce plans that would arguably 

protect the patient’s choice of pharmacy. To the extent that this 

hearing sheds light on whether we should revisit that question, I 

believe it could be helpful to the Committee. 

Now, also, other legislative issues, for example, the lack of transparency of the PBM call structures, that the Ways and Means 

Committee could appropriately consider. 

I look forward to hearing from the experts assembled here today. 

I know that their testimony will provide the public with a fuller 

understanding of the issues at hand. But let me be clear: The ultimate determination as to whether this merger impermissibly restrains competition or otherwise violates the antitrust laws lies 

with the FTC and not with the House of Representatives or the Judiciary Committee on which we sit today. 

Mr. Chairman, I yield back, and thank you to the Chairman. 

Mr. GOODLATTE. I thank the Ranking Member. 

The Chair will now recognize the gentleman from Pennsylvania, 

Mr. Marino, for an opening statement. 

Mr. MARINO. I thank the Chairman. 

Chairman Goodlatte, Ranking Member Watt, I would like to 

thank you for holding this hearing today on the proposed merger 

between Express Scripts and Medco, and particularly for inviting 

my constituent Mr. Joseph Lech to testify. 

I believe that this hearing gives us the unique opportunity not 

just to discuss the merits of this particular merger, but to discuss 

the broader challenges that many community pharmacists are facing. 

In the 10th Congressional District of Pennsylvania, local pharmacies are the foundation of many communities. People know their 

pharmacists and have trusted their advice and guidance for years. 

My daughter takes a great deal of medication on a daily basis. My 

pharmacist is always there; he knows us on a first-name basis. 

There have been situations where we have gone away and either 

forgotten or ran out of a prescription. We just call our pharmacist, 

and he makes the arrangements, and we are taken care of wherever we are. 

It is personal service like this that makes community pharmacies 

so valuable. In fact, nothing has highlighted the importance of local 

pharmacies and the role they play in the community more than the 

recent events that occurred in northeastern Pennsylvania over the 

past few weeks. It is my understanding that Mr. Lech is prepared 

to discuss in more detail a personal story about this. But I can tell 

you that without community pharmacies like Mr. Lech’s, a horrible 

situation for our friends and neighbors could have been much 

worse. 

Community pharmacies are now facing a number of challenges 

that are threatening their ability to continue to provide personal 

services to communities and neighborhoods that need them the 

most. As a result, we have seen the number of community pharmacies decline nearly 50 percent since 1980. This is a disturbing 

trend, especially because it is small businesses such as Lech’s 

Pharmacy that will lead us out of these difficult economic times. 

5 

As policymakers it is our job to focus on laws and policies that 

empower small businesses to grow and create jobs right here in the 

United States. I have serious questions and concerns that the 

merger we are discussing today could worsen the climate for independent pharmacies and could lead to excess access and higher 

costs for patients. 

I am especially concerned about the consolidation this merger 

would cause in the mail-order and specialty drug markets. According to 2011 Atlantic Information Systems data, the combined mailorder facilities would concentrate 59 percent of the mail-order market, and in 2009 the combined specialty drug market share for Express Scripts and Medco was 52 percent. There have already been 

a number of reports where patients are being directed away from 

local specialty pharmacies to ones that may be much farther away 

and are owned by the PBMs. 

While I am concerned about the effects of this merger, it is important to recognize that regardless of the outcome of the Federal 

Trade Commission review, independent pharmacies will still face 

substantial difficulties. For this reason I have introduced H.R. 

1946, the Preserving Our Hometown Independent Pharmacies Act, 

that would be one step toward leveling the playing filed for community pharmacies. This legislation would allow independent pharmacies to join together to negotiate the terms and conditions of insurance contracts, to produce plans designed that would better protect the patient’s access to their pharmacy of choice and are fair 

to the pharmacies. This legislation would put an end to the ‘‘take 

it or leave it’’ tactics that small pharmacies are currently forced to 

accept. Many of my colleagues from the Committee and Subcommittee have already joined me in these efforts by cosponsoring 

this legislation. 

In conclusion, I would like to enter into the record a letter I received from the Pennsylvania House of Representatives chairman 

of the Health Committee, Matthew Baker, in opposition to the 

merger. In the letter he stated, PBMs’ record of controlling costs 

is questionable, and the proposed merger would limit the ability of 

both the private and public sector to control health care costs, thus 

resulting in a significant reduction of competition. 

Again, I would like to thank the Chairman for holding this important hearing. As the FTC commits its review and continues of 

this proposed merger, I would ask that they pay special attention 

to what it would do to patient access to the local pharmacies and 

the personal care these pharmacies provide. I look forward to working with you, Chairman Goodlatte and Ranking Member Watt, to 

ensure that we are doing everything we can to give hometown 

pharmacies the opportunity to grow and create jobs, while providing the best care for our families. 

Mr. GOODLATTE. I thank the gentleman, and, without objection, 

the letter from Mr. Baker will be made a part of the record. 

[The information referred to follows:] 

6 

Mr. GOODLATTE. We are pleased to be joined by the Ranking 

Member of the full Judiciary Committee, the gentleman from 

Michigan, Mr. Conyers, and I am pleased to recognize Mr. Conyers. 

Mr. CONYERS. Thank you, Chairman Goodlatte and Mel Watt, 

our Ranking Member. 

I had said before that I have rarely met a merger that I liked, 

but this is one that I like more than the ones that I don’t like. And 

so the biggest problem I have here is that the small pharmacies 

and independents are urging me not to support it, and I hope I 


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hear persuasive discussion that will lead me to go along with this 

circumstance. 

Now, this is a case of a small company taking over a bigger company, isn’t it, which is also quite unusual. So here we come with 

these intermediaries, these folks that work in between the pharmacy benefit managers. How did they get into the picture? Where 

did they come from? What created them? I understand there are 

more than 40 floating around, and I think—and I hope I heard my 

leader Mel Watt say that we determine what is—what violates 

antitrust, not the FTC. But that is what is in our jurisdiction anyway. 

So I come here thinking that in the long run somebody is going 

to go out of business if they don’t merge. I don’t want to try to tell 

you I have looked at the books of anybody, but what I am hearing 

is if this merger doesn’t take place, it is not unlikely that somebody 

will go out of business, so that from a jobs perspective this is a 

strong case for the merger. 

And so I will introduce into the record my complete statement 

and ask that all of you expect me to discuss Chairman Goodlatte’s 

observation that the wave of mergers were the result of the ill-conceived health care bill. I hope that you are all prepared to answer 

that question. 

And I thank you, Chairman Goodlatte. 

Mr. GOODLATTE. I thank the gentleman. 

[The prepared statement of Mr. Conyers follows:] 

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Mr. GOODLATTE. And it is now my pleasure to introduce our witnesses. We have a very distinguished panel of witnesses today. And 

before I introduce them, I would like them to stand and be sworn. 

[Witnesses sworn.] 

Mr. GOODLATTE. Thank you, and please be seated. 

Each of the witnesses’ written statements will be entered into 

the record in its entirety. I ask that each witness summarize his 

or her testimony in 5 minutes or less. To help you stay within that 


68401B-7.eps
15 

time, there is a timing light on your table. When the light switches 

from green to yellow, you will have 1 minute to conclude your testimony. When the light turns red, that is it. It signals that the witness’ 5 minutes have expired. 

Our first witness is George Paz, chairman and CEO of Express 

Scripts, Incorporated. If the merger is approved, Mr. Paz will be 

the chairman and CEO of the new merged company. 

Our second witness is David Snow, chairman and CEO of Medco 

Health Solutions. 

Our third witness is Joseph Lech, an independent community 

pharmacist from Tunkhannock, Pennsylvania. 

Our fourth witness is Dennis Wiesner, a senior director of the HE-B grocery chain with responsibilities for privacy, pharmacy and 

government affairs. 

Our fifth witness is Dan Gustafson, a founding member of the 

Minneapolis law firm Gustafson Gluek. 

Our sixth and final witness is Stephanie Kanwit, counsel at the 

law firm Manatt, Phelps & Phillips. 

Mr. Paz, we will begin with you. Welcome. 

TESTIMONY OF GEORGE PAZ, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, EXPRESS SCRIPTS, INC. 

Mr. PAZ. Thank you, Mr. Chairman and Members of the Subcommittee. 

Mr. GOODLATTE. You may want to turn on that microphone and 

pull it close. 

Mr. PAZ. Thank you, Mr. Chairman and Members of the Subcommittee. Thank you for the opportunity to explain how the combination of these two innovative companies can benefit the Nation’s 

patients and its public and private purchasers. I believe that today’s hearing will demonstrate that this merger is one of the best 

prospects to secure safer and more affordable prescription drugs for 

tens of millions of Americans. 

I would like to begin by addressing a concern on every American’s mind: jobs. Health care costs are a worrisome part of running 

a business. Yesterday an important new study was released, which 

I ask to be included in the hearing record. It concludes that for 

every 1 percentage point reduction in prescription drug costs, 

20,000 jobs in the United States can be funded. 

PBMs have a proven track record of generating savings for employers and their workers. There are many proven tools available 

through PBMs like Express Scripts and Medco that reduce drug 

costs, and this merger will sharpen and expand the availability of 

these tools. 

Four of us on this panel are part of the same noble mission. Patients in need of medicine rely on us for access to affordable care. 

Each us is committed to the highest ideals of the practice of pharmacy: accuracy, safety, affordable care, and service. 

Mr. Lech’s pharmacies are a part of our network. We are the 

PBM for Blue Cross of Northern Pennsylvania, the insurer that 

covers many of his customers. We work with literally thousands of 

independent pharmacies like those of Mr. Lech all across the country, and we value those relationships. 

16 

Mr. Wiesner’s employer, H-E-B, has been our client for many 

years. His chain of stores are also an important part of our pharmacy network. Let me also acknowledge Mr. Wiesner’s service on 

the Texas Board of Pharmacy, where he is developing the next generation of skilled pharmacists to serve patients. 

I am proud to report that one of my company’s employees was 

just named the outstanding young pharmacist of the year by the 

Texas Pharmacy Association. 

Each of us here today should ask ourselves what is in the best 

interest of a patient when they are trying to fill a prescription? 

And who is there to ensure that the American family is getting the 

best value for their money? PBMs help American families and their 

employers get the best possible deal while improving safety. We 

make the use of prescription drugs safer and more affordable. 

After a patient has been seen by their caregiver and has a prescription that needs to be filled, they are hardly in a position to negotiate with a drug company or a pharmacy. They just know they 

need the prescription filled as their ticket to getting well. If they 

are one of our patients, when they walk into a pharmacy, they 

have all 13,0000 Express Scripts employees standing with them. 

Before they ever receive their medicine, over 100 safety checks are 

conducted by our system, one of most advanced high-tech systems 

in the world. In less than 2 seconds, we determine if there is a 

clinically appropriate, less costly generic drug available. We also 

make sure the patient is not subject to adverse drug events. Further, what patients pay is reduced on average by 30 to 40 percent. 

For Mr. Lech, Mr. Wiesner and other pharmacies, they receive 

safety information, and they are assured payment, eliminating $7.3 

billion in bad debt to pharmacies each year. These are all giant 

leaps forward for patients and pharmacies that companies like our 

help create, and we make these benefits available to over 65,000 

pharmacies in every corner of the United States. 

I believe drug costs are still too high for American families. 

When the big drug companies’ charge for their medicines keeps 

going up, and large retail drugstore chains want to dictate prices, 

I want a fair deal for our patients and employers. That mission 

goes to the core of what our companies are all about. We are fully 

aligned with our patients and employers. We make money by saving them money. This union of our two companies will strengthen 

our ability to do just that. 

In my formal testimony I go through many of the tools we have 

developed to drive down drug costs while improving health outcomes. We have a proven track record. 

There are other benefits to the health care system by combining 

our two companies. For example, one, we increase patient adherence and reduce unnecessary medical expenses; two, we help the 

FDA monitor drug shortages and identify safety concerns quickly; 

three, we empower Federal and State responders from all public 

health and respond to natural disasters; and, four, we help law enforcement address fraud, waste and abuse. 

In conclusion, the merger of Express Scripts and Medco is the 

best opportunity to continue to lower drug costs while improving 

health care today and for the immediate future. 

17 

1http://www.imshealth.com/deployedfiles/ims/Global/Content/Corporate/Press%20Room/Topline%20Market%20Data/2010%20Top-line%20Market%20Data/2010lDistributionlChannell 

bylRX.pdf 

Mr. Chairman and Members of the Subcommittee, I thank you 

for the opportunity to speak to you today. 

Mr. GOODLATTE. Thank you for your testimony, Mr. Paz. 

[The prepared statement of Mr. Paz follows:] 

Prepared Statement of George Paz, Chairman and Chief Executive Officer, 

Express Scripts, Inc. 

INTRODUCTION

Chairman Goodlatte, Ranking Member Watt, and Members of the Subcommittee, 

my name is George Paz and I am the Chairman and Chief Executive Officer of Express Scripts, Inc. Express Scripts is headquartered in St. Louis, Missouri and has 

more than 13,000 employees located in 13 states including Arizona, Florida, Indiana, New York, Ohio, Pennsylvania and Texas. 

I wish to thank the subcommittee for the privilege to testify and share my perspective on why and how the proposed merger of Express Scripts and Medco Health 

Solutions will be a win/win for the nation’s patients and its public and private purchasers. It is my hope that today’s hearing will also make clear why failure to finalize and approve the merger will eliminate one of the best prospects we know to secure safer, better and more affordable pharmaceutical coverage and care for tens of 

millions of Americans. 

Express Scripts is one of more than 40 pharmacy benefit managers, or PBMs, operating in the United States. Every year, Express Scripts is hired by thousands of 

small businesses, Fortune 500 employers, Taft-Hartley funds, managed care plans, 

and state and local governments to manage the pharmacy benefits for more than 

50 million patients. 

Clients appreciate what we do to help them provide cost-saving, medically appropriate prescription drug coverage for American workers and families. Failure to 

produce savings and value for our customers means they turn to our competitors 

or attempt to manage the costs themselves. We are quite proud, however, that our 

clients ‘‘re-elect’’ us 98% of the time. Several of our more widely known clients such 

as, Blue Cross Blue Shield of Northeast Pennsylvania, Blue Cross Blue Shield of 

Massachusetts, MetLife and Lowes have contracted with Express Scripts for more 

than a decade. 

Express Scripts is a genuine American success story. We have grown rapidly over 

our 25-year history, bringing innovation to the marketplace, driving out unnecessary 

or expensive spending in the pharmacy benefit and making medicines safer and 

more affordable. Since being founded in 1986, much has changed in the world. One 

overriding principle that forms the bedrock of our company never wavered: our goals 

will always fully align with our clients’ needs. 

Simply and most accurately put, we and our competitors in the PBM industry are 

successful when our clients save money through lower employer and employee 

health premiums and/or reduced out-of-pocket costs while at the same time enhancing safety and more positive medical outcomes. To the extent we fail to deliver on 

that promise, we fail to retain and sustain our client base and business model. 

PBMS LOWER PRESCRIPTION DRUG COSTS FOR CONSUMERS & PAYERS

At Express Scripts, we work hard on behalf of our clients to rein in high drug 

costs, improve patient outcomes, advance the practice of pharmacy, and assist law 

enforcement in critical efforts to stop fraud, waste and prescription drug abuse. 

With nearly four billion prescriptions filled in the United States last year alone 1, 

pharmacy is the most frequently used part of health care and demands the sophisticated tools and expertise only PBMs can bring to bear. 

Express Scripts’ fundamental mission is to make medicines safer, more affordable 

and more accessible. PBMs make prescription drugs more affordable for clients by 

creating old-fashioned American competition among brand-name and generic drug 

manufacturers as well as among more than 60,000 chain drugstores, mass merchandisers, independent pharmacies, and grocery pharmacies. We ‘‘ride the same horse’’ 

with our clients, helping them benefit directly from our bargaining know-how and 

world-class clinical initiatives. 

At a time when many Americans struggle to afford their medications, sometimes 

having to choose between a rent check and the prescription to keep their diabetes 

18 

2 US GAO ‘‘Effects of Using Pharmacy Benefits Managers on Health Plans, Enrollees and 

Pharmacies’’ GAO–03–196 3http://www.consumerreports.org/health/resources/pdf/best-buy-drugs/StatinsUpdate-FINAL. 

pdf 4Kuklina EV, Shaw KM, Hong Y. Vital Signs: Prevalence, Treatment, and Control of High 

Levels of Low-Density Lipoprotein Cholesterol—United States, 1999–2002 and 2005–2008. Morbidity and Mortality Weekly Report. 2011;60(4):109–114. Available at: http://www.cdc.gov/mmwr/ 

pdf/wk/mm6004.pdf Accessed February 4, 2011. 

under control, our role has real meaning in the lives of so many. When a patient 

visits a pharmacy, she leaves with both peace of mind and the right medication to 

improve her health and well-being. Whether a patient realizes it or not, through our 

rapid and robust high-tech adjudication process, more than 100 safety checks occurred before she left the pharmacy. These safety checks avoid costly drug interactions, contraindications, and other harmful medication errors. PBMs save lives 

and deliver real value for millions of Americans every day. 

PBM–GENERATED COMPETITION LOWERS DRUG PRICES

PBMs have had tremendous success in driving down prescription drug costs for 

patients and payers. In doing so, PBMs have relied upon a wide range of tools and 

techniques, including expanded access to less costly, medically appropriate generic 

drugs, step therapy programs, and home delivery pharmacy. According to our data, 

Express Scripts members utilizing our full complement of tools enjoy an additional 

annual average savings of over 11 percent per year. These savings are in addition 

to the discounts from negotiating with drug makers, which average 27 percent below 

the average cash price consumers would pay at a retail pharmacy for brand name 

drugs and 53 percent below the retail cash price for generic drugs.2

The decisions we make and the innovations we bring forward are rooted in the 

best clinical data available anywhere in the world. A key tool PBMs rely upon to 

increase competition in the prescription drug supply chain begins with a Pharmacy 

and Therapeutics (P&T) Committee. Comprised of an independent group of highlytrained physicians and pharmacists, these panels review every marketed prescription medication to ensure safety, clinical appropriateness, and establish coverage parameters to guide formulary (the list of covered medications) development. These 

P&T Committees are focused solely on the clinical benefit of these medicines and 

are not involved in negotiations with pharmaceutical manufacturers, contracting 

with network pharmacies, or any other aspect of a PBM’s business. The P&T Committee develops independent, science-based clinical parameters consistent with best 

medical practices, which PBMs use to build innovative programs and negotiate with 

drug makers to compete at the lowest price. 

Perhaps a P&T Committee’s role can be best explained through the example of 

a class of medications that treat high blood cholesterol (hyperlipidemia). Payers, 

whether health plans, employers or the federal government, spend more on prescription medications in this class than any other group of medications. Within this 

therapeutic class, there are dozens of available treatments. Looking just at statins, 

a sub-class that lowers LDL cholesterol, there are seven different medications available. As the P&T Committee reviews this class, clinicians examine all the available 

data, weed out the ‘‘me-too’’ drugs from truly novel therapies, and determine that 

a clinically comprehensive formulary should include generic medications and only 

one high-potency statin. With only one high-potency statin needed on the formulary, 

the manufacturers of these products blindly bid at the lowest possible price in an 

effort to ensure placement on the formulary. Price variation in this class is significant, with the monthly treatment costs varying from $11 to more than $200 3. 

In 2010, brand drug makers increased prices on statins by an average of 9.3 percent. Yet because of Express Scripts’ sophisticated negotiating tools, our clients’ exposure to this increase was limited to 6.3 percent—which translates to a 32 percent 

discount for clients. Our business model is a winning formula for patients, payers, 

and the entire health care system. Each of our clients makes their own choice about 

how to use these savings. Some use the savings to offset premium increases. Others 

offer these savings to patients through reduced copayments, coinsurance, or through 

copayment waivers altogether. Interestingly, the number of patients receiving treatment for high-blood cholesterol actually increased last year, addressing a public 

health concern well documented by the Centers for Disease Control and Prevention 

(CDC)4. 

PBMs are creating competition in the drug supply chain. If a dozen different prescription medications treating the same condition were all covered by a health plan 

at identical levels, drug makers would be incentivized to maximize prescription drug 

prices to whatever level the market would bear. Instead, the use of independent 

19 

5 National Health Expenditure Data from the Centers for Medicare & Medicaid Services. 

https://www.cms.gov/NationalHealthExpendData/downloads/highlights.pdf Accessed September 

14, 2011. 6http://www.gphaonline.org/about-gpha/about-generics/case/generics-providing-savings-americans 7http://www.hhs.gov/news/press/2011pres/08/20110804a.html 

P&T Committees creates a market dynamic where the manufacturers of these products must compete with one another for placement on the plan formulary. The result—patients and plan sponsors save money and have better health outcomes. 

PBMS HAVE DRIVEN DRAMATIC DECLINE IN DRUG TREND IN THE PAST DECADE

The emergence of PBMs correlates directly with the reduction in the rate of 

growth in prescription drug costs. In the late 1990s, the rate of growth in the cost 

of pharmaceuticals was at an all-time high annual growth rate of 18 percent. This 

growth rate was simply unsustainable. Employers seeking to rein in costs were desperate for help and began turning to PBMs in earnest for solutions. Throughout the 

2000s, the annual rate of growth was reduced gradually to just 5 percent in 2009.5

This historic decline in drug trend is attributed to a variety of factors, including the 

expanded use of cost-effective generic alternatives. Trend management tools that 

promote the use of generic drugs are the single most potent tool to lower drug 

spending. Largely because of the leadership from companies like mine, the use of 

generic drugs has saved American patients and payers $824 billion in the last decade alone 6. 

MEDICARE PART D: WORKING AS CONGRESS INTENDED TO LOWER SENIORS’ DRUG COSTS

Medicare and more than 40 million older Americans and people with disabilities 

have also benefitted from PBMs’ tool and techniques. Prior to the advent of Medicare Part D in 2006, about one in three Medicare beneficiaries lacked prescription 

drug coverage. Without comprehensive drug coverage provided through PBMs, millions of seniors every month faced agonizing choices that either meant forgoing 

needed medications or diverting scarce resources away from rent or food to pay for 

their prescriptions. Working together on a bipartisan basis, Congress passed historic 

legislation in 2003 modernizing Medicare by adding a much-needed prescription 

drug benefit. 

Despite dire predictions by some of high costs and low participation, Medicare 

Part D has exceeded expectations. Beneficiary satisfaction is very high, with seniors 

enjoying broad access to a wide range of medicines. Plan participation is robust, 

with dozens of health plans and PBMs acting as prescription drug plan (PDPs) 

sponsors or Part D sub-contractors. Premiums are far lower than originally forecast 

and the program has come in under budget. In fact, the Center for Medicare and 

Medicaid Services announced in early August that 2012 Medicare Part D premiums 

will actually go down for the first time in the program’s six year history. This is 

due to competition amongst Medicare Part D plans (administered by PBMs) and increased generic utilization.7 While there are important distinctions between Medicare Part D and how PBMs operate in the commercial marketplace—particularly 

how Part D’s design protects drug makers from competition for certain classes of 

drugs—Part D nonetheless builds on many of PBMs’ core business functions. 

IMPROVING PATIENT CARE THROUGH PRESCRIPTION-DRUG ADHERENCE PROGRAMS

While Express Scripts and Medco have built very different capabilities to serve 

their patients, we have a shared mission to protect working families and small businesses from high prescription drug costs. Express Scripts has advanced this goal by 

applying behavioral sciences to healthcare to understand the reasons why patients 

may not always adhere to their medications. More than half of all patients fail to 

engage in behaviors consistent with their intentions. This disconnect between patient intent and reality results in the wasting of more than $18 million of pharmacy 

benefits each and every day. Imagine if our system could recoup even a modest portion of this waste? These resources could be allocated much more effectively in other 

parts of the system. 

Express Scripts helps close this intent-behavior gap and improve patient outcomes 

through the application of behavioral sciences. Inherently, we all want to use the 

least costly medicine, delivered as safely as possible. Any number of barriers can 

come along that trip us up—leading to non-adherence, financial waste and poor outcomes. We cut through the noise and create simple to execute programs allowing 

people to act on their best intentions. While Express Scripts has focused on improving compliance, Medco has made a key priority of managing chronic illness through 

20 

8 Express Scripts. 2010 Drug Trend Report. 

9Pharmaceutical Care Management Association. White paper on Fraud, Waste and Abuse. 

July 2011. 

Therapeutic Resource Centers (TRCs). TRCs focus on patients diagnosed with different chronic diseases and employ an array of specially trained clinicians to optimize therapy effectiveness, maximize health outcomes by improving adherence, and 

help patients avoid adverse drug interactions. While our clinical capabilities are 

very different, we share the same goal and these capabilities will be a powerful complement to one another when the merger receives regulatory approval and is finalized. 

Let me leave you with another example of how this combination will improve 

healthcare. You recall the excitement around the mapping of the human genome. 

We were promised a golden era of medicines. By and large, that promise has not 

been fulfilled. By bringing together our companies’ complementary expertise in behavioral sciences and pharmacogenomics, we have the potential to truly deliver on 

the real promise of personalized medicine: ensuring that patients get the right treatment at the right time for the best outcome. 

REDUCING PHARMACY FRAUD, WASTE AND ABUSE

Another shared goal of Express Scripts’ and Medco’s business is driving waste out 

in the pharmacy benefit, deterring fraud, and reducing prescription drug abuse. In 

2010, Americans unnecessarily spent more than $400 billion on their health care, 

and risked their lives and health, by choosing the wrong medication, pharmacy or 

through simple but all-too-frequent non-adherence to their doctors’ instructions 8. Beyond wasteful prescription drug spending, these costs include unnecessary hospitalizations, testing and treatment in costly emergency rooms. These are very real 

problems with costs across the entire health system and PBMs are the most advanced partners to provide common-sense solutions. 

As much as 1 percent of prescription drug costs result from fraud, waste, and 

abuse 9. With Americans spending $307 billion just on prescription drugs in 2010, 

this amounts to several billions of dollars in unnecessary costs to our system. Our 

clients already rely on us to help detect and prevent fraud, waste and abuse. 

Through advanced high-tech programs and processing systems, we save clients millions of dollars in wasteful pharmacy spending. Beyond saving money for our clients 

and patients by preventing this wasteful, and in some cases criminal behavior, our 

merger can bring new resources to bear for law enforcement to address America’s 

other drug problem—prescription drug abuse. 

Examples of fraud in the pharmacy marketplace are plentiful. A few years ago, 

six pharmacists, a doctor, and five drug dealers in Texas were convicted for conspiracy to divert more than 1.7 million tablets of prescription pain killers for illicit 

sale and use. The $30 million scheme involved pharmacists repeatedly refilling 

fraudulent prescriptions that were dispensed to drug dealers. These criminal enterprises have become so wide-spread, several states have enacted anti-‘‘pill mill’’ legislation to detect and end this kind of prescription drug abuse. 

The combination of Express Scripts and Medco’s systems will create a new tool 

for law enforcement when investigating potentially criminal prescribing or dispensing patterns. With data from more than 65,000 pharmacies across the country, 

doctor-shopping, polypharmacy, and other instances of fraud can be stopped like 

never before. 

EXPANDED CLINICAL OFFERINGS

Express Scripts and Medco both have significant clinical capabilities to serve all 

of our patient groups. By combining these offerings, we can pioneer new drug safety 

systems, create new resources for public health, and continue to advance evidencebased medicine to better serve our patients. 

Express Scripts has been on the cutting edge of improving patient safety. Through 

a combination of our P&T committee expertise, our vast database of prescription 

drug utilization, and post-marketing surveillance, Express Scripts identified serious 

safety concerns with Vioxx® more than six months before the FDA withdrew market approval. By combining with Medco, we will have even more clinical data that 

can create the largest and best real-time early warning drug safety system in the 

world. 

This combined clinical data is also useful to public health. As various government 

agencies monitor epidemiology, or track supply chain disruptions in the United 

States, our resources will provide comprehensive data that have never before existed. The FDA, CDC, DEA and FEMA could all benefit from the comprehensive 

21 

warehouse of supply chain data to track, distribute and respond to public health 

emergencies. 

We also intend to continue our focus on evidence-based medicine that improves 

the safety and cost-effectiveness of prescription drugs. The growing availability of 

generic alternatives has already created enormous opportunities to better manage 

prescription drug spending. 

ADVANCING SPECIALTY PHARMACY SERVICES

An Express Scripts-Medco merger will facilitate the advancement of specialty 

pharmacy services for patients facing the challenges of diseases like cancer, MS, leukemia, and hepatitis C among others. Express Scripts is very proud of our specialty 

pharmacy capabilities. We are committed to providing the best in class specialized 

care to patients with chronic, complex diseases with medications that can cost tens 

or even hundreds of thousands of dollars per year. Our specialty pharmacy programs keep patients adherent to injectable and infusible therapies, avoid more costly treatment settings, and improve the livelihood of our patients. Our specialty 

pharmacies also partner with drug makers, the Food and Drug Administration, and 

the Drug Enforcement Agency because of the need for post-marketing surveillance. 

Narrow distribution channels are necessary for drugs that are sometimes schedule 

III controlled substances. Specialty pharmacy is a complex market with competition 

both inside and outside of the pharmacy benefit, including retail pharmacies across 

the nation. 

WE WILL PROTECT AMERICAN FAMILIES FROM THE RISING COST

OF PRESCRIPTION MEDICINES

A combined Express Scripts and Medco will be well-positioned to protect American families from the rising cost of prescription medicines. The Federal Trade Commission, the country’s only regulatory agency tasked with both consumer protection 

and competition, is reviewing the competitive effects of our merger. After its thorough review, the FTC will make its determination as to whether the proposed transaction passes muster under the antitrust laws. 

The PBM marketplace is highly competitive and dozens of PBMs compete for business in various payer streams providing coverage to roughly 260 million Americans. 

This marketplace consists of large group, small group, and individual insurance 

markets, Taft-Hartley union plans, and an array of separate public programs, including Medicare, Medicaid, Children’s Health Insurance Program (CHIP), 

TRICARE, state employee benefit plans, and the federal employees’ program (FEP). 

More than 20 different PBMs service the Fortune 500 employers and the advent of 

the Medicare Part D program has dramatically increased the number of prescription 

drug benefit offerors. 

While a focus on historical market shares ignores the highly complex and dynamic 

nature of the marketplace and how PBM business is bid and won, by our estimates, 

the combined historical shares of the companies would be approximately 30 percent. 

This range falls well inside the parameters of mergers which have passed antitrust 

regulatory review. 

The benefits of this merger are numerous and will accrue to patients, employers, 

clinicians, and payers alike by: 

• Generating greater cost savings for patients and plan sponsors; 

• Closing gaps in care and achieving greater adherence through behavioral approach and clinical strengths; 

• Providing leadership and resources required to drive out waste and improve 

health outcomes; 

• Utilizing shared expertise to better manage the cost and care associated with 

specialty drugs—the biggest driver of costs in the drug supply chain; and 

• Responding to the national call for a more affordable and accountable 

healthcare system. 

In conclusion, our health care system is at a crossroads. Consumers want the protection that comes from comprehensive coverage providing high-quality, affordable 

care, including pharmacy benefits. Employers, already struggling in a difficult economy, are seeking greater value for their health care spending and are looking for 

a calm port amidst the storm of rising costs and middling outcomes. Policymakers 

are combing through our nation’s accounting ledgers and finding Medicare and Medicaid awash in red ink. 

22 

The proposed merger of Express Scripts and Medco will not resolve all of the challenges facing our health care system, but it is an affirmative step in the right direction. The merger of Express Scripts and Medco will help make prescription drugs 

more affordable for seniors, people with disabilities and working families. It will 

also help small businesses and large employers better compete in a global economy 

by helping to rein in their medical costs. Finally, a combined Express Scripts and 

Medco will help deliver real savings to Medicare and Medicaid beneficiaries and put 

our nation’s fiscal footing on a stronger foundation. 

Thank you for the opportunity to testify today and to explain the consumer benefits and enhanced competition that will arise with a merged Express Scripts-Medco. 

I look forward to answering any questions you may have. 

Mr. GOODLATTE. And, without objection, the study you referenced 

in your testimony will be made a part of the record. 

[The information referred to follows:] 

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Mr. GOODLATTE. Mr. Snow, welcome. We are pleased to have 

your testimony. 


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TESTIMONY OF DAVID B. SNOW, JR., CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, MEDCO HEALTH SOLUTIONS, INC. 

Mr. SNOW. Chairman Goodlatte, Ranking Member Watt, Members of the Committee, thank you for this opportunity to discuss 

the proposed merger of Medco Health Solutions and Express 

Scripts. My name David Snow, and I am the chairman and CEO 

of Medco Health Solutions. Medco is an industry leader in pharmacy that employs over 3,000 skilled pharmacists. We develop innovative solutions that deliver unique value to private and public 

employers, health plans, labor unions, and government agencies of 

all sizes, as well as individuals served by Medicare Part D drug 

plans. 

Everyone recognizes that the ever-rising cost of health care in 

America is unsustainable. As the health care industry necessarily 

focuses on reducing costs without compromising patient care, we all 

face the irrefutable fact that we must do more with less. 

The services that PBMs provide are very much part of the solution. By merging Medco with Express Scripts, we will significantly 

accelerate our efforts to reduce overall costs in the health care system and improve the quality and efficiency of care delivery. 

To understand the value of the combination of our two companies, it is critical to recognize the dynamic marketplace in which 

we operate. Our competitors include some 40 PBMs, household 

names like Aetna, and Cigna, and CVS Caremark, and others who 

may not be so well known but continue to make major investments, 

like Prime Therapeutics, Catalyst, SXC, and perhaps most significantly UnitedHealth Group, who has announced its plans to take 

in house the 14 million lives previously served by Medco in order 

to increase its investment in its own PBM, Optum Rx. 

As these few quick examples demonstrate, competition for PBM 

services is intense and diverse, and new entry remains a very real 

prospect. That competition will only be enhanced by the Express 

Scripts-Medco merger. 

It was within the context of this competitive marketplace that 

the merger of our two companies was conceived. The essence of the 

PBM business is to bring lower drug prices and higher-quality care 

to patients, employers and taxpayers. The combination of Medco 

and Express Scripts will accelerate our efforts to achieve that goal 

in a number of ways. I will just mention two: volume and improved 

clinical practices. 

First, our combined entity will be able to lower drug and patientuser costs by achieving even greater discounts from drug manufacturers, thereby lowering costs to consumers and employers. In fact, 

under the terms of our existing employer contracts, the ones that 

we have in place today, $1 billion in savings will be passed back 

to our clients, guaranteed. 

And second, the merger will create synergies by combining the 

best of our complementary patient-centered clinical care programs. 

We are particularly proud of Medco’s specially trained pharmacists 

who use clinical protocols and in-depth counseling to help chronically ill Americans to most appropriately and safely manage their 

highly complex conditions. The result? An estimated $900 million 

in savings from reduced hospitalizations and associated costs last 

year. But we have only scratched the surface. We as a Nation could 

43 

save a total of over $350 billion a year by addressing medications 

that are underprescribed, misprescribed or simply not taken as directed by their physician. 

Taken together, the merger will help government, businesses and 

the economy as they jointly confront the necessity to decrease the 

cost of entitlement programs, thus reducing the overall deficit and 

increasing job growth. As is the case with the private sector, better 

management of costs within the Medicare and Medicaid programs 

can achieve savings without the need to reduce benefits. And at 12 

percent of payroll, health care is the most costly benefit expense for 

employers. Improving outcomes while reducing costs is the definition of doing more with less, and it will make our Nation’s businesses more competitive and successful. 

We recognize that many have voiced concern about the impact of 

an Express Scripts-Medco merger on retail pharmacies, particularly on independent pharmacies. More than 85 percent of Medco 

customer prescriptions are filled through our network of over 

60,000 retail pharmacies nationwide. There is nothing we plan to 

do that will change this. As our written testimony details, we are 

proud that our partnership with the community pharmacist has 

provided technology and information that have helped independent 

pharmacies protect and grow their business in an environment that 

favors national chains and big box retailers. 

The examples I have provided today clearly demonstrate that our 

health care system does best when many different companies and 

different models are all working to improve patient health. This diversity of approaches breeds innovation and collaboration. It is a 

catalyst for experimentation and progress, often leading to breakthrough solutions. 

We all know the future belongs to those who deliver more for 

less. Together Express Scripts and Medco will build a strong, competitive company that helps millions of people to live longer, 

healthier lives, while supporting the Nation’s goal of a sustainable, 

affordable health care system. 

Mr. Chairman, Ranking Member Watt and Members of the Committee, thank you for listening to my testimony, and I would be 

happy to answer any questions you may have. 

Mr. GOODLATTE. Thank you, Mr. Snow. 

[The prepared statement of Mr. Snow follows:] 

Prepared Statement of David B. Snow, Jr., Chairman and 

Chief Executive Officer, Medco Health Solutions, Inc. 

I. INTRODUCTION

Chairman Goodlatte, Ranking Member Watt and Members of the Committee, 

thank you for this opportunity to discuss the proposed merger of Medco Health Solutions and Express Scripts. My name is David Snow, and I am the Chairman and 

CEO of Medco Health Solutions. Medco is a leading health care company that has 

pioneered the world’s most advanced pharmacy. When we originally became a public 

company, our goal was to leverage the power of pharmacy to redefine the way that 

health care is delivered—to improve patient outcomes and lower costs. Today, we 

define that mission in three words, ‘‘making medicine smarter.’’ 

We are an industry leader in developing innovative solutions that deliver unique 

value to our clients and their members. We provide clinically driven pharmacy services designed to improve the quality of care and lower total health care costs for 

private and public employers, health plans, labor unions and government agencies 

of all sizes, as well as for individuals serviced by Medicare Part D Prescription Drug 

Plans. 

44 

1 IMS Institute for Healthcare Informatics’ study, ‘‘The Use of Medicines in the United States: 

Review of 2010,’’ April 2011. 2 Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics 

Group, 2010. 

Everyone has recognized that the ever-rising costs of the health care system in 

America are unsustainable. In 2010, U.S. spending for prescription drugs alone was 

more than $300 billion and is expected to reach more than $450 billion by 2019.1,2

As the health care industry necessarily focuses on reducing costs; as the ‘‘Super 

Committee’’ seeks to find health care savings without compromising patient care; 

and as all participants in the system are faced with the prospect of doing more with 

less, we believe that the services that Medco provides are part of the solution. And 

now, by joining with Express Scripts and combining the complementary expertise 

of the two companies, we will be able to significantly accelerate efforts to reduce 

overall costs in the health care system and improve the quality and efficiency of care 

delivery. 

II. MEDCO BACKGROUND

Our mission to make medicine smarter truly defines our company and guides our 

business strategy. In 2011, Medco captured the number one position in the Health 

Care: Pharmacy and Other Services sector on Fortune’s World’s Most Admired Companies List for the fourth consecutive year. In this sector, Medco ranked number one 

in all nine attributes: innovation, use of corporate assets, social responsibility, quality of management, financial soundness, quality of products and services, people 

management, long-term investment and global competitiveness. 

Our services are designed not only to reduce drug costs, but also to close gaps in 

pharmacy care. We reduce drug costs for our clients and their members in a variety 

of ways including: maximizing the substitution rate from expensive brand-name 

drugs to lower-cost clinically equivalent generic drugs; driving competitive discounts 

and rebates from brand-name and generic drug pharmaceutical manufacturers; 

minimizing the cost and improving the accuracy of filling prescriptions; and applying our sophisticated service innovations to efficiently administer prescription dispensing through our mail order pharmacies. By utilizing advanced clinical tools to 

encourage adherence and drawing on real-time prescription drug and medical databases in a truly wired fashion, we improve patient health and reduce total medical 

spending levels. 

Our business model requires collaboration with payors, retail pharmacies, including independent pharmacies nationwide, physicians, pharmaceutical manufacturers 

and CMS for Medicare and state Medicaid agencies. We provide our services 

through our national networks of retail pharmacies and our own mail order pharmacies, as well as through our specialty pharmacies. 

Our unique Medco Therapeutic Resource Centers conduct therapy management 

programs using Medco Specialist Pharmacists who have expertise in the medications used to treat the most prevalent and costly chronic conditions. Our personalized medicine capabilities through our Medco Research InstituteTM and genomics 

counseling services foster the integration of genetic information into everyday health 

care decision making. These services represent innovative and successful models for 

the care of patients with chronic and complex conditions. 

III. DYNAMIC MARKETPLACE

The business of pharmacy benefit managers (PBMs) is defined by robust competition, with more than 40 PBMs working hard to provide differentiated value propositions for public and private payors. These firms are a diverse group with very different business models and varying degrees of vertical integration, some integrated 

with pharmacies, others integrated with managed care organizations and others entirely independent. Nine Fortune 500 companies operate their own PBMs. Non-PBM 

participants like Wal-Mart and Target also contribute meaningfully to the competitive landscape by offering low-price generic prescriptions, as do other retail pharmacies that are providing steep discounts on 90-day prescriptions. 

Whatever customer group you might define, there are numerous PBMs currently 

serving accounts and many more with the capability to do so. This is because the 

core services offered by PBMs are similar regardless of the size and nature of a client’s business. For example, in the context of the largest accounts, more than 10 

PBMs currently serve state accounts; at least 10 PBMs serve Fortune 50 companies. 

Our competitors often are major industry participants with household names like 

Aetna, Cigna and CVS Caremark. Other competitors may not be so well-known but 

45 

continue to make major investments to grow and to better serve current and potential customers. 

For example, Catalyst acquired Walgreens’ PBM in June, more than doubling its 

number of members and prescriptions. In a recent earnings call, Catalyst’s COO 

highlighted the company’s recent success in winning large, national employers during this selling season—and this was even before the acquisition. Several of Catalyst’s recent wins came against Medco and Express Scripts for Fortune 500 firms. 

These wins have allowed them to add big name companies like Ford Motor Company, MGM Mirage International, Whirlpool and Waste Management to their growing roster of Fortune 500 customers—a list that already included companies like 

Nike, Sprint, Southwest Airlines and Lear Corporation. 

Prime Therapeutics recently won from Medco the Blue Cross and Blue Shield of 

North Carolina account with more than a billion dollars in drug spending. Prime 

was originally formed by Blue Cross entities and has expanded from the PBM inside 

the private label offering of the Blues to becoming a major independent customer. 

And just last month, another notable merger was announced: SXC Health Solutions agreed to acquire PBM PTRx and mail order pharmacy provider SaveDirectRx, 

again illustrating the constantly evolving nature of the market. At one time SXC 

was thought of as more of a data processor for PBMs and other health organizations. They have evolved with the marketplace and now offer a full service PBM capable of competing effectively. The company, which this year jumped to number one 

on Fortune’s 100 Fastest-Growing Companies list, has also captured more than a 

billion dollars in drug spend with its Bravo Health victory. 

Perhaps nothing more clearly demonstrates the dynamic character of the PBM 

business than the evolution of our soon-to-be former customer UnitedHealth Group, 

now the largest single health carrier in the U.S. UnitedHealth used to have its own 

PBM business but sold it in the early 1990’s. They became a Medco customer in 

2000, and over the years Medco facilitated a private label PBM offering by 

UnitedHealth that had Medco ‘‘inside’’ running the PBM operation while 

UnitedHealth was the ‘‘outside’’ face to the customers. In 2005, as part of the 

PacifiCare acquisition, United acquired Prescription Solutions, a stand-alone PBM. 

United has steadily built up Prescription Solutions and rebranded it as Optum Rx. 

This summer it was announced that they would not renew their contract with 

Medco and would take in-house the 14 million lives previously served by Medco. At 

the same time, UnitedHealth has publicly highlighted its increased investment in 

Optum Rx and its intention to serve accounts of all sizes. We now have another 

major competitor in the marketplace, one that is widely regarded to be a significant 

force in the market going forward. And, as noted by Optum Rx CEO Jacqueline 

Kosecoff in a recent interview, the company is ‘‘very interested in the employer market and [is] getting very aggressive on bidding some very large accounts.’’ 

As you can tell from just these examples, Medco itself is all too familiar with the 

intensity and diversity of competition for PBM services. We compete against a wide 

variety of firms, generating a number of wins, as well as some significant losses. 

New entry remains a very real prospect in this business, one that ensures competition remains strong. Against this backdrop, PBM clients will have plenty of competitive choices post-merger, and the combined Express Scripts and Medco will be fully 

subject to the competitive pressures that will ensure value-based pricing and service. Taken together, these recent activities demonstrate the dynamic, competitive 

nature of the PBM marketplace and belie the notion that the combination of Medco 

and Express Scripts represents a threat to client choice. The reality is that the PBM 

business is extremely competitive and that competition will only be enhanced rather 

than diminished by the Express Scripts-Medco merger. 

IV. BENEFITS OF THE COMBINATION

It is within the context of this competitive marketplace that the merger of our 

two companies was conceived and ultimately approved by our management and respective boards of directors. The essence of the PBM’s business is to bring lower 

drug prices and higher quality care to its clients. We compete with one another to 

provide that value, and as competition becomes more intense in our industry, it 

drives innovation aimed at doing even more to serve our patients. In the health care 

industry today, we all share the same goal of reducing costs by improving the quality and efficiency of care delivery. 

The combination of Medco and Express Scripts makes strategic sense for our clients and patients. Each company uses a fundamentally different business model to 

address the needs of customers. Combining the best attributes of those business 

models will give us an enhanced capability to lower prices and improve quality care 

for our clients. We will accomplish this in a number of ways. 

46 

3Medco Research Data, 2010. 

4 Ibid. 

5 RAND Corporation Study, 2005; Institute for Health and Productivity Management; Medical 

Care. 2004 Mar; 42(3); 200–209. 

First, our combined entity will be able to lower drug acquisition costs by improving efficiency across the system and encouraging the most appropriate channels of 

distribution based on patient needs. Our clients and the consumers we mutually 

serve will benefit from these savings. For example, Medco negotiates the terms of 

its agreements with its clients in a fully transparent manner which, at the client’s 

discretion, directs us to pass through discounts and rebates that we negotiate with 

pharmaceutical manufacturers. Under the terms of our existing contracts alone, $1 

billion in savings from the merger will be passed back to our clients. 

Second, the combined entity will allow us to further innovate our robust technology platform so we can fully leverage the cost and quality benefits of our fully 

wired system that seamlessly integrates prescription management at both mail 

order and retail with our client and member services. This will result in substantial 

cost savings passed on directly to government, businesses and, ultimately, consumers. Third, our combined company will bring together advanced capabilities to integrate prescription management, including technological platforms to communicate 

with pharmacists and physicians in real time, allowing not only efficient claims 

processing, but also secure access to patient information and drug utilization reviews. Both Medco and Express Scripts complement and enhance physicians’ care 

using advanced clinical services to deliver tailored treatments with the highest levels of efficacy, value and speed. For instance, the Medco Research Institute integrates genetic information into everyday health care decision making—offering patients and providers actionable information to drive more precise health care decisions. One Medco Research Institute study conducted with the Mayo Clinic showed 

that a simple genetic test reduces hospitalization rates by nearly one-third for patients on warfarin, a widely-prescribed blood thinner. The combined entity will deliver even greater value to the companies’ clients and their members by applying 

the best practices of both companies. 

Fourth, the merger will allow the companies to benefit from economies of scale 

as the firms merge operations and implement each other’s best practices. Many aspects of core PBM operations can benefit from economies of scale, including contracting, mail order pharmacy operations, and designing and operating specialized 

clinical programs. At a high level, our ability to put more volume through a combined network will drive efficiencies that will reduce the unit cost of medications 

for our patients and customers. Increased scale will also allow the merged company 

to develop and apply new programs and practices more broadly. And the expanded 

scale and expertise of the combined firm will allow us to accelerate the research, 

development and deployment of new and innovative solutions for improving adherence and safety that have the potential go well beyond what each company could 

accomplish on its own. 

Finally, and perhaps most significantly, the Express Scripts–Medco combination 

will allow the two companies to use their collective and complementary expertise 

and capabilities, creating unique synergies to close gaps in care, particularly for 

chronically ill patients. Even the most effective treatments cannot help patients if 

they are not used properly. Gaps in care related to medication non-adherence affect 

millions of Americans; they cost dollars and lives. More than 75 percent of all health 

care costs in the United States are associated with chronic and complex conditions, 

such as cancer, heart disease, and asthma.3 In nearly 90 percent of these cases, prescription drugs are considered a first line of defense.4 However, gaps in care, largely 

caused by under-prescribed and mis-prescribed medications, as well as patient nonadherence, result in substantial waste each year in the form of unnecessary hospitalizations, emergency room visits, and extended illnesses. Poor management of 

chronic and complex conditions has lead to an estimated $350 billion in unnecessary 

health care costs annually.5

To address the needs of patients with chronic and complex conditions, Medco’s 

Therapeutic Resource Centers (TRCs) engage members and model behaviors to improve clinical outcomes and reduce costs. In the Medco TRCs, more than 1,000 

Medco specialist pharmacists—who have additional training and certification in the 

medications used to treat the most prevalent and serious chronic conditions and comorbidities—use clinical protocols to assess patients’ prescription orders along with 

barriers to adherence; they provide in-depth counseling to patients as well as reminders to take their prescribed medications. Through use of TRCs, Medco members 

have achieved significantly higher adherence rates than patients receiving tradiVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
47 

6Medco 2010 Annual Report. 

7 ESI 2010 Drug Trend Report. 

8Medco Health Solutions Illinois Pilot Project. 

9Drug Channels, ‘‘Owning a Pharmacy: Still Pretty Profitable,’’ January 25, 2011 (Analysis 

of 2010 NCPA Digest Data). 

tional pharmacy care for a broad range of medication categories. We estimate that 

in 2010 alone, TRCs closed more than 2.3 million clinical gaps in care with a projected savings of approximately $900 million from reduced hospitalizations, ER visits, and other medical expenses across a range of chronic and complex conditions.6

At the same time, through its Consumerology initiative, Express Scripts has applied advanced behavioral science to identify and change common behaviors that 

prevent patients from adhering to their prescription medications. Their research has 

also helped to increase generic substitution and increase use of the most efficient 

and safest delivery channels. Through this initiative, Express Scripts has also increased adherence and achieved significant cost savings.7

Combining Medco’s expertise in advanced clinical pharmacy with Express Scripts’ 

expertise in behavioral science will create a new entity that is uniquely able to provide significant progress toward closing gaps in care, saving dollars and saving lives. 

By joining together, millions of members served by both of our companies will reap 

the benefits of these unique and complementary programs: increased prescription 

adherence and reduced gaps in care, resulting in better health outcomes and lower 

costs. And these benefits will help businesses and the economy more broadly. At 

12% of payroll, health care is the most costly benefit expense for employers. Reducing the cost of quality patient care will make all American business more competitive—creating a healthier, more productive workforce, preserving existing jobs and 

creating new jobs in the future. 

V. INDEPENDENT PHARMACIES

We recognize that many have expressed concern about the impact of an Express 

Scripts-Medco merger on retail pharmacies, particularly on independents. The facts 

are that more than 85% of prescriptions filled for Medco customers are filled 

through our networks of more than 60,000 retail pharmacies representing over 95% 

of all retail pharmacies nationwide. In short, either as a stand-alone company or 

combined with Express Scripts, Medco is dependent on the continued existence of 

strong independent retail pharmacies. Even as our companies seek to drive efficiency in the health care system, retail pharmacies will always play a crucial, complementary role to PBMs. 

Moreover, the services that PBMs provide have helped independent pharmacies 

better care for their patients, including by helping to close gaps in care, increase 

patient adherence and reduce adverse drug interactions. The Express Scripts-Medco 

combination will combine both companies’ capabilities aimed at improving patient 

adherence, which means that the millions of patients who use independent pharmacies will be more likely to complete their full course of prescription treatment, 

improving their overall health. The combination will also create additional partnership opportunities that can help independent pharmacies improve their customers’ 

adherence while creating new sources of value. 

A program implemented by Medco is an example of the type of mutually beneficial 

collaboration that could be expanded under the merger. Medco’s Cognitive Care Initiative, a twenty-six-week collaboration with community pharmacies in Illinois, significantly improved adherence and increased the value offered by participating independent pharmacies. Community pharmacists were trained to provide expert patient 

counseling on the importance of adherence and techniques to improve it. The initiative identified 2,400 adherence gaps; pharmacists in the program filled 48% more 

prescriptions after patient counseling and closed 27% more adherence gaps.8 The 

success of the pilot led to additional partnerships between Medco and community 

pharmacists in New Mexico, North Carolina and Florida. We look forward to continued collaboration on initiatives such as this in the days ahead. 

In recent years, even as PBMs have become increasingly important participants 

in the health care system, independent pharmacies have thrived. Between 2009 and 

2010, the number of independent community pharmacies grew by almost 400, to 

more than 23,000, representing a $93 billion industry. Last year, they filled nearly 

three times more prescriptions than were filled through mail order delivery services 

such as those offered by Express Scripts and Medco. And pharmacy profits have 

doubled since 1999, with average profits per pharmacy of close to $1 million.9 These 

data points confirm what our experience tells us to be true: PBMs and independent 

pharmacies are complementary businesses whose success can be mutually beneficial. It is our expectation that a successful Express Scripts-Medco—far from being 

48 

a threat to independent pharmacies—will actually be a driver of improved care for 

our mutual customers and improved economics for their businesses. 

VI. CONCLUSION

The data points I have discussed confirm what our market experience has long 

told us: our health care system does best when many different companies and different models are all working to improve patient health. This diversity of approaches breeds innovation and collaboration. It is a catalyst for experimentation 

and progress, leading to incremental improvements and often to breakthrough solutions. 

Today, there is a sense of urgency among all these many participants in our 

health care system. We all know the future belongs to those who deliver more for 

less. The merger of Express Scripts and Medco is part of that transformative process. Together, our companies will focus on lowering the prices customers pay for 

their medicines and improving their quality of care. And by delivering on that promise we will build a strong, competitive company that helps millions of people to live 

longer, healthier lives, while supporting the nation’s goal of a sustainable, affordable 

health care system. 

Mr. GOODLATTE. Mr. Lech, welcome. We are pleased to have you 

here today. 

TESTIMONY OF JOSEPH LECH, R.Ph., OWNER, LECH’S PHARMACY, AND MEMBER, NATIONAL COMMUNITY PHARMACISTS 

ASSOCIATION 

Mr. LECH. Thank you. 

Good afternoon, Chairman Goodlatte, Ranking Member Watt and 

Members of the Subcommittee. Thank for conducting this hearing 

and for the opportunity to share my view regarding the proposed 

Express Scripts-Medco merger. My name is Joe Lech of 

Tunkhannock, Pennsylvania. I am the owner of five independent 

retail community pharmacies in rural northeast Pennsylvania, and 

have been a practicing pharmacist for 30 years. I am a member of 

the National Community Pharmacists Association, which represents the pharmacists, owners, managers and employees of more 

than 23,000 independent community pharmacies across the United 

States. These pharmacies dispense nearly half of the Nation’s retail 

prescriptions. 

I would also like to thank Congressman Marino, my Congressman, for the active role he has taken in trying to level the playing 

field between community pharmacies and pharmacy benefit managers. In particular we thank him for introducing the Save Our 

Independent Hometown Pharmacies Act, which has been endorsed 

both by NCPA and NACDS, the group representing chain pharmacies. Thank you. 

As a health care provider, my primary concern is the health and 

well-being of my patients, and access to prescription medications is 

essential in maintaining the health of those patients. 

As you are aware, Pennsylvania, like many other States, was recently devastated by flooding. Many people in the area where I am 

from were evacuated from their homes with nothing more than the 

clothes on their back. The morning after the rain started, the road 

conditions were so bad that my usual 30-minute commute to the 

pharmacy took almost 2 hours. As I approached the pharmacy, I 

saw Mr. Slater, a longtime patron of our pharmacy, standing in 

front. He and his wife had been plucked from an upstairs window 

of their home and taken by boat to safety. They were unable to reVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6601 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
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trieve his 16 medications and her 8 that they need on a daily basis. 

I assured them I would provide them with their prescriptions. But 

what would happen in cases such as this if pharmacies like mine 

disappeared from the community that they rely on? The fact is 

community pharmacies are closing. 

This is just one story. There are thousands just like mine of community pharmacies stepping up to assist patients and getting their 

much-needed prescription medications. 

During the recent flooding, Congressman Marino’s district office 

staff got their feet wet, so to say, as they participated with Lech’s 

Pharmacy and Red Cross in prescription and supply deliveries from 

our pharmacy. Our three pharmacies were the only pharmacies 

open in the county for 2 days, and they assisted in the delivery of 

prescriptions and supplies by boat. The reason I am telling you this 

is because PBMs, or middlemen, already have so much control over 

the marketplace that it greatly concerns me about what will happen should this merger occur. 

Over my 30 years in pharmacy, I have seen the large pharmacy 

benefit managers gobble up smaller PBMs to reduce competition. 

The result is a highly concentrated, consolidated marketplace. Currently there are three PBMs that overwhelmingly dominate the national marketplace: Express Scripts, Medco and CVS Caremark. As 

a health care provider, I am aware of the consolidation within the 

health care industry, specifically consolidation within the PBM industry, which I believe has and will continue to negatively impact 

not only community pharmacies, but, more importantly, the patients that we serve. 

The recently announced proposal of a merger of Medco and Express Scripts will exacerbate the problems pharmacies and patients 

face with respect to PBMs. The merger of these two PBMs would 

create a mega PBM with overwhelming power in markets that are 

critical to controlling health care costs. I believe the resulting 

merger will harm patients by reducing choice, by decreasing access, 

and ultimately leading to higher prescription drug costs paid by 

plan sponsors and consumers. In fact, the proposed merger a tipping point in terms of PBM market concentration. The merger will 

cause a substantial reduction in both price and nonprice competition among PBMs. If approved, this mega PBM will control over 40 

percent of the national prescription drug market. 

The size of this consolidation is enhanced by the fact that large 

and national health plans, insurance companies and governmentsponsored health plans are already largely limited in their PBM 

choice. Postmerger, these large national customers will have fewer 

drug benefit administration alternatives, which will allow the 

merged PBM entity to dictate plan design and benefit structures at 

the expense of purchasers. 

The merger will force more into mail order. The merger will create the largest mail-order operation, accounting for over 60 percent 

of all mail-order directed business in the U.S. The merged firm will 

have the increased ability and incentive to force consumers to utilize the mail-order portion of their business. 

A misconception put forth by the merging parties is that this 

switch to mail order will lower drug costs for consumers. Evidence 

demonstrates the opposite. Mail-order operations push out more 

50 

brand-name drugs and fewer generics than the retail pharmacies, 

thereby lowering generic dispensing rates. 

A dramatic consequence of more and more switch to mail is in 

too many cases a pharmacy is unable to stay in business. Pharmacy closures are felt particularly hard in rural areas, where these 

community pharmacies function as health care providers on the 

front lines when a disaster such as a hurricane, a tornado, or, in 

my case, excessive flooding strikes. 

ESI and Medco neglect to tell you that this merger, if approved, 

will cost our local economies jobs and tax revenues due to the number of pharmacies that will likely be out of business due to the shift 

of prescriptions to out-of-State mail-order production. This merger 

will harm small business and cost jobs, something our economy can 

least afford at this time. 

In conclusion, I would add that I enjoy being a pharmacist, I love 

what I do, and I believe I am making a difference to all the patients who depend on my pharmacies. However, I am concerned 

that this merger will reduce patient access, ultimately leading to 

higher drug costs due to the reduction in competition. 

I thank you for the invitation, I welcome any questions, and as 

part of the proceedings, I would like to enter this document, which 

I believe all the Members have received in a packet—but I would 

like to introduce this document called Waste Not, Want Not, dealing with waste in prescriptions. 

Mr. GOODLATTE. Without objection, the report will be made a 

part of the record, and thank you, Mr. Lech. 

[The prepared statement of Mr. Lech follows:] 

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Mr. GOODLATTE. Mr. Wiesner, we are pleased to have you with 

us today. 

TESTIMONY OF DENNIS WIESNER, R.Ph., SENIOR DIRECTOR 

OF PRIVACY, PHARMACY, AND GOVERNMENTAL AFFAIRS, 

H-E-B GROCERY COMPANY, LP 

Mr. WIESNER. Thank you. Mr. Chairman, and Members of the 

Subcommittee. Thank you for the opportunity to testify. My name 

is Dennis Wiesner. I am a pharmacist, and I have worked in comVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6601 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA

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munity pharmacies for over 40 years. I have grave concerns about 

this proposed merger. It would be a tipping point in PBM market 

consolidation, harming patients as well as government and private 

health plans and employers. 

Mr. NADLER. Mr. Chairman, can you ask the witness to speak 

into the mic more? 

Mr. GOODLATTE. Is it turned on? Make sure the green light is on. 

Is that better? 

Mr. WIESNER. There is only one stakeholder that would benefit: 

the new mega PBM. Since the merger was announced, many Members of Congress, consumer groups, State insurance commissioners, 

State attorneys general and State legislators have expressed concerns to the Federal Trade Commission. This would be a merger of 

two of the big three PBMs. If approved, nearly 135 million Americans would rely on this single PBM to manage their prescription 

benefits. It would control over 40 percent of the national prescription volume, 60 percent of the mail-order pharmacy market, and 

more than 50 percent of specialty pharmacy sales. 

Patients in particular will be harmed through reduced or no 

choice of their pharmacy providers; decreased or limited access to 

essential pharmacies services; a separation of their prescription 

medication records that could result in potential adverse patient 

health outcomes, disruption to normal timely prescription service, 

and potentially decreased medication adherence. Reducing patient 

choice and access will lead to higher prescription costs, potential 

adverse patient outcomes, and higher downstream health costs. 

Do PBMs actually reduce health care costs? There is no proof 

that they pass along the purported savings to health plans, employers or consumers. In fact, the PBM industry has been fraught with 

allegations of extensive deceptive and fraudulent practices. In recent years cases brought by a coalition of over 30 State attorneys 

general have resulted in over $370 million in penalties. It has been 

found that PBMs have accepted rebates from manufacturers in return for placing higher-priced medications on prescription drug 

plan formularies, switched customers to the higher-priced drugs, 

and then benefited from both the rebate received and the higherpriced drug payment without passing along the enrichment to the 

health plan or employer. 

PBMs already operate in an opaque manner. They are middlemen in a unique position to dictate contract terms to health plans 

and pharmacy providers. The new mega PBM would have even 

greater ability to dictate one-sided, unfavorable contract terms to 

pharmacies, health plans and employers, ultimately harming consumers. This is one reason we oppose the merger and we seek legislative relief on PBM practices. 

Pharmacies that refuse their contract terms would be shut out 

of the networks that provide pharmacy services to their neighbors 

and huge portions of American consumers. In addition, more consumers would be forced into using PBMs’ own mail-order facility as 

opposed to choosing their local pharmacy, depriving consumer access to vital health care services and valuable face-to-face counseling. 

The Butt family founded H-E-B 106 years ago with a firm commitment to serve all the citizens in all our communities. That comVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6601 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
81 

mitment is stronger today than ever. However, being able to continue servicing the prescription and health care needs of our customers and neighbors has been threatened by the one-sided nature 

of pharmacy agreements with PBMs. We have seen firsthand the 

unilateral nature of these contracts. They are allowed to establish 

the basis of costs for the prescription medications; they are allowed 

to change that basis of cost with limited or no notice, especially for 

generic medication; and they are allowed to second-guess or override a physician’s prescription order. Claims submitted to the PBM 

and approved are routinely reviewed retroactively and payment recouped due to inadequacies in the PBM claims adjudication system. 

My company experiences these and other examples each and every 

day. 

Our internal health benefits team provides health care services 

to over 140,000 individuals. They feel strongly that this merger 

would limit competitive options and result in total costs, especially 

administrative fees, increasing. 

Pharmacists helped ensure that patients understand their medications and take them as directed. Pharmacists collaborate with 

doctors and other local health care providers to assist in medication 

decisions. Community pharmacies also provide critical, cost-effective services like immunizations, disease state management and 

monitoring, health education, and screening programs. Together all 

these services improve patients’ health and reduce out costs. 

As I said, the situation with PBMs has worsened through consolidation. Because of this, we support legislation to rein in their more 

egregious actions, including H.R. 1971 and H.R. 1946. 

In conclusion, PBMs already use a lack of transparency, failing 

to pass through rebates from drug manufacturers to consumers and 

other payers, inflating drug costs for health plans and employers, 

and lowering payments to pharmacies for their own personal financial gain. Patients appear to be an afterthought. A mega PBM 

would have an increased ability to engage in similar conduct to the 

detriment of consumers, payers and pharmacy providers. 

Thank you for your time. 

Mr. GOODLATTE. Thank you, Mr. Wiesner. 

[The prepared statement of Mr. Wiesner follows:] 

Prepared Statement of Dennis Wiesner, R.Ph., Senior Director of Privacy, 

Pharmacy, and Governmental Affairs, H-E-B Grocery Company, LP 

On behalf of the National Association of Chain Drug Stores (NACDS), I am 

pleased to submit a statement for the hearing on ‘‘The Proposed Merger between 

Express Scripts and Medco.’’ My name is Dennis Wiesner. I am a pharmacist and 

have worked in numerous roles in community pharmacy for over forty years. I am 

currently a Senior Director for H-E-B with responsibilities for privacy, pharmacy 

and government affairs. H-E-B is a private family owned regional food-drug retailer 

with over 300 stores in Texas, 222 of which have pharmacies. In addition, H-E-B 

has extensive warehousing and manufacturing facilities and over 80,000 employees. 

Our stores provide services to over 20 million Texans each year. 

I am also Chairman of the NACDS Policy Council. NACDS represents traditional 

drug stores, supermarkets, and mass merchants with pharmacies—from regional 

chains with four stores to national companies. Chains operate more than 40,000 

pharmacies, and employ more than 3.5 million employees, including 130,000 fulltime pharmacists. They fill over 2.6 billion prescriptions annually, which is more 

than 72 percent of annual prescriptions in the United States. The total economic 

impact of all retail stores with pharmacies transcends their $900 billion in annual 

sales. Every $1 spent in these stores creates a ripple effect of $1.81 in other industries, for a total economic impact of $1.76 trillion, equal to 12 percent of GDP. 

82 

This proposed merger poses significant anti-competitive threats to numerous U.S. 

industries and markets. If allowed, this merger would have grave consequences for 

consumers and the nation’s community pharmacies that serve them, as well as for 

health plans and employers that utilize PBM services, specialty pharmacy services, 

and mail order pharmacy services. NACDS opposes this merger and has urged FTC 

to block it. Earlier this month, the FTC issued a ‘‘Second Request’’ to Express 

Scripts and Medco to gather more data on the merger. According to media reports, 

only 4% of similar proposed deals in 2010 were issued a Second Request by the FTC. 

This merger has received the attention of not only FTC and this Committee, but 

also numerous other Members of Congress, numerous state Insurance Commissioners, state Attorneys General, and state legislators, who have all asked FTC to 

give this proposed merger a high level of scrutiny. 

BACKGROUND ON PBMS

PBMs manage and administer the prescription drug benefits of more than 210 

million Americans. Employers and health plans contract with PBMs to manage and 

administer prescription drug benefits (as opposed to medical benefits) as part of 

overall health benefits. PBMs construct and manage drug formularies and use these 

formularies to negotiate discounts with pharmaceutical drug manufacturers. Manufacturers want to include their drugs on a PBM’s formulary, and in order to do so, 

they provide discounts and rebates to the PBM, which are not always disclosed or 

passed on to purchasers of PBM services (e.g., employers and health plans). If the 

PBM can increase a manufacturer’s market share for certain drugs, the rebates and 

discounts are typically adjusted accordingly to incentivize the PBM to increase the 

dispensing of the manufacturer’s drugs, even if the incentives increase the costs to 

plans. The PBM consults with employers and health plans as to what drugs they 

should place on their formulary, but often without full transparency of the financial 

incentives. In other words, the PBM acts as a ‘‘double agent’’ negotiating with drug 

manufacturers as well as employers and health plans to create consumers’ prescription drug plans that benefit the PBM’s profitability. 

The PBM then contracts with community pharmacies to provide prescription 

drugs and pharmacy services to the plans’ beneficiaries. The payment from a PBM 

to a pharmacy for dispensing a prescription drug differs from the amount a PBM 

charges a plan for the same prescription drug, to the benefit of the PBM. Plans 

sponsors are typically unaware of this difference, commonly referred to as the 

‘‘spread.’’ PBMs profit not only from the spread, but also from additional administrative fees charged to the plan for processing the claim. Many PBMs also own mail 

order pharmacies that they encourage consumers to use instead of the community 

pharmacies. In addition, Express Scripts and Medco each separately own two of the 

largest specialty pharmacy companies in the U.S. 

As an industry, PBMs are virtually unregulated. They may have tangential regulatory compliance for insurance related processes through their relationships with 

health plans and employers. A handful of states directly regulate some PBM functions, such as how they conduct audits of pharmacies, and some state boards of 

pharmacy regulate them to the extent that their activities can be construed as practicing pharmacy. The vast majority of their remaining functions and activities are 

unregulated, as there are no state or federal authorities with direct jurisdiction over 

them. 

OVERVIEW OF CONCERNS

The proposed merger of Express Scripts and Medco would result in unparalleled 

market concentration in an already extremely limited marketplace. Because of several mergers and acquisitions over the past decade, the number of PBMs has declined significantly since 2000 and the concentration among the largest PBM providers has increased during that time. The market for national prescription drug 

plans is currently concentrated in just three PBMs. If the merger proceeds, there 

will be a reduction in competition in already highly-concentrated markets, including 

those involving PBM services, as well as mail order distribution services and specialty pharmaceutical services. 

The proposed merger would be a tipping point in terms of PBM concentration that 

would have a considerable anti-competitive impact on employers, health plans, federal employee benefit plans, and TRICARE, along with their beneficiaries. The postmerger PBM marketplace would have markedly reduced choice for all patients and 

consumers, as well as governmental, employer and third-party payors. 

83 

1 Atlantic Information Services (‘‘AIS’’), 2010 data; J.P. Morgan, Healthcare Technology & Distribution, Gill’s Guide to Rx Channel—An Investor Handbook, May 10, 2011. 2 Bloomberg, Express Scripts-Medco Deal May Spur Purchases by Rivals, July 22, 2011. 

3 Atlantic Information Services (‘‘AIS’’), 2010 data; J.P. Morgan, Healthcare Technology & Distribution, Gill’s Guide to Rx Channel—An Investor Handbook, May 10, 2011. 4The American Antitrust Institute; ‘‘Commentary: The FTC Should Issue a Second Request 

on Express Scripts’ Proposed Acquisition of Wellpoint’s PBM Business,’’ May 11, 2009. 5See 2010–2011 Prescription Drug Cost and Plan Benefit Design Report at 28, available at 

http://www.benefitdesignreport.com/Portals/0/2010–2011lBDRlR1.pdf. 

REDUCED PBM COMPETITION

Express Scripts and Medco are two of the ‘‘Big Three’’ PBMs that control 50–60% 

of the national overall prescription drug volume.1 If approved, approximately 1/3 of 

all Americans (roughly 135 million people) would rely on the new ‘‘mega PBM’’ to 

manage their prescription benefits.2 This ‘‘mega PBM’’ alone would control over 40% 

of the national prescription drug volume.3 Certain classes of customers such as 

large, complex health plans would be left with only two choices for PBM services, 

the merged entity and the one remaining large PBM. Smaller regional PBMs would 

be unable to constrain anticompetitive conduct because of their smaller size, geographic limitations, and lack of ability to secure rebates. 

This substantial reduction in competition will harm purchasers of PBM services 

and the purchasers’ beneficiaries by limiting consumer choice, reducing transparency, reducing access to pharmacy services, and increasing costs to the beneficiaries. 

ANTI-COMPETITIVE CONCENTRATION IN THE PBM MARKET

The proposed merger will lead to anticompetitive concentration in the PBM market, resulting in market foreclosure practices that harm purchasers of PBM services 

and consequently, consumers of pharmacy services. Specifically, the merged PBM 

will have an incentive to use its increased market power as both a seller and a purchaser of pharmacy services to impose unfavorable contract terms on community 

pharmacies. Consequently, this ‘‘mega PBM’’ would have the ability to raise prices 

for health plans and patients, limit access to pharmacy patient care and force patients to use the PBM’s mail order pharmacies rather than their trusted community 

pharmacies, driving up costs for employers, health plans and other federal and state 

programs. 

PBMs operate unregulated and in an opaque manner. They claim that they save 

money by negotiating rebates and discounts from drug manufacturers and negotiating lower reimbursement rates from pharmacies. However, there is no proof that 

they pass along any of this purported savings to health plans, employers or consumers. In fact, the PBM industry has been fraught with allegations of extensive 

deceptive and fraudulent practices. In recent years, cases brought by a coalition of 

over 30 State Attorneys General have resulted in over $370 million in penalties for 

deceptive and fraudulent conduct.4 It was found that PBMs accepted rebates from 

manufacturers in return for placing higher priced medications on prescription drug 

plans’ formularies, switched customers to the higher priced drugs that were paid for 

by the health plan/employer, and benefitted from both the rebate received and the 

higher priced drug payment without passing along the enrichment to the health 

plan/employer. In essence, PBMs use lack of transparency to negotiate higher rebates from drug manufacturers, higher drug prices for health plans/employers, and 

lower payments to pharmacies, while keeping the gains for themselves. We can expect a ‘‘mega PBM’’ to have freer reign to engage in similar egregious conduct. 

As middlemen, PBMs claim that their ability to negotiate with drug manufacturers and pharmacies reduces overall prescription drug costs. However, despite their 

claims, overall prescription drug spending continues to steadily increase. Moreover, 

recent studies show that PBMs’ mail order pharmacies have lower generic dispensing rates than retail community pharmacies.5 A ‘‘mega PBM’’ would be even 

more likely to increase drug costs by shifting more patients to mail order, which utilizes more expensive, brand name drugs. This increased cost would be borne by 

health plans, employers, and ultimately consumers. 

CONCERNS ABOUT SPECIALTY PHARMACY AND MAIL ORDER SERVICES

Specialty pharmaceuticals are high cost drugs required by patients undergoing intensive therapies for chronic, complex, relatively rare and/or potentially life-threatening illnesses. Industry experts anticipate that sales of specialty pharmaceuticals 

84 

6See CVS Caremark Corp., 2010 Annual Report at http://www.annualreports.com/HostedData/ 

AnnualReports/PDFArchive/cvs2010.pdf (citing ModernHealthcare.com). 7 AIS 2011 data. 

will account for an increasing dollar share of all drugs consumed, estimated to be 

27% of all drug sales by 2015.6

The merger would combine two of the three largest suppliers of specialty pharmacy services, creating an entity with more than 50% share of all specialty pharmacy sales. CuraScript (owned by Express Scripts) and Accredo (owned by Medco) 

are the two largest specialty pharmacies in the U.S. Combined, these two entities 

account for an estimated 52% of all specialty pharmaceuticals in the U.S.; this 

would be enough power to stifle competition in the specialty pharmacy market and 

command even higher prices. Both PBMs have attempted to significantly increase 

prices of specialty pharmaceuticals in recent years. We can expect an even greater 

effort to do this should the merger be approved. 

The merger will also create the largest mail-order pharmacy accounting for close 

to 60% of all mail-order scripts processed in the U.S.7 The merged company will 

have even more market power to reduce patient access to community pharmacies 

and force consumers and employers to use its own captive mail order operation. Although the merging firms may claim that shifting prescriptions to mail order prescriptions from retail community pharmacies will drive down drug costs to consumers, their increased market power is likely to result in an artificially high reduction in prescriptions filled through community pharmacies, and increased costs for 

payors and beneficiaries. 

The ability of PBMs to drive prescriptions to their own mail order facilities is inherently anticompetitive. Congress has recognized the potential for this type of 

abuse, and in Medicare, this type of ‘‘self dealing’’ in the case of physicians is illegal. 

Moreover, PBMs determine the income received by pharmacies (by setting pharmacies’ reimbursement rates) and then directly compete with pharmacies by driving 

prescriptions to their own mail order facilities. Further consolidation of PBMs and 

mail order pharmacies, in addition to the lack of transparency in PBM operations, 

will further exacerbate these conflicts. The result will be increased costs for public 

programs such as Medicare, beneficiaries, private health plans and employers, and 

the American taxpayer. 

In addition, the merged entity’s ability to shift patients to its mail-order operations will have a direct and harmful impact on patient care. It will allow the mega 

PBM to limit consumers’ access to their local pharmacies and the vital healthcare 

services and one-on-one counseling they provide. In addition to dispensing prescriptions, pharmacists counsel patients on a daily basis to ensure that they take their 

medications as directed by their doctors. They also provide a broad range of critical, 

cost-effective services such as immunizations, counseling for diseases such as diabetes, and other health education and screening programs. These high quality services 

increase the therapeutic benefits of prescription drugs, which improve health outcomes and lowers costs. There is simply no substitute for the in-store, face-to-face 

services provided by pharmacists. 

CONCLUSION

NACDS thanks the Committee for consideration of our comments on the proposed 

merger of Express Scripts and Medco. We are deeply concerned about the anti-competitive impact the merger would have and are extremely skeptical that the American public can trust a ‘‘mega PBM’’ to look out for the best interests of patients 

and payors, or to pass any purported ‘‘savings’’ along to beneficiaries and other consumers. These concerns are compounded by the fact that the PBM industry as a 

whole is virtually unregulated. 

Mr. GOODLATTE. And now we will hear from Mr. Gustafson. Welcome. 

TESTIMONY OF DAN E. GUSTAFSON, PARTNER, 

GUSTAFSON GLUEK PLLC 

Mr. GUSTAFSON. Chairman Goodlatte, thank you for providing 

me the opportunity to testify today. My name is Dan Gustafson, 

and I practice antitrust law at Gustafson Gluek in Minneapolis. I 

85 

am also working with a group at the American Antitrust Institute 

to evaluate the proposed merger. 

Although our work is preliminary, we have identified several potential concerns with regard to this merger, but before I identify 

these concerns, let me emphasize first that the time for careful 

evaluation of this merger is now. Although antitrust enforcement 

can sometimes undo the effects of already concentrated markets or 

anticompetitive conduct, preventing such conduct before it occurs is 

far more effective antitrust and public policy. For that reason we 

applaud the FTC’s second request for information as it continues 

to evaluate this merger proposal. 

PBMs play an important and ever-expanding role in our health 

care system. They touch most American lives in their role as managers of prescription drug benefits through their pharmacy claims 

processing, formulary management and home-delivery pharmacy 

services. They also negotiate discounts and rebates on purchases 

from pharmaceutical companies. 

The market for national PBM services is already concentrated. 

CVS Caremark, Express Scripts and Medco control more than 50 

percent of the market when measured in terms of prescriptions, 

and over 80 percent of the market when measured in terms of large 

plan-sponsored contracts. A merged Express Scripts-Medco company will overwhelmingly dominate the PBM services market, covering nearly 150 million prescription drug consumers and over 50 

percent of the large plan sponsors. In terms of covered lives, no 

other PBM would remotely approach Express Scripts-Medco. 

As a result of our evaluation of this merger, we raise several concerns. First, will the merger reduce competition for the provision 

of PBM services to large plan sponsors? Although there are numerous smaller PBMs, many of these smaller entities operate only in 

regions, some serve only a special niche markets such as government services, and other offer a limited menu of services in areas 

such as specialty drugs, mail order or claims processing. The smaller PBMs lack the ability to negotiate the same discounts and rebates from drug manufacturers that large PBMs can obtain. As a 

result, regional PBMs may be unable to constrain potential anticompetitive conduct. 

Second, will the proposed merger lead to increased prices or reduced services in the distribution of specialty pharmaceuticals? Significant concerns exist in the market for the distribution of specialty drugs where Express Scripts and Medco will own the two 

largest specialty pharmacy businesses. The proposed merger will 

result in a company holding more than a 50 percent share of the 

specialty pharmacy market segment. Specialty pharmacies provide 

important service and treatments to consumers with complex, 

chronic and often life-threatening illnesses. They often help administer complex treatments, work with physicians to monitor patient 

therapy, and play a role in the medication compliance issues. Reduced competition in this market segment could lead to increased 

costs and reduced services to the consumers who depend on those 

treatments the most. 

Third, will the proposed merger increase the exercise of buyer 

power to reduce the delivery of traditional pharmaceutical services? 

We are concerned that the major PBMs already possess the ability 

86 

1The AAI is an independent Washington-based non-profit organization addressing antitrust 

issues from a perspective of increasing competition and ensuring that competition works to benefit consumers through vigorous public and private antitrust enforcement. AAI Website, About 

Us, http://www.antitrustinstitute.org/content/about-us 

and incentive to exercise market power over retail independent and 

chain pharmacies. Reimbursements from the PBMs is a major 

source of their revenue, and the proposed merger could enable the 

two remaining large PBMs to push compensation to the retail 

pharmacies below competitive levels, eliminating jobs and leading 

to reduced and important services for their consumers. 

This proposed merger would also create the largest mail-order 

pharmacy in the United States, accounting for nearly 60 percent of 

all mail-order scripts, because large PBMs could divert prescriptions to their own mail-order facilities instead of to their retail traditional pharmacies. They could maximize their own gains if they 

then select drugs on which they receive superior rebates from manufacturers. The opportunity for potentially anticompetitive selfdealing which harms consumers may be enhanced by the creation 

of a dominant PBM in the mail-order pharmacy market space and 

elimination of one of its only two competitors. 

Finally, we need to be careful to examine the claim deficiencies 

to determine if the savings that are proposed are specific to this 

merger and cannot otherwise be obtained by means unrelated to 

the merger. A careful analysis made as to whether and to what degree these claimed efficiencies will actually be passed on to plans, 

and therefore consumers, is important as well. 

Past consolidation in this industry provides sufficient data to 

evaluate the previous efficiency promises that have been made. The 

recent spike in the profits of the largest PBMs suggest less and not 

more competition and, as a result, higher prices for plans and for 

consumers. 

Thank you for providing me the opportunity to testify today. I 

am happy to answer any questions that you may have. 

Mr. GOODLATTE. Thank you, Mr. Gustafson. 

[The prepared statement of Mr. Gustafson follows:] 

Prepared Statement of Dan E. Gustafson, Partner, Gustafson Gluek PLLC 

I. INTRODUCTION

Chairman Goodlatte, Ranking Member Watt, and members of the Committee. 

Thank you for providing me the opportunity to testify before you today regarding 

the proposed Express Scripts-Medco merger, two of the largest pharmacy benefit 

managers (PBMs) in the United States. My name is Dan Gustafson from Gustafson 

Gluek in Minneapolis, Minnesota. I am an advisory board member of the American 

Antitrust Institute (AAI)1 and part of an ad hoc working group of the AAI that is 

investigating and analyzing the impact of this proposed merger. 

II. AAI’S ROLE AND ANTITRUST ENFORCEMENT

Our analysis has just begun and has been limited to considering publicly available 

materials. At the conclusion of our evaluation, we expect to author an antitrust 

white paper to recommend actions that the AAI believes the FTC should take with 

respect to this proposed merger. 

Although the working group has not yet reached any conclusions and the AAI 

Board of Directors has not taken any position on the merger, I appear before you 

today at their request to identify some areas of concern that suggest further careful 

investigation and analysis is warranted. We hope that this information will assist 

the Committee as it considers this proposed merger. 

87 

2Mark Meador, Squeezing the Middleman, 20 Annals of Health Law 77, 78–79 (2011). 3 Blue Cross Blue Shield of Massachusetts, Glossary, http://www.bluecrossma.com/bluelinksfor-employers/glossary.html 4 AAI White Paper, The FTC Should Issue a Second Request on Express Scripts’ Proposed Acquisition of Wellpoint’s PBM Business, May 11, 2009 (‘‘AAI 5/11/09 White Paper’’), at 4. 5Testimony of David Balto on Health Industry Consolidation, September 9, 2011 (‘‘Balto 9/ 

9/11 Testimony’’), at 6; Change to Win, CVS Caremark: An Alarming Merger, Two Years Later, 

November 2009, at 6; AAI 5/11/09 White Paper, supra, at 9. 6 Allison Dabbs Garrett & Robert Garis, Leveling the Playing Field in the Pharmacy Benefit 

Management Industry, 42 Val. U. L. Rev. 33, 37, 66–68 (2007); AAI White Paper, Express 

Scripts’ Proposed Acquisition of Caremark: An Antitrust White Paper, February 14, 2007 (‘‘AAI 

2/14/07 White Paper’’), at 2, 4, 7–8. 7PBMs also offer additional services such as compliance programs outcome research, drug 

therapy management programs, data analysis, and distribution services. Garrett & Garis, supra, 

at 34–38; AAI 5/11/09 White Paper, supra, at 7. 

It is important to note that now is the time to evaluate and analyze this proposed 

merger. Although some post-merger antitrust enforcement successfully corrects excessive market concentration or other anticompetitive conduct, antitrust policy in 

this area should focus on preventing anticompetitive conduct by foreclosing combinations that incentivize or further anticompetitive conduct. Effective merger review requires that regulatory agencies take appropriate steps at this stage—before the 

merger happens—to ensure that competition and consumer interests are protected. 

With respect to this proposed merger, the FTC has already issued a Second Request, and the AAI applauds its continuing investigation of this matter. Although 

the FTC cleared the CVS Caremark merger without a Second Request, previous decisions of the Commission indicate that it believed the PBM industry to be competitive. Although the Commission has issued some broad statements about the competitiveness of the industry, we believe those statements should be reexamined in 

light of recent enforcement actions by state attorneys general, increased consolidation and the escalating profits of the major PBMs. 

III. INDUSTRY BACKGROUND

PBMs play several roles in our healthcare system. They touch most American 

lives in their role as managers of prescription drug benefits for third-party payors. 

In this role, they integrate retail pharmacy claims processing, formulary management, and home delivery pharmacy services.2

In addition to adopting a pre-approved list of commonly prescribed prescription 

medications, formulary management includes managing the utilization of covered 

medications by balancing clinical effectiveness with costs, traditionally through clinical programs developed and maintained by plan doctors and pharmacists.3 Litigation by state attorneys general in recent years has raised concerns that the decisions made by large PBMs on these formulary issues may be improperly influenced 

by discounts and rebates received from manufacturers in exchange for placing higher priced medications on the formulary, and exclusive contractual arrangements 

that may lead to favorable treatment for higher priced drugs, irrespective of their 

relative utility.4

In recent years, many PBMs, including both Express Scripts and Medco, have acquired major specialty pharmacy businesses and, as a result, now also serve as distributors of specialty drugs. Although there is no universally accepted definition for 

a ‘‘specialty drug,’’ it usually refers to medications for the treatment of serious, 

chronic ailments that are expensive and often require special handling and control, 

complex administration and careful monitoring.5

The large PBMs have also increasingly expanded into mail order pharmacy businesses. These mail order pharmacies further the vertical integration of large PBMs 

and compete directly with national, regional and traditional local pharmacies.6 The 

PBMs with large mail order operations often limit distribution of certain drugs solely through the mail.7

IV. PROPOSED MERGER BETWEEN EXPRESS SCRIPTS AND MEDCO

A. Market Concentration 

Although it is premature to reach conclusions about the relevant market definitions in an antitrust context, the AAI working group is considering some market 

concentration issues that may raise potential concerns. The market space for PBM 

services is already concentrated. The top three PBMs, CVS Caremark, Express 

Scripts and Medco, control approximately 50% of the market when measuring preVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6621 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
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8Guggenheim, ESRX/MHS Still Faces Tough Review—We Think This Could Benefit WAG and 

CVS at 3, Sept. 6, 2011. 9 A plan sponsor is the employer insurance company, union or other entity which purchases 

PBM services on behalf of its employees or members. 10 AAI 5/11/09 White Paper, supra, at 1. 11 AAI 5/11/09 White Paper supra, at 2. 12 Balto 9/9/11 Testimony, supra, at 6. 13 Balto 9/9/11 Testimony, supra, at 6. 14 Numbers based on http://pbmi.com/PBMmarketshare1.asp. 15 In re Merck & Co., 127 F.T.C. 156 (1999); In re Eli Lilly & Co., 120 F.T.C. 243 (1995). 16 Balto 9/9/11 Testimony, supra, at 6. 17Garrett & Garis, supra, at 67. 18Zachary French, Express Scripts and Medco Merge Mail Order, Specialty Pharmacies, and 

of Less Importance, PBM Operations, July 22, 2011. 19PBMs determine the income received by pharmacies (by setting pharmacies’ reimbursement 

rates) and then directly compete with pharmacies by driving prescriptions to their own mail 

order facilities. See Statement of the National Association of Chain Drug Stores for U.S. House 

of Representatives Committee on Ways and Means, Subcommittee on Health, Hearing on 

‘‘Health Care Industry Consolidation,’’ September 9, 2011. 

scriptions filled or controlled.8 If the market concentration is measured in terms of 

contractual arrangements with large plan sponsors,9 the market is even more concentrated, with the big three PBMs controlling over 80%.10

Concentration in this market already has occurred through mergers. CVS 

Caremark is a result of a $21 billion merger of CVS and Caremark in 2007 that 

was cleared without a Second Request from the FTC.11 If Express Scripts and 

Medco merge, three will become two. A merged Express Scripts-Medco company will 

dominate the PBM services market space covering more than 150 million prescription drug consumers and 50% of the large employer market.12 Combined with the 

next largest PBM, CVS Caremark, the two would cover approximately 240 million 

prescription drug consumers.13 In terms of covered lives, no other PBM, post-merger, would remotely approach Express Scripts-Medco. Even CVS Caremark would be 

a distant second.14

The post-merger Express Scripts-Medco company may lessen the competition between the top PBMs and smaller, regional PBMs and as a direct result, may harm 

consumers, plans, employers, unions, and pharmacies. 

In the past, the FTC has defined this market as the provision of PBM services 

to large plan sponsors.15 Although that market definition is clearly relevant to the 

discussion of the proposed merger today, it is not the only market segment that 

should be examined. We also plan to consider the impact of PBM concentration on 

at least the specialty, mail order, and retail independent and chain pharmacy market segments. 

There may be substantial concerns in the market space for distribution of specialty drugs where Express Scripts and Medco own, respectively, Curascript and 

Accredo, the two largest specialty pharmacy businesses.16 Specialty pharmacies provide service and treatments to consumers with complex, chronic, and often potentially life-threatening illnesses, including HIV/AIDS, Crohn’s Disease, and some 

forms of cancer. 

Specialty pharmacies also often provide the most cost-effective use of these expensive treatments, and reduced competition in this market segment could lead to reduced service and increased costs to the consumers who depend on specialty treatments and the broad counseling services provided by independent specialty pharmacies. This market segment has become increasingly concentrated and poses its 

own special concerns. This proposed merger would leave the post-merger company 

with more than a 50% share of the specialty pharmacy market segment, and may 

threaten competition in this area. 

The largest PBMs also own businesses that provide mail order pharmacy operations. These mail order pharmacy operations provide a significant source of revenue because the PBM controls both the claims adjudication function and prescription dispensing function.17 Some sources suggest that a merged Express ScriptsMedco company would control almost 60% of the mail order market space.18 Although the proposed merger parties may claim that shifting prescriptions to mail 

order prescriptions from retail community pharmacies will lessen drug costs for consumers, their increased market power in the mail order segment may actually reduce pharmacy prescriptions and increase costs.19

Concerns also have been raised over the past several years on the lack of competition in the PBM market and deceptive conduct that harms consumers. In the past 

six years, a coalition of over 30 state attorneys general have brought cases against 

89 

20 AAI 5/11/09 White Paper, supra, at 4. 21 National Community Pharmacists Association, Pharmacists Can Help States Reduce Medicaid Costs, While Preserving Patient Choice, June 16, 2011, http://www.ncpanet.org/index.php/ 

news-releases/1016-community-pharmacists-can-help-states-reduce-medicaid-costs-while-preserving-patient-choice. 22Morgan Stanley Research, Healthcare Services & Distribution: Fortune 50 and Respective 

PBMs, July 28, 2011. 23 AAI 5/11/09 White Paper, supra, at 5–7. 24 AAI 5/11/09 White Paper, supra, at 7. 25 AAI 5/11/09 White Paper, supra, at 5–7. 26 AAI 5/11/09 White Paper, supra, at 7. 27Medscape News, The Medicare Prescription Drug Benefit: PBMs and Supporting Institutions, http://www.medscape.com/viewarticle/409818l3. 28Garrett & Garis, supra, at 61–72; AAI 5/11/09 White Paper, supra, at 5–7; Statement of 

National Association of Chain Drug Stores for Hearing on ‘‘Health Care Industry Consolidation,’’ 

September 9, 2011 (‘‘NACDS Statement’’), at 4–6. 29Pharm. Care Mgmt. Ass’n v. Rowe, Civ. No. 03–153, 2005 WL 757608, *2 (D. Me. Feb. 2, 

2005), aff’d 429 F.3d 294 (1st Cir. 2005). 

each of the big three PBMs securing over $370 million in penalties and fines.20 Over 

the past few years, the profits of the big three have soared over 400%.21

B. The Antitrust Concerns 

There are several issues that the AAI working group will continue to investigate 

and evaluate. 

First, could the merger reduce competition for the provision of PBM 

services to large plan sponsors? 

Currently, CVS Caremark, Express Scripts, and Medco are, by far, the three largest PBMs serving large plan sponsors. Over 40 of the ‘‘Fortune 50’’ largest corporations rely on these three PBMs for PBM services.22 Because of their size and potential to offer exclusive contracts, these big three PBMs have significantly greater purchasing power than smaller PBMs for both brand and generic drugs. Their mail 

order and specialty operations similarly enable them to provide a wider range of 

services, and they have broader technological capability and better claims processing. Not surprisingly when one of the big three loses a large plan sponsor it is 

almost inevitably to another one of the big three.23

Although there are numerous smaller PBMs in the market space for PBM services, smaller PBMs often face regional limitations, others serve a special niche market, such as government entities, and others do not have a full menu of services 

such as mail order, specialty pharmacy and the lack of claims processing capabilities 

to service national accounts. These smaller PBMs also face a limited ability to secure discounts or rebates from PBM suppliers.24

The Express Scripts-Medco merger reduces the number of viable providers of PBM 

services to large plan sponsors from three to two and may result in higher prices, 

less innovation, and increased barriers to entry. As noted above, the three national 

PBMs have significant advantages in national scope, drug purchasing, discounts and 

rebates, mail order distribution, specialty pharmaceuticals and administrative services. As a result, the remaining smaller, regional PBMs may be unable to constrain 

potential anticompetitive conduct of the large PBMs.25 A key consideration in that 

respect is how markets are ultimately defined. 

Because PBMs enter contracts with large plan sponsors that typically span several years, the ability to compete for such contracts lessens as the bigger PBMs increase their base. These contracts are renewed at a high rate.26 PBMs also enter 

contracts with government entities—such as Medicare Part D, Tricare, and the Federal Employee Health Benefit Plan—through a competitive bidding process. PBM 

contracts with large plan and government plan sponsors are exclusive.27

Second, would the merger pose a threat of coordinated interaction by 

eliminating a major competitive firm from the market? 

As the PBM services segment loses major participants, the risk of coordinated 

interaction increases. The market is already dominated by a small number of large 

firms and there are substantial barriers to entry. Transparency issues make it difficult for plan sponsors to determine whether they are receiving the full benefits 

from their arrangement with the PBM. The lack of transparency and the length and 

exclusivity of contracts hamper plan sponsors’ ability to negotiate meaningfully with 

PBMs.28

As one federal court has observed, ‘‘Whether and how a PBM actually saves an 

individual benefits provider [plan sponsor] customer money with respect to the purchase of a particular prescription drug is largely a mystery to the benefits provider.’’ 29 Even when a benefits provider receives a shared rebate from the PBM, it 

90 

30Pharm. Care Mgmt. Ass’n v. Rowe, Civ. No. 03–153, 2005 WL 757608, *2 (D. Me. Feb. 2, 

2005), aff’d 429 F.3d 294 (1st Cir. 2005). 31 Express Scripts, 2010 Drug Trend Report: A Market and Behavioral Analysis (April 2011), 

at 91. 32Medco Health Solutions, 2011 Drug Trend Report (2011), at 35. 33 Change to Win, supra, at 6; Balto 9/9/11 Testimony, supra, at 6; NACDS Statement, supra, 

at 6–7. 34 NACDS Statement, supra, at 6–7; Balto 9/9/11 Testimony, supra, at 6. 35Lehigh Valley Women’s Journal, Administrators of Pharmaceutical Industry ‘‘Steering’’ 

Profits to Themselves, and Refusing to Give Patients a Choice, Sept. 14, 2011. 36 Change to Win, supra, at 6; Balto 9/9/11 Testimony, supra, at 6; NACDS Statement, supra, 

at 6–7. 37 Change to Win, CVS Caremark: An Alarming Merger, Two Years Later (Nov. 2009). 38 NACDS Statement, supra, at 7. 39Meador, supra, at 84. 

may not make up for the higher base price of the more expensive drugs that the 

PBM selects based on manufacturer rebates or exclusive supply arrangement, resulting in a net economic loss to the benefits provider. In the current climate, PBMs 

‘‘introduce a layer of fog to the market that prevents benefits providers from fully 

understanding how best to minimize their net prescription drug costs.’’ 30 Further 

consolidation could threaten to make this problem worse. 

Third, could the proposed merger lead to increased prices in the distribution of certain specialty pharmaceuticals? 

Specialty pharmaceuticals, which are generally more costly than traditional pharmaceuticals, are an increasingly important area of concern for cost-conscious plan 

sponsors and a major source of revenue for PBMs. The cost of specialty drugs in 

the aggregate is rising rapidly—increasing by nearly 20 percent in 2010 and the cost 

of all specialty drugs is expected to reach as high as 27.5 percent of the cost of all 

medications covered by pharmacy benefits by 2013.31 By 2016, 8 of the top 10 prescription drugs are expected to be considered specialty drugs.32

Specialty pharmacies manage the highly expensive treatments of the most dynamic, complex, and serious illnesses and the service they provide is both distinct 

and significant. Specialty pharmacies traditionally educate patients on effective 

treatment utilization, monitor side effects and partner with physicians to identify 

ineffective medications and recommend treatment changes. Specialty pharmacies 

also play an active role in providing continuity of patient care to ensure that costs 

are minimized and health outcomes improve.33

This proposed merger needs to be investigated to see whether it poses a threat 

to competition in this important area of primary care because each of the major 

PBMs has acquired specialty pharmaceutical companies in the recent years. Some 

critics have suggested that it is a common business practice for these PBMs to prevent other pharmacies from dispensing specialty drugs and to force patients to use 

the PBM’s mail order facility.34 These restricted networks disrupt the continuity of 

care and degrade health outcomes by forcing patients to switch away from their 

pharmacy of choice. The major PBMs also regularly mandate that patients purchase 

large supplies of expensive medication. Not uncommon in the treatment of these 

complex conditions, many patients may find after purchasing that they are not responsive to the drug, their treatment regimen needs to be adjusted or that they cannot tolerate the drug. Having already purchased a large prescription of non-refundable medication, even minor adjustments to improve the effectiveness of treatment 

may result in thousands of dollars in wasted medication in addition to the cost of 

the replacement drug that they need.35

Because the proposed merger would give Express Scripts-Medco a much larger 

role as a PBM, it will expand its control of patient data and realize an increased 

ability to use this data to move patients to its own pharmacy operations. This concern is real in light of CVS Caremark’s demonstrated ability to use data received 

in its PBM capacity to boost sales of its CVS pharmacies.36 Because the relationship 

with a clinical pharmacist has been repeatedly shown to improve medication compliance and health outcomes, a market free of anticompetitive conduct by PBMs to 

steer patients in-house would support the services that most effectively promote the 

health of the patient. This proposed merger, however, will likely limit patient choice 

and lessen clinical service because of the favoritism that the benefit manager exhibit 

towards its own mail-order operations.37

The proposed merger would create the largest mail order pharmacy in the United 

States, accounting for nearly 60% of all mail order scripts processed.38 PBMs can 

direct prescriptions to their own mail order facilities instead of to competitors.39

PBMs channeling prescriptions through their own mail order operations may maximize their own gains—at increased price to the plan sponsor—by selecting drugs on 

91 

40Garrett & Garis, supra, at 67. 41Meador, supra, at 77–84. 42 AAI 5/11/09 White Paper, supra, at 9. 43 Balto 9/9/11 Testimony, supra, at 6; Milt Freudenheim, The Middleman’s Markup, New 

York Times, April 19, 2008. 44 NACDS Statement, supra, at 3–7; Garrett & Garis, supra, at 46. 45 United States v. George’s Foods, LLC, No. 5:11-cv-00043 (W.D. Va.) 46 Barclays Capital, Medco-Express Scripts Antitrust: Part II, Sept. 12, 2011, at 9. 47FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 61–63 (D.D.C. July 31, 1998). 

which they receive superior rebates from manufacturers.40 The opportunity for this 

kind of potentially anticompetitive, self-dealing, which harms consumers, will be enhanced by the creation of a dominant PBM in the mail order pharmacy market and 

the elimination of one of its only two real competitors. 

In addition to expanding its ownership of specialty pharmacies and mail order operations, the major PBMs continue to expand exclusive distribution arrangements 

with pharmaceutical manufacturers. Further analysis is required to determine 

whether these acquisitions and distribution alliances have led to decreased service 

and consumer choice in providers, as well as substantial increases in the prices of 

several specialty drugs.41 In the past, Express Scripts has imposed substantial price 

increases after becoming the sole distributor of certain drugs. For example, the price 

of H.P. Acthar Gel, a drug for treating children with a rare form of epilepsy, jumped 

from $1,600 a vial to $23,000 a vial after Express Scripts was given sole distributorship rights.42

By securing sole access to over 50 percent of the specialty market, Express 

Scripts-Medco could have increased leverage to restrict network access and enter 

into exclusivity arrangements with drug manufacturers.43 The proposed merger 

thereby could increase the potential for Express Scripts-Medco to engage in anticompetitive conduct and threatens to increase specialty drug prices and limit access 

to critical medications. 

Fourth, will the proposed merger increase the exercise of monopsony 

power to reduce the local delivery of pharmaceutical services? 

We should be concerned that the major PBMs may already possess the ability and 

incentive to exercise market power over retail independent and chain pharmacies 

because reimbursement from PBMs is a major source of revenue for retail pharmacies.44 The proposed merger could enable these major PBMs to push compensation to the retail pharmacies below competitive levels, ultimately leading to lost jobs 

and diminished service for their consumers. 

An adverse impact on the delivery of pharmaceutical services at the retail level 

should be sufficient by itself to raise serious concerns and motivate the government 

regulators to closely scrutinize the proposed merger. In recent years, federal and 

state regulatory agencies have become more sensitive to the exercise of buyer power 

as raising a potential antitrust concern. The Antitrust Division has brought cases 

against both health insurers and agricultural processors based on the impact on doctors and farmers respectively. In the recent George’s Foods enforcement action, the 

DOJ sued to enjoin a merger of two of the three largest chicken processors in the 

Shenandoah Valley area, which were ‘‘the only competitive buyers for grower services’’ in the area, solely based on the impact on chicken farmers.45 Thus, the exercise of such buyer power should be a primary focus of any further review. 

C. Potential Efficiencies Must Also Be Investigated 

There should also be careful consideration about whether the proposed merger 

will lead to increased efficiencies that are specific to this proposed merger and that 

cannot be achieved by means not related to a merger. In the context of this proposed 

merger, any efficiency claims should be supported by existing business documents 

and demonstrable outcomes. 

Cognizable efficiencies should not be associated with anticompetitive reductions in 

output or service. For example, if reducing excess capacity of mail order pharmacy 

services as the result of the merger is a potential efficiency, the companies should 

demonstrate that the existing mail order capacity has not historically contributed 

to lower health care costs for plan sponsors and that reduction in capacity would 

not also entail substantial job losses.46 Competition also has the ability to create efficiency, and the merging entities must show that the same efficiencies cannot be 

realized through existing, continued competition.47

The FTC and this Committee should also work to make sure that any suggested 

cost savings will result from scale efficiencies and not the exercise of monopsony 

power and focus on whether, and to what extent, these claimed cost savings will 

actually be passed on to the PBMs’ customers and, therefore, consumers. A fruitful 

area of investigation may be to determine why profits of the PBMs have increased 

92 

at such a substantial rate during a time of industry consolidation which promised 

increased efficiencies. Does this suggest that the merged firms will retain a good 

portion of any future cost savings? Such profit retention (as opposed to passing on 

such savings) is consistent with a market place that exhibits less, not more, competition. 

V. CONCLUSION

Thank you for providing me the opportunity to present my views of the proposed 

merger of Express Scripts and Medco. The proposed merger raises serious concerns 

that call for further careful study and evaluation, including the risks to competition 

in the PBM services to large plan sponsors, specialty pharmacy operations, mail 

order pharmacy operations and retail pharmacy markets, as well as to consumers 

and patient health care. The AAI looks forward to providing you its white paper 

once it has been completed. 

Mr. GOODLATTE. Ms. Kanwit. 

TESTIMONY OF STEPHANIE KANWIT, COUNSEL, MANATT, 

PHELPS & PHILLIPS, LLP 

Ms. KANWIT. Thank you, Mr. Chairman and Members of the Subcommittee. I am honored to be asked to testify here today. I am 

Stephanie Kanwit, and I want to note that I am not testifying on 

behalf of either party to this merger, but, given my antitrust and 

Federal Trade Commission backgrounds, have been asked to testify 

about how the agency is likely to view this merger based on both 

Federal merger law as well as its previous and very extensive studies and letters relating to PBMs. 

I have great respect for the FTC’s expertise here. And they are 

very knowledgeable, the agency is very knowledgeable, about what 

PBMs do for a living, all the entities they interface with, and how 

competitive the market is. As Mr. Watt rightly noted in his introduction, the FTC is going to subject this merger to very close scrutiny. 

And here is the ultimate question that the agency has to answer 

in antitrust lingo: Will it substantially lessen competition? And 

what that means is will there still be aggressive competition in the 

PBM marketplace that will promote lower prescription drugs prices 

for consumers and result in higher quality and more access to prescription drugs? As. 

The Federal merger guidelines make clear—they were just enacted by the FTC and the Department of Justice last year—antitrust merger law is about the impact of the merger on the cost and 

quality for consumers. It is not concerned with the impact on individual competitors in that particular market. 

So here is how the FTC will be looking at this merger. It is going 

to be looking at both hats that the PBMs wear. They wear many 

hats, but it is these particular hats they will look at. 

First question: What is the impact on PBM customers? In a nutshell my testimony outlines in detail multiple reports and FTC investigations which have found the market competitive and found 

that PBM customers out there have choices. The FTC has repeatedly, in letters and studies, et cetera, talked about all the multiple 

PBMs out there, how they are varied, how they sell in a variety 

of geographic and product markets. And, in fact, some are even 

buying groups of independent pharmacies. 

93 

It is a fluid market where entries and exits are frequent. And, 

for example, I will just give you one example, recently the large retailer, Walmart, has entered the PBM space. So the bottom line is 

that the FTC has found, in a very extensive 2005 study where it 

subpoenaed PBMs for information, that customers both large and 

small have multiple choices and frequently can and do switch 

PBMs if they are unhappy with service or pricing, and that they 

can negotiate contracts that benefit their members and themselves 

at both prices and quality, whatever they want in terms of price 

and quality. 

The number second question in addition to customers the FTC is 

going to ask is what is the impact on retail pharmacies? Now, the 

representative retail pharmacies here today have been very eloquent in condemning this merger, but I just want to make two 

points, one practical and one legal. As you have heard from some 

of the previous testimony, PBMs need retail pharmacies and pharmacists. They need them. They have to assure that their customers 

can fill prescriptions at various locations. And I would just note access standards in programs like TRICARE for the military and 

Part D Medicare, they are very, very strict what they call network 

adequacy standards, where, for example, in urban areas 90 percent 

of the beneficiaries have to live within 2 miles of a retail pharmacy. 

So it is important, as the FTC has found, for PBMs to have extensive pharmacy, retail pharmacy, networks. 

Legally you have also heard some discussion about whether this 

is going to adversely affect retail pharmacists, but that is not the 

test under antitrust law. Antitrust law, as I mentioned, is concerned with competition in general, not individual competitors. So 

the FTC is going to look, and this is a long section of the merger 

guidelines, at whether it brings efficiencies to the market and what 

are those efficiencies. 

I just cite in my testimony in detail a past PBM merger case 

talking about how a merger is pro-competitive if it results simply 

in a shift in purchases from an existing source to a lower-cost, 

more efficient source rather than a reduction in purchases. So, in 

other words, that is important. If you are taking costs out of a system, a merger can be very pro-competitive. 

In conclusion, I just want to say the merger guidelines make very 

clear that the FTC is supposed to look and see whether a proposed 

merger is competitively harmful, but it is also supposed to avoid interference with what the guidelines call competitively beneficial 

mergers. That is right out of the guidelines. So the FTC is going 

to look at this merger in light of the prism of its previous conclusions in this area, and it has found in many different studies that 

the market is competitive. 

Thank you for your time. 

[The prepared statement of Ms. Kanwit follows:] 

Prepared Statement of Stephanie Kanwit, Counsel, Manatt, 

Phelps & Phillips 

Thank you for inviting me to speak today. I am counsel to the law firm of Manatt, 

Phelps & Phillips. I was formerly a Regional Director of the Federal Trade Commission (FTC), and have written a textbook on that agency. I have forty years of antitrust background as a litigator, have served as head of litigation for a large health 

94 

1FTC Act, 15 U.S.C. § 45. 

2Timothy J. Muris, ‘‘Everything Old is New Again: Health Care and Competition in the 21st 

Century,’’ Competition in Health Care Forum, Nov. 7, 2002, at 6. 3FTC and DOJ, ‘‘Improving Health Care: A Dose of Competition’’ (2004) (hereafter ‘‘FTC/DOJ 

Report’’) 4Sage, W., Hyman, D., and Greenberg, W., ‘‘Why Competition Law Matters to Health Care 

Quality,’’ 22 Health Affairs No. 2 at 31. (March/April 2003). 5See Brown Shoe v. United States, 370 U.S. 294, 320 (1962) (Clayton Act illustrates ‘‘congressional concern with the protection of competition, not competitors, and its desire to restrain 

mergers only to the extent that such combinations may tend to lessen competition.’’) 

insurer as well as general counsel of a health plan trade association, and teach a 

course in health care competition at George Washington University graduate school. 

I would like to note that while my firm is an outside counsel, as am I, for the 

trade association of pharmaceutical benefit managers (PBMs), and occasionally provides legal services for Medco Health Solutions, neither the firm nor I represent Express Scripts or Medco in regard to this proposed merger. Nor have I spoken to or 

consulted with any of the companies’ personnel or their attorneys, or with any of 

the government personnel involved in the evaluation of the proposed merger in connection with the proposed transaction. 

As a result, I am acting here as a witness at the invitation of the Committee, am 

not appearing on behalf of any party, and have purposefully avoided gaining specifics of the proposed merger except through public sources. My testimony outlines 

generally what the FTC has found in its extensive recent analyses of the competitiveness of the PBM industry, as well as my sense of how the agency is likely to 

view this proposed merger based on its previous rulings and studies. 

More specifically, this testimony outlines: 

(1) The role of the FTC in preventing unfair methods of competition. 

(2) The FTC’s extensive analyses of the nature of the PBM industry, including its multiple findings that the market is highly competitive. 

(3) How the FTC has characterized the functions of the PBM industry 

and the characteristics of its participants, customers and contractual partners. 

(4) How the agency could be expected to evaluate the proposed merger 

to determine if it ‘‘substantially lessens competition.’’ 

(5) The precedent of the FTC’s opinion finding no anticompetitive effects of the 2004 AdvancePCS/Caremark merger, and how the agency evaluates merger efficiencies. 

I. INTRODUCTION: THE FTC’S ROLE IN ENSURING COMPETITIVENESS IN

HEALTH CARE MARKETS: 

Health care markets have always been a high priority for the Commission. The 

agency’s goal has been to ensure that these markets operate competitively, and its 

reports, advocacy letters, and investigations aim to carry out the mandate Congress 

gave it almost a hundred years ago, in 1914: to prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce.1

The FTC’s role, in a nutshell, is to protect the market from anticompetitive conduct that prevents it from responding freely to the demands of consumers. That is 

the key to antitrust law initiatives—determining the impact on consumers, in terms 

of possible higher prices and reduction in quality and choices. As former chair Timothy Muris of the FTC has succinctly stated, ‘‘Aggressive competition promotes 

lower prices, higher quality, greater innovation, and enhanced access.’’ 2 The FTC 

and its sister enforcement agency, the Department of Justice (DOJ), step in when 

they view private markets as operating improperly, such as when competitors 

collude on prices, or divide customers and markets, or when monopolists charge 

higher than competitive prices for goods or services. Indeed, the Agencies have collaborated in issuing reports such as the massive 2004 Healthcare Report examining 

the role of health care competition in addressing the cost and quality challenges facing our health care system.3

The result of what Prof. Muris calls ‘‘aggressive competition,’’ however, may not 

always be desirable for the particular competitors involved.4 That’s because competition law focuses on protecting competition and the competitive process, rather than 

individual competitors.5 Indeed, in their 2004 Report the enforcement agencies 

pointed out that while ‘‘competition can be ruthless,’’ in the long run the fact that 

95 

6FTC/DOJ Report, Executive Summary, at 4. 

7 Id. at Sec. 1. 

8 ‘‘Improving Health Care,’’ ch. 7 at 9. See Kanwit, S, ‘‘FTC ‘Conflict of Interest Report’: Implications for the Competitive Marketplace in Prescription Drugs,’’ American Bar Ass’n Antitrust 

Bulletin (2005). 9There is extensive literature on PBM cost savings, including from the U.S. General Accountability Office (PBMs produced savings for health plans participating in FEHBP from retail pharmacies averaging about 18% lower than cash customers paid):‘‘Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies,’’ Jan. 2003. 10FTC Letter to Hon. James L. Seward, New York, Aug. 8, 2011. 11Letter to Assembly member Greg Aghazarian, California, Sept. 2, 2004, at 9; see also letter 

to Rep. Patrick T. McHenry, North Carolina, July 15, 2004; letter to Delegate Terry Kilgore, 

Virginia House of Delegates, Oct. 2, 2006. 

it ‘‘creates winners and losers can inspire health care providers to do a better job 

for consumers.’’ 6

Most pertinent here today is the FTC’s merger work, including its issuance last 

year in conjunction with the DOJ of new revised Horizontal Merger Guidelines for 

the first time in more than 18 years. Those Guidelines, discussed below, provide 

what the FTC calls ‘‘more transparency so that businesses and their counsel may 

better understand the merger review process.’’ 7 The FTC uses the principles in 

those Guidelines to review a wide variety of mergers in the health care arena, not 

just PBM mergers, but also drug company mergers, as well as mergers involving 

hospitals, insurers, and ancillary services like dialysis clinics. 

II. THE FTC’S EXTENSIVE ANALYSES OF PBMS: 

The proposed merger the Committee is focused on today involves pharmacy benefit managers, or PBMs, and the FTC considers itself as an expert in the area— 

and rightfully so. It has been extensively involved in reports and advocacy letters 

regarding PBMs, including: 

• Its ground-breaking report on health care competition issued in 2004 (in conjunction with the DOJ) contains an extensive discussion of why the growth 

of PBMs constitutes ‘‘an important development in providing consumer access 

to prescription drugs.’’ 8 The report devotes an entire chapter to how PBMs 

operate, and covers such topics as drug formularies, payment terms, industry 

overview, as well as data on PBM cost savings.9

• Its 2005 comprehensive ‘‘Conflict of Interest’’ PBM Study, written at the behest of Congress under the 2003 legislation that instituted the Medicare prescription drug program, which examined possible conflicts of interest that 

might arise when PBMs owned mail-order pharmacies. The Commission obtained extensive data, including agreements between PBMs and their plan 

sponsors as well as between PBMs and pharmaceutical manufacturers. The 

PBM Study found strong evidence that such ownership of mail order pharmacies generally did not disadvantage plan sponsors and that competition in 

the industry afforded health benefit plans sufficient tools with which to safeguard their interests. 

• Multiple advocacy letters, where the FTC comments on the anticompetitive 

implications for consumers of proposed state legislation that interferes with 

PBMS’ flexibility to work with their customers to design drug benefits that 

lower costs and expand access. For one example, it recently recommended 

against enactment of a New York bill that would limit a health plan’s ability 

to steer beneficiaries to a lower cost mail order vendor of drugs.10 For another 

example, it has been in the forefront in opposing state attempts to pass socalled ‘‘transparency’’ statutes (which mandate exhaustive disclosures of proprietary information to PBM clients) as counterproductive, because (1) PBM 

customers do not need the mandated information to make purchasing decisions, and (2) having that information publically available furthers possible 

tacit collusion among pharmaceutical manufacturers with which PBMs must 

bargain for lower drug prices. 

The Commission’s general concern in all these studies and reports, again, is how 

well the market is working competitively for consumers to keep drug prices low. The 

FTC has repeatedly cautioned against enacting legislation resulting in higher prices 

for PBM services and pharmaceuticals that can ‘‘undermine the ability of some consumers to obtain the pharmaceuticals and health insurance they need at a price 

they can afford.’’ 11

96 

12FTC PBM Study, Executive Summary, at i through vi. 13FTC Letter to Terry Kilgore, VA House of Delegates, Oct. 2, 2006 at 4. 14FTC Statement, In the Matter of Caremark Rx, Inc./AdvancePCS, at 6. 15FTC PBM Study, Exec. Summary, at v. 16 Atlantic Information Services, ‘‘2000–2009 Survey Results: Pharmacy Benefit Trends and 

Data,’’ 2009. 17FTC PBM Study, Press Statement of Chairman Deborah Platt Majoras, Sept. 6, 2006. 18FTC Letter to Rep. Patrick McHenry, regarding No. Carolina HB 1374 (July 15, 2005), at 

8. 

III. HOW THE FTC WILL LOOK AT THE PBM MARKET: 

The FTC will view the potential merger at issue here against the backdrop of this 

extensive history of analyzing the PBM marketplace, and hence some of its previous 

analyses and findings are instructive here in terms of (1) what the industry does, 

and (2) how competitive the industry is. 

What PBMs do: More than 215 million Americans (nearly 90% of all of those with 

prescription drug coverage) get their benefits through PBMs, according to the research firm Visante. Those benefits can be provided through Federal programs (like 

Medicare, Medicaid, and the Federal Employees Health Benefits Program, or 

FEHBP), and also through the commercial market. The functions PBMs perform are 

many-faceted, as they interface both ‘‘up’’ and ‘‘down’’ with all the myriad entities 

in the drug distribution chain. In the words of the FTC, PBMs do the following: 

• they interface with their clients, namely the health plans, private and public 

employers, insurers, unions and other entities that provide prescription drug 

benefits to their employees or members; 

• they interface with retail pharmacies as they assemble networks to allow consumers to fill prescriptions at many locations; 

• they may set up mail-order operations for health plan enrollees, often for 

maintenance medications; 

• they interface with pharmaceutical manufacturers as they negotiate pricing, 

including preferred placement rebates and administration fees.12

In addition, PBMs often provide ‘‘quality-related’’ services to their customers, including the following, again in the FTC’s words: 

• they provide drug utilization reviews that include analysis of physician prescribing patterns to identify physicians prescribing high cost drugs when 

lower cost, therapeutically equivalent alternatives are available. 

• they provide disease management services by offering treatment information 

to and monitoring of patients with certain chronic diseases.13

How competitive the market is: The FTC has consistently found that the PBM industry is vigorously competitive, in that multiple PBMs compete for contracts with 

plan sponsors.14 The agency’s 2005 PBM Study estimated that about 40–50 PBMs 

operate in the country.15 Another source, Atlantic Information Services, indicates 

that today that number has risen to nearly 60 PBMs in the marketplace.16

No single PBM or PBM model dominates the marketplace. The Commission’s 

former Chairman in the agency’s FTC Study specifically noted ‘‘the variety of PBM 

services’’ available to PBM customers, including the wide variations in ownership 

structure.17 Some PBMs are stand-alone independent PBMs (like Express Scripts), 

some are affiliated with health insurers or health plans (like Aetna, CIGNA, and 

Kaiser), and some consist of buying groups of independent pharmacies, such as 

EPIC. CVS Caremark is a combination of a PBM and a retail drug chain. Until recently, in fact, the large drug retailer Walgreens owned a PBM business, which it 

sold to another PBM. 

PBMs also vary greatly when it comes to the market they specialize in—e.g., larger vs. smaller employers, or regional vs. national markets. Significantly, although 

some PBMs operate only locally or regionally, the FTC in the past has found them 

capable of competing with the big national PBMs.18 Moreover, while some PBMs operate their own mail order facilities, others contract that service out. Some PBMs 

participate in the Federal Medicare prescription drug program known as Part D as 

PDPs, including the two companies at issue here, while some do not. 

To add more heterogeneity to the competitors operating in the market, only some 

PBMs manage the important and fast-growing category of specialty drugs, i.e., those 

used to treat serious and chronic conditions like cancer, multiple sclerosis, hemophilia, and rheumatoid arthritis; the drugs in this category are not only costly (tens 

of thousands or even hundreds of thousands of dollars a year) but often require speVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6621 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
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19 ‘‘Slowing the Impact: The Role of Specialty Pharmacy in Managing Progressive and Chronic 

Diseases,’’ UnitedHealth Group White Paper, April 2011. 20 Horizontal Merger Guidelines, released April 20, 2010, replacing the Guidelines issues in 

1992, revised in 1997. The FTC’s Bureau of Competition has also issued a Statement on Negotiating Merger Remedies, at www.ftc.gov./bc/bestpractices030401.shtm. 21 15 U.S.C. § 18. 22 2010 Guidelines at 4. 23 2010 Guidelines at 3. 

cial handling and administration.19 Competing with PBMs in this market segment 

are entities such as health plans and stand-alone specialty providers. 

IV. HOW WILL THE FTC DETERMINE IF THE PROPOSED MERGER WILL

‘‘SUBSTANTIALLY LESSEN COMPETITION’’?

Under the Federal premerger notification program established by the Hart-ScottRodino Act, larger mergers are subject to the regulatory approval process run by the 

FTC as well as the DOJ. 

The starting point in determining how the FTC is likely to look at this (or other) 

proposed mergers is the antitrust agencies’ new joint Horizontal Merger Guidelines, 

released in April, 2010.20 The Guidelines emphasize that they are just that –guides 

–to assist the analytical process. Their goal is to help answer the key question: will 

the merger substantially lessen competition? That accords with the underlying statute, Section 7 of the Clayton Act, which condemns mergers and acquisitions where 

the effect ‘‘may be substantially to lessen competition, or to tend to create a monopoly.’’ 21 The Clayton Act is enforced by both the DOJ and FTC. 

The Guidelines note that the Agencies wisely attempt ‘‘to identify and challenge 

competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.’’ How is that determination 

made? The process is always steered by the facts particular to a given merger. Like 

antitrust law in general, merger analysis is (in the words of the Guidelines) ‘‘a factspecific process through which the Agencies, guided by their extensive experience, 

apply a range of analytical tools to the reasonably available and reliable evidence 

to evaluate competitive concerns . . .’’ 

The most important theme of the Guidelines is that ‘‘mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.’’ 

Reams have been written about what constitutes ‘‘market power,’’ but the definition 

in the Guidelines is relatively straightforward: ‘‘A merger enhances market power if 

it is likely to encourage one or more firms to raise prices, reduce output, diminish 

innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.’’ 

While the Guidelines generally cover merger analysis in terms of impact on pricing, they caution that enhanced market power ‘‘can also be manifested in non-price 

terms and conditions that adversely affect customers . . . ’’ So the Agencies would 

look at a proposed merger through the prism of whether it would be likely to (for 

example) reduce the quality of the product, or the variety of product available, or 

reduce product quality, or diminish innovation—all key to assessing competitive impact. 

What sources of evidence does the FTC look at? The Guidelines note that information can come from (1) the merging parties in the form of documents, testimony, or 

data ‘‘describing industry conditions,’’ (2) customers, who can be asked about the 

likely impact of the merger, and (3) other industry participants and observers, such 

as suppliers, analysts, and rival firms in the market. All perspectives are considered, whether evidence that the ‘‘merger is likely to result in efficiencies’’ will be 

reviewed, as well as any evidence of possible anticompetitive results, such as ‘‘that 

the merging parties intend to raise prices, reduce output or capacity, reduce product 

quality or variety . . .’’ 22

What kinds of evidence is the FTC assessing? Broadly, ‘‘any reasonably available 

and reliable evidence’’ may be reviewed to see if a merger ‘‘may substantially lessen 

competition.’’ For example, the Guidelines call for looking at evidence regarding ‘‘direct comparisons based on experience,’’ i.e., the economic history and structure of the 

PBM industry, such as ‘‘recent mergers, entry, expansion, or exits in the relevant 

market.’’ 23 The second type of evidence would include ‘‘the merging parties’ market 

shares in a relevant markets, the level of concentration, and the change caused by 

the merger.’’ In addition, the Guidelines note that the Agencies will consider 

‘‘whether the merging firms have been, or likely will become absent the merger, substantial head-to-head competitors.’’ 

98 

24 2010 Merger Guidelines at 18. 25 2010 Merger Guidelines at 18. 26 2010 Guidelines at 7. 27Merck & Co., Inc., 127 F.T.C. 156 (1999). That case involved the acquisition by a pharmaceutical manufacturer of a PBM. 28 Note that Express Scripts partners with health plans in the Part D program, while Medco 

is a PDP itself, and has a broad portfolio of Part D products. 

Applying the Merger Guidelines to PBMs: 

Market share analysis generally: 

When sellers exercise market power, it is called ‘‘monopoly,’’ and when buyers exercise it, it is called ‘‘monopsony.’’ Both decrease consumer welfare. PBMs can be 

viewed in a broad sense as both buyers (of services and discounts from retail pharmacies to be included in a plan’s pharmacy network, for example) as well as sellers 

(of administrative services to health plans and their other customers). That dual 

role makes the analysis more complicated, but the same principles apply to both. 

Media accounts of mergers or proposed mergers often focus on the concept of 

‘‘market share,’’ implying that this measure is a certain way to determine anticompetitive effects. What the antitrust agencies care about is market power: do sellers (or buyers) in the market have the ability to profitably maintain prices above (or 

below) competitive levels for a significant period of time? Measuring market power 

is a fact-intensive job. Absent direct evidence of anticompetitive effects (higher 

prices, lower outputs, and lower quality), the analysis begins with (1) identification 

of the relevant product and geographic markets, and then (2) calculation of the 

shares of the market participants and the concentration ratios. To identify concentration levels that might require further regulatory scrutiny, the antitrust agencies traditionally use the Herfindahl-Hirschman Index (HHI), calculated as the sum 

of squared market shares.24 The antitrust agencies consider both the post-merger 

level, as well as the increase resulting from the merger, and regard a market in 

which the HHI is below 1500 as unconcentrated, while above 2500 is deemed highly 

concentrated. 

But it is a mistake to place too much weight on market concentration in a highly 

fluid market like PBMs, where market shares are not ‘‘stable over time’’ (in the 

words of the Guidelines.)25 As the Agencies note, ‘‘even a highly concentrated market can be very competitive if market shares fluctuate substantially over short periods of time in response to changes in competitive offerings.’’ Conclusions regarding 

‘‘concentration’’ depend enormously on how market is defined, whether broadly or 

narrowly. In addition, once the particular market is determined the real issue becomes whether the firm has obtained or maintained that power through improper 

means. 

Applying the Market Share Analysis to PBMs: 

It is likely that the FTC will find the PBM market to be unconcentrated, assuming it regards the product market as the national provision of pharmacy benefit 

manager services. As outlined below, (1) no single PBM’s market share exceeds 12% 

based on 2009 data, and customers have multiple choices; (2) the market is dynamic, meaning that there are multiple entries and exits of market participants; 

and (3) it appears that the market has become more competitive and more heterogeneous over time. 

To analyze competitive effects, the agency, in accord with classic merger analysis, 

will first likely define the various markets in which PBMs operate (e.g., small vs. 

large employer, government customers vs. commercial business, mail-order vs. nonmail order, among others) and analyze those customers’ ‘‘ability and willingness to 

substitute away from one product to another in response to a price increase or a 

corresponding non-price change such as a reduction in product quality or service.’’ 26

While it is difficult to know definitively what market (or markets) the FTC will 

choose to evaluate here, it may be multiple markets. In a past (1999) evaluation involving a PBM, it found the market to be ‘‘the provision of [PBM] services by national full-service PBM firms.’’ 27 Because both the merging parties operate nationally, that is likely to be designed as the geographic market. But in terms of product 

market, the FTC may decide to look not just at the commercial market as a whole, 

but also at the merging parties’ shares of retail scripts vs. mail scripts; or shares 

of the Medicare Part D market, where numerous PDPs including UnitedHealth 

Group, CVS Caremark, Humana, Coventry, CIGNA and others compete.28 Then the 

FTC must judge if the large employer market is separate from the small employer 

market, and if so, what the impact on those customers might be if the parties 

merged. 

99 

29 Atlantic Information Services, Inc., 2000–2009 Survey Results, Pharmacy Benefit Trends & 

Data: Costs, Benefit Design, Utilization and PBM Market Share, at 53. 30Walgreens sold its PBM business to Catalyst Health Systems, and WellPoint sold its PBM 

to Express Scripts. 31 ‘‘A merger is not likely to enhance market power if entry into the market is so easy that 

the merged firm and its remaining rivals . . . could not profitability raise prices or otherwise 

reduce competition . . . ’’ 2010 Guidelines at 27. 32 AISHealth.com, ‘‘Drug Benefit News,’’ Sept. 9, 2011. 33 Id. 34For example, CalPERS (the California Public Employees’ Retirement System) announced in 

May, 2011 that it would not renew its contract with Medco beyond 2011. 

There are numerous sources of respected data for the FTC to peruse regarding 

PBM market share, and it is likely the FTC will look at both (1) the number of covered lives (i.e., members) each company has, as well as (2) the total annual prescription volume of each PBM. Using either measure, Atlantic Information Services (AIS) 

reports that no single PBM dominates the market: under the ‘‘covered lives’’ measure, the largest PBM in 2009 (CVS Caremark) had an 11.85% market share, while 

Medco Health Solutions was assigned a 8.67% and Express Scripts a 7.95% share.29

Thus, no individual PBM’s share exceeded 12% during that time period. 

That 2009 data, however, must be tweaked in light of the fluidity of the PBM 

marketplace. Players (and their market shares) have changed since then, and are 

likely to continue to morph, a fact that the FTC will undoubtedly take notice of. The 

FTC and its economists in the Bureau of Economics will have up-to-the-minute data 

presenting a complete picture of that market in all its complexity. For an important 

example, the 2009 AIS data cited above will soon be outdated as to Medco, since 

UnitedHealth announced this summer that it will take back the PBM business it 

outsourced to Medco at the end of the year for its own PBM, OptumRx. Two more 

examples: the AIS 2009 survey lists Walgreens-OptionCare as having 10.85% of the 

PBM market, but Walgreens has since sold that business,30 and it also lists 

WellPoint’s NextRx as having 5.07% of the market, but WellPoint sold that business 

in the second half of 2009. 

The possibility of new entrants is also critical: whether it is relatively easy to 

enter into the market and compete with the merged entity is also a factor for the 

FTC.31 Again demonstrating the fluidity of the market, the large retailer Wal-Mart 

has recently entered the PBM space, and introduced a preferred network model that 

includes 400 employers and 20 PBMs and managed care organizations; it also has 

a Part D network in conjunction with the health insurer Humana.32 Moreover, 

‘‘Drug Benefit News’’ and other industry sources report continually on new initiatives and novel business models undertaken by large PBMs as well as small PBMs, 

some affiliated with health plans and some stand-alone, as well as retail pharmacies. 

Impact of a merger on PBM customers: 

The Merger Guidelines stress that what counts in assessing a proposed merger 

is whether customers have alternatives both in terms of price and/or quality.33 The 

FTC will look at the impact on both (1) PBM clients, which include the health plans, 

private and public employers, insurers, unions, and (2) the ultimate consumers of 

those drugs, who will ultimately benefit if the merger brings efficiencies to the marketplace. 

It is likely, given what the FTC has previously found to be the competitive nature 

of the market, that customers will have sufficient alternatives to which they can 

turn should they find that the merger has resulted in a price increase or a reduction 

in quality of service. Plan sponsors can and regularly do change PBMs if they are 

dissatisfied with performance and/or pricing.34 The FTC has found that PBM customers are sophisticated purchasers, who often submit Requests for Proposal (RFPs) 

to suppliers of PBM services to assure they have options and an objective assessment of multiple alternatives. Often clients rely on expert consultants to assist them 

throughout the RFP process to assure their needs are met and their interests are 

protected, including agreed-upon pricing based on the customer’s unique requirements, plan designs to encourage plan enrollees to use more affordable medications, 

specific performance guarantees, and extensive audit rights. Moreover, most PBM 

contracts are only for relatively short periods (one, two or three years is common) 

so that plan sponsors have the opportunity to switch PBMs if they are dissatisfied 

with performance or pricing. 

As a result of the RFP process, the PBM customer can almost always leverage 

its negotiating ability and have multiple PBMs competing for its business. Sometimes those customers increase competition among PBMs by bidding out separate 

aspects of PBM services (such as claims processing or network access), instead of 

100 

35FTC Letter to Hon. James L. Seward, N.Y. Senate, March 31, 2009; FTC PBM Study at 

57–58. 36Statement of the Federal Trade Comm. ‘‘In the Matter of Caremark Rx, Inc./AdvancePCS 

File No. 031 0239’’ at 2, available at http://www.ftc.gov/os/caselist/0310239/040211ftc 

statement310239.pdf. 37FTC Statement at 2, emphasis in original. 38FTC Statement at 2. 39 2010 Guidelines at 29. 

retaining a single PBM to provide a comprehensive group of services. Moreover, 

critically for competitive purposes, these PBMs have to compete for the business on 

non-price dimensions as well, including benefit design, the extent of the retail network, and the quality of mail-order service. 

The FTC has historically been very confident of plan sponsors’ ability to negotiate 

flexible yet transparent contracts with PBMs that suit the customers’ particular 

needs. As the FTC noted in its PBM Conflict of Interest study, ‘‘health plans already 

are able to negotiate contract terms –including diverse disclosure and audit rights— 

that protect them from conflicts of interest.’’ The agency has emphasized the wide 

range of pricing models available to customers in PBM contracts.35

V. EVALUATING A PBM MERGER FOR POSSIBLE EFFICIENCIES: 

THE 2004 CAREMARK/ADVANCEPCS EXAMPLE: 

In 2004, the FTC investigated a proposed merger of two large PBMs and found 

there was not likely to be anticompetitive impact either for plan sponsors or for retail pharmacies. In fact, the merger was found likely to generate efficiencies that 

helped the merged entity’s ability to compete and might result in lower drug prices 

for consumers. 

The then-proposed acquisition of AdvancePCS by Caremark Rx., Inc. involved (in 

the FTC’s words) ‘‘two of the largest providers of prescription benefit management 

services in the United States.’’ After analysis, it found the following: 

• No anticompetitive impact for either small or large employer customers, because they could turn to other alternatives. The FTC concluded that (a) ‘‘dozens of small, often regionally-oriented PBMs provide sufficient service offering 

to smaller employers (and will continue to do so post-acquisition),’’ and (b) 

‘‘large employers are not likely to encounter anticompetitive effects’’ given 

adequate competition from full-service PBMs with national scope as well as 

‘‘significant additional competition from several health plans and several retail pharmacy chains offering PBM services . . .’’ 36

• No anticompetitive impact on retail pharmacies: Focusing on the merged entity’s future negotiation of dispensing fees with retail pharmacies, the FTC concluded that the impact was not likely to be anticompetitive. While those dispensing fees might be reduced as a result of the increased bargaining power 

of the merged PBM, such increased bargaining power can be ‘‘procompetitive 

when it allows the buyer to reduce its costs and decrease prices to its customers.’’ 

This second finding in the AdvancePCS investigation is important here, because 

the FTC addressed the fact that PBMs in effect wear ‘‘two hats’’ in the prescription 

drug marketplace. Viewed vis-a`-vis retail pharmacies, PBMs are ‘‘buyers’’ of their 

services. What the FTC found is that it is procompetitive if a PBM merger results 

simply in a shift in purchases from an existing source ‘‘to a lower-cost, more efficient 

source,’’ rather than a reduction in purchases.37 And who are the ultimate beneficiaries? The consumers of prescription drugs, since the agency found it ‘‘likely that 

some of the PBM’s increased shares would be passed through to PBM clients,’’ given 

the highly competitive nature of the industry. 

Thus when PBMs contract with retail pharmacies, it does not constitute an indicia of anticompetitive behavior if a merger results in lower payments to pharmacies. 

As the FTC commented: ‘‘Nor do competition and consumers suffer when the increased bargaining power of large buyers allows them to obtain lower input prices 

without decreasing overall input purchases.’’ 38 The AdvancePCS merger analysis 

highlights a second important point: as noted in the Merger Guidelines, mergers can 

bring about efficiencies and enhance the merged firm’s ability and incentive to compete. The result may be ‘‘lower prices, improved quality, enhanced service, or new 

products.’’ 39

While the Guidelines caution that these types of efficiency claims cannot be 

‘‘vague’’ or ‘‘speculative,’’ it is likely that the Agency will find efficiencies here, when 

the merger is viewed in light of the following: 

101 

40Keehan, S. et al., ‘‘National Health Spending Projections Through 2020,’’ 30:8 Health Affairs 

(Aug. 2011), citing figures from CMS’s Office of the Actuary. 41 ‘‘Step therapy, generics, smart technology are among top 2012 benefit design tactics,’’ ‘‘Drug 

Benefit News,’’ Aug. 15, 2011. 42 2010 Guidelines at 1. 

• the demand in the marketplace for PBM services, 

• the highly competitive nature of marketplace, and 

• the record of PBMs in driving down prescription drug prices. 

The evidence on the last point, the record of PBMs in driving down drug prices, 

is impressive. Prescription drug spending (according to government figures) grew 

only 3.5% in 2010, down from 5.3% in 2009.40 Much of the credit for that goes to 

PBMs as well as their customers, who are seeking to control total health care costs, 

and adopting measures such as promoting the cost-savings of generic medications 

as well as other options such as larger copayment spreads and narrower pharmacy 

networks.41

VI. CONCLUSION

The mission of the Federal Trade Commission in evaluating this proposed merger 

is to decide if the merger will be competitively harmful while at the same time 

‘‘avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.’’ 42 The FTC is uniquely qualified to perform that evaluation –and 

in a relatively short time—given its past extensive studies and reports on the PBM 

marketplace. 

Thank you for the opportunity to testify, and I am available to answer any questions on my statement. 

Mr. GOODLATTE. Thank you, Ms. Kanwit. We will now proceed 

with questions for the witnesses. I will start with you, Mr. Paz. 

Isn’t there a great benefit to patients in having a personal relationship with a community pharmacist rather than a detached relationship with a mail order pharmacy? For example, how can Express Scripts’ mail order drug adherence programs be as effective 

in promoting proper use of prescription drugs as a live, in person 

consultation with a pharmacist? 

Mr. PAZ. Thank you, Chairman. First of all, to follow on with 

what Ms. Kanwit said, it is very important that we have all levels 

of access to pharmaceuticals, both at the retail level and at the 

mail order. If you think about somebody with a severe health condition and they are in a local community, they need to be able to 

get to that local pharmacist, and we do support local retail pharmacies. The independents are very important to us, as that is 

again part of the negotiation between the large drugstore chains 

and the small drugstores. It is very important to have them and 

to keep all the prices competitive. So we don’t selectively choose 

one versus the other. Most of our clients, who are very sophisticated, want access. We supply access. 

With respect to the actual pharmacist—I am sorry? 

Mr. GOODLATTE. I just want to interrupt and ask you if your resistance to Walgreens’ promoting 90-day prescriptions to its retail 

customers, is that at least partly motivated by your desire to fill 

these prescriptions through your own mail order pharmacy? 

Mr. PAZ. No, sir. The 90-day prescriptions are set by plan design. 

We do not govern the client’s plan design. We show them the cost. 

Mail order is much cheaper. It makes sense. We can fill over 

100,000 prescriptions a day with Six Sigma quality; in other words, 

less than two defects per million error rates, which is very, very, 

102 

very low. The cost of producing an error in prescription is very 

high. 

So what ends up happening is the plan ultimately decides what 

their cost structure wants to be. A company that is in economic 

trouble will be much more confined and want higher levels of mail 

order. Those clients that don’t have economic issues, they may be 

less forceful in these areas. 

For example, setting copay levels. The more the company has to 

save on its drug costs, the higher the copays. Express Scripts nor 

Medco nor CVS Caremark set those levels. The plan sets those levels. We administer those on behalf of our plans. Ninety day retail 

at Walgreens—— 

Mr. GOODLATTE. Mr. Paz, I am going to have to interrupt because I have got a bunch of questions to ask a bunch of people and 

only have 5 minutes to do it in. 

Mr. PAZ. Well, let me just finish by just telling you that we do 

not want to stand in front of the community pharmacist serving 

their member. Many, many pharmacists—— 

Mr. GOODLATTE. Let me direct that question to Mr. Snow. You 

testified that PBMs are dependent on the continued existence of 

strong independent retail pharmacies and that PBMs engage in 

‘‘mutually beneficial collaboration with independent pharmacies.’’ 

If the PBM-pharmacy relationship is mutually beneficial, why is 

there so much tension, criticism and distrust of PBMs among pharmacists? 

Mr. SNOW. That is a very good question, and there are a number 

of factors that go into that, and I understand the plight of the independent pharmacists. If you look at the competitive landscape 

today, new retail pharmacies continue to open each and every year. 

They are independent pharmacies, they are chain pharmacies, they 

are grocery store pharmacies. The numbers of pharmacies in this 

country continue to grow. When I walked down the street in my 

hometown 10 years ago, there was one pharmacy that served my 

community. 

Mr. GOODLATTE. But why is the tension there? Why when I visit 

one of these community pharmacies do I hear an earful about you? 

Mr. SNOW. Here is why, because now there are two chain stores 

within 100 yards of that independent pharmacy. So you have intense—and every grocery store since 10 years ago has opened their 

own pharmacies as well. So you have enormous competition for 

that foot traffic. Patients are making choices. There is this competition for foot traffic. It is a very competitive environment, and it 

does put stress on the economics of an independent pharmacy. 

Mr. GOODLATTE. Let me ask you a question about competition at 

the PBM level. What is the largest contract that Medco has bid for 

and lost in recent years that went to anyone other than Express 

Scripts or CVS Caremark? 

Mr. SNOW. Let me think. I won’t name the account, but it is a 

well-known account that was about $1.5 billion, and it went to one 

of those companies I mentioned in the second tier in terms of Catalyst Rx. 

Mr. GOODLATTE. How long ago was that? 

Mr. SNOW. That was I think 18 months ago, 2 years ago, approximately. 

103 

Mr. GOODLATTE. Thank you. Well, my time has expired. I will 

now recognize the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. I think Ms. Kanwit’s testimony demonstrates how technical and precise this analysis will 

have to be and illustrates the point that I made in my opening 

statement. But we are here, and let me see if I can ask a few questions to try to clarify my own thinking. 

Mr. Snow, I understand that Medco, the special niche that Medco 

has in North Carolina is in the specialty drug area, is that correct? 

Mr. SNOW. We are in North Carolina. We have many, many clients in North Carolina, but we are a full service PBM. We don’t 

have a special niche. 

Mr. WATT. You said—you are denying what some people have 

told us? 

Mr. SNOW. I do not have a special niche in specialty pharmacy 

in North Carolina. 

Mr. WATT. If you do and Mr. Gustafson’s testimony is correct 

that this combination will give more than 50 percent control over 

the specialty market, would that be a relevant consideration as far 

as you are concerned? 

Mr. SNOW. Yeah, it would be. But the facts on this are in the 

PBM space broadly there are 40 competitors today. In the specialty 

space there are hundreds of competitors. And honestly, if you look 

at the specialty space, you need to look at the disease level. 

Mr. WATT. I am not looking for a treatise on the way the industry works. 

Ms. Kanwit, let me just pull out the specialty drug area here. Assume that the combination of these two companies ends up with 

more than 50 percent of the specialty drug market. How is that 

likely to play itself out before the FTC? 

Ms. KANWIT. Well, number one, we have to decide—the FTC has 

to look at it, Mr. Watt, as the submarket, in other words, if that 

is an actual market for antitrust purposes there and that 50 percent is relevant. 

Secondly, as I caution in my testimony, market shares per se 

don’t really mean very much. What really is interesting is how 

much market power the companies can exercise. 

Mr. WATT. You are saying a company that has 50 percent of the 

market doesn’t have more market power than somebody that has 

5 percent of the market? 

Ms. KANWIT. Well, here is my point. Specialty drugs are a whole 

different kettle of fish and as I understand it, manufacturers of 

specialty drugs drive the distribution process. It is a different process than it is, say, with Lipitor or just a regular brand name drug. 

Mr. WATT. Is that more a mail order—— 

Ms. KANWIT. Well, it can be, if they are maintenance drugs. 

There are very specific administration issues related to speciality 

drugs which as you know are for cancer and multiple sclerosis and 

hemophilia, et cetera. 

Mr. WATT. So the bottom line is the FTC may segment this 

whole analysis on specialty drugs and analyze that as a separate 

impact situation? 

Ms. KANWIT. It may. It may choose to do so. 

104 

Mr. WATT. Okay. All right. Efficiency, Mr. Paz and Mr. Snow, 

you have made some claims about it. How do we know that the results of those efficiencies are being passed along to customers? 

Mr. PAZ. Well, I will start, and, David, you can certainly chime 

in. If you look back at Express Scripts’ history, it is one of acquisitions. We have done many transactions. If you also look at our contract with the Department of Defense, we are proud to serve our 

men and women in uniform and their families. Over the course of 

those acquisitions, if you look at the pricing, the pricing has 

stepped down through every one of our acquisitions. We have saved 

the Department of Defense over half a billion dollars over our contract term. 

Mr. WATT. That is fair. Let me just ask this question, Mr. Snow 

and Mr. Paz. You all have been competitors for a number of years. 

What benefits have there been from your being competitors that 

will go away as a result of the merger? 

Mr. PAZ. Well, I don’t—— 

Mr. WATT. I am just being honest now. This is not a trick question. 

Mr. PAZ. I don’t see the benefits going away. Actually, Mr. 

Snow’s company, Medco, has a different approach to the administration of the drug benefit than my company. I think they are both 

very good. But together, combining the best of both companies I believe takes us to a whole new level of clinical expertise and the 

ability to drive more costs and improve health outcomes—— 

Mr. WATT. What do you say on that, Mr. Snow? My time is up, 

but I would like to get your view on it. 

Mr. SNOW. The reason the companies hire us, Mr. Watt, is 

they—— 

Mr. WATT. That is not what I asked you, but if you want to answer a different question than the one I asked. I am asking what 

benefits were there from the competition between the two companies that will go away as a result of the merger? 

Mr. SNOW. As Mr. Paz said, we honestly see no benefits going 

away. We only see benefits added. 

Mr. WATT. Okay. My time has expired. Thank you. I yield back, 

Mr. Chairman. 

Mr. GOODLATTE. The Chair now recognizes the gentlewoman 

from Florida, Mrs. Adams, for 5 minutes. 

Mrs. ADAMS. Thank you, Mr. Chair. 

Mr. Paz, we all know that health care costs are on the rise and 

a lot of us here and my constituents back home want to know what 

can be done to further lower the costs of prescriptions, both in the 

commercial market and Medicare and Medicaid markets? 

Mr. PAZ. One of the most important things we can do, Congresswoman, is to eliminate fraud, waste and abuse. It is the biggest 

issue we face. Everything from, and Florida is a great example, we 

have helped the law enforcement agencies by turning over pharmacies that were pill-mills, if you will, where we could see undue 

uses of C2—of, you know, of controlled substances, I am sorry, I am 

used to the industry jargon, but controlled substances. And getting 

people to stay on their medication and getting them on the right 

medication and looking for gaps in care are incredibly important 

for eliminating costs in the equation. 

105 

Mrs. ADAMS. So what we are here to talk about is competition 

today, so I am curious as to how many PBMs typically compete 

with Express Scripts when you bid on a contract and how often do 

you win, how often do you lose on those contracts? 

Mr. PAZ. Right. From a competitive perspective, most clients 

enter into 3-year contracts. When they go out for bid, they usually 

invite anywhere from seven to eight to nine different companies to 

bid that contract. They usually take it down to two or three, which 

become the finalists. 

When you look at the purchasers of our product, these are very 

sophisticated buyers. They understand—the big, big Fortune 500, 

the big health plans, they hire people who know prescription drugs 

and have been in our industry, are pharmacists by education or 

have a medical background. They also hire consultants, and the 

consultants are the ones that also help them. They often come out 

of our industry as well. It is an incredibly competitive process 

bought by very sophisticated buyers. 

Mr. SNOW. Congresswoman, can I add something please? 

Mrs. ADAMS. Sure. 

Mr. SNOW. It is an important fact that for the Fortune 50, there 

are 10 different PBMs right now serving the Fortune 50, to give 

you a sense of how competitive our market is. 

Mrs. ADAMS. So would you agree that health care costs, it is 

waste, fraud and abuse, or would you believe that it is competition 

that could add to the lowering of the cost? 

Mr. SNOW. I actually would focus on something else. George said 

our companies are different, and I think when you pull them together, you get more. But I honestly believe, and it involves all 

pharmacists, is we as a country need to focus on the better management of patients with diabetes and other chronic diseases, because they spend 96 percent of the drug money, 75 percent of the 

medical money in this country. It is estimated we waste $350 billion a year each and every year 

because of the poor management of chronic and complex disease. 

Using a wired health care system, seeing gaps in care, helping 

pharmacists when they are seeing a patient know there is a gap 

in care, closing those gaps in care, get in enormous amounts of 

money that help our system. 

We in fact in your State are doing a project with retail pharmacies where we push information about the patient and all the 

drugs they are taking from all the pharmacies they go to so that 

they can see up against national-based, evidence-based protocols 

what that patient’s gaps in care are so they have an opportunity 

to close those gaps in care. And we have worked with States to 

help the retail pharmacies get reimbursed for that cognitive time 

and patient, because that is where—it isn’t what retail pharmacies 

cost. They are an important part of our system. It is really how we 

are wasteful in the way we deliver total health care, and we need 

better systems to support the patient in that care. That is what 

Medco has been all about, and that is really what we want to continue to do. 

Mrs. ADAMS. Did you want to add something to that? You looked 

like you were thinking about what he was saying. 

Mr. LECH. Oh, yes. I have been chomping at the bit. 

106 

Mrs. ADAMS. I could tell. 

Mr. LECH. I think we are confusing matters here. It is the pharmacies—the pharmacists who have gone to school to become pharmacists. It is not a PBM. It is not all this technology they talk 

about that makes that difference. Yes, we need the things that 

PBMs do. We need that data integration. We need those reports 

about those DEA kind of situations. But we have got it twisted by 

the way these gentleman to my right are describing it. 

Somewhere in their testimony they mentioned that a pharmacy 

is complementary to the PBM industry. Well, I will tell you what. 

As a professional, as a pharmacist, they have got that totally backward. They are the complement to us. It is our profession, it is our 

art, it is our science, that in a sense they are getting in the way 

of. They have become burdensome and they have become fat, to use 

that word. And I believe the reason why they are fat is because of 

the profits that they are extracting by the eloquent way they have 

been able to self-aggrandize themselves and do this great marketing thing and release a study the day of the hearing that is 

funded by them. 

So, rather than go on and on and on about that, I think we need 

to put things into perspective and put the power into the pharmacist’s hands. We have that technology now. We might not have 

everything he is talking about, but we have computer systems that 

bring up interactions. And they say there is 100. The only ones I 

seem to get are the ones refilled too soon. We don’t get these clinical edits, we can get them from our software. I get them from the 

online that I subscribe to for my clinical use, and my pharmacy and 

every pharmacist does that. 

And we also—we need one—it would be ideal if a person had one 

pharmacy and one pharmacist. To have all this data, yeah, people 

travel and all that kind of stuff. But I think we need to get a 

health care system that directs persons to a pharmacy home, just 

as they do a medical home. When a doctor writes a prescription, 

that is the beginning of my job. You go to a doctor and you get a 

diagnosis and you get an examination and you get some lab tests 

that you want, his job is done in that sense. My job starts. And 

these guys are there to complement me in doing that and not get 

in my way. 

Mrs. ADAMS. Thank you. My time has expired. I yield back. 

Mr. GOODLATTE. I thank the gentlewoman. The gentleman from 

Michigan, Mr. Conyers, is recognized for 5 minutes. 

Mr. CONYERS. Thanks, Chairman. 

Mr. Snow, how has the health care bill complicated or made 

more convenient your life as a pharmacist? 

Mr. SNOW. I would tell you that the health care bill has not necessarily complicated my life, other than the fact that underneath 

the policy Congress passed the rules are not yet written. So it is 

very difficult to manage my company and my 23,000 employees and 

set direction for that company when I don’t know what the administrative rules are underneath the policy, because many of the 

things that were promulgated are not effective until 2014 and 

2015. That is hard. 

But I will say, I am a big believer that the things we are trying 

to do as part of health care reform are important. Chairman GoodVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6601 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
107 

latte mentioned a comment I made on the announcement that in 

fact health care reform is driving many mergers. It is happening 

with physicians and hospitals. Hospitals are being bought by 

health plans. Health plans are buying physician practices. I am not 

saying these are bad things. I am saying that what is happening 

in our environment is people know that this combination in scale 

drives enormous efficiency that drives costs out of the system, 

which is really at the root of what health care reform is all about. 

Mr. CONYERS. Who wants to add their view to this discussion? 

Okay, then I will call on somebody. 

Mr. LECH. Driving inefficiencies out of the system is very important and we need to work together in doing that. 

Mr. CONYERS. Well, Mr. Snow, you support the bill and its objectives? 

Mr. SNOW. I support many elements of the bill, and I would also 

say that the bill is a first step along an evolutionary path. We are 

going to need to do an awful lot more to finish the reform effort. 

Mr. CONYERS. Mr. Lech, have you ever heard of universal health 

coverage? 

Mr. LECH. Certainly, Congressman. 

Mr. CONYERS. Okay. How does that figure into your plans for 

health care for all Americans as an independent pharmacist? 

Mr. LECH. If universal health care coverage means that every 

American has health care, then I am 100 percent in favor of it. 

Mr. CONYERS. Does everybody agree with that? 

You know, I don’t get many volunteers for my questions. I am 

wondering, are you trying to—see, we have a fundamental philosophy here in the lawmaking process. My good friend the Chairman 

thinks that this was an ill-conceived effort in health care. 

Do you, Ms. Kanwit? 

Ms. KANWIT. Yes, Mr. Conyers. I think portions of the bill are 

very, very beneficial. For example, I am watching closely the portion on accountable care organizations, the Medicare demonstration 

project, to see if that can drive costs out of the system and get more 

value into the health care system. 

Mr. CONYERS. Do you think the bill is unconstitutional, Mr. Paz? 

Mr. PAZ. Sir, I am not a lawyer. I will tell you that I think part 

of the bill, again, is good. I think we are one of the richest countries in the Nation and people should have access to health care. 

I think that we did not do enough to address the cost side. I see 

it in my business every day, a lot of waste and spend. The $300 

billion that Mr. Snow was discussing, we see it every day. We 

didn’t address that, sir. 

Mr. CONYERS. Boy. Did you guys meet before this hearing? No, 

I know you didn’t. But what I am trying to find out—that is right, 

you are under oath, too, so you have got to tell me the truth. 

Where does this issue of pharmacy practice—we have got three 

people for this bill, we have got three people against the bill. How 

does the ObamaCare health care plan affect your business? 

Mr. SNOW. May I volunteer? 

Mr. CONYERS. Yes. 

Mr. SNOW. The way I think about the President’s health plan bill 

and Congress’ bill is that health care reform is a three-legged stool; 

it is access, cost and quality. We have done a good job beginning 

108 

the process of trying to get universal access. It is fundamentally 

important. However, we as a nation need to finance that access. 

To Mr. Paz’s point, I agree with him, we need to do more on the 

cost-quality equation side to pay for the access. So I think that is 

where more evolution will occur, and I think that is where the public-private partnership between health care providers and government is going to bring the best result. I think it is underway. It 

is just going to continue to evolve. You are already seeing some of 

the policies evolving as we work with them and we learn that there 

is even a better way. That is expected. 

Mr. CONYERS. Can I get a half a minute more, Chairman Goodlatte? 

Mr. GOODLATTE. Without objection, the gentleman is recognized 

for an additional minute. 

Mr. CONYERS. How does all this saving from fraud, waste and 

abuse, how will that be affected by whether or not this merger is 

approved? 

Mr. PAZ. Under this merger, one of—our continuing focus is to 

bring the best of both of our tools together to look for those gaps 

in care, to find out where prescriptions aren’t being properly written, and contact the doctors, work with the pharmacists, work with 

the local pharmacies to make sure that in fact we can take that 

waste out of the system. 

Many diabetics today are not getting drugs for hypertension and 

lowering their cholesterol. It is a proven fact those are better for 

them. We are not doing it today. Identifying that—— 

Mr. CONYERS. You know, you are the first—if somebody else 

agrees with you on the panel, I have never heard a pharmacist to 

call up doctors to tell them that they prescribe the wrong thing. 

Mr. LECH. Oh, it happens all the time, practically daily. 

Mr. CONYERS. Oh, really? 

Mr. WIESNER. That is a daily occurrence, sir. 

Mr. CONYERS. All right, let me recognize my friend over here. 

Mr. GUSTAFSON. Congressman, I wanted to answer the question 

about fraud and abuse. I would suggest that the best thing that 

will combat the fraud, waste and abuse would be more vigorous 

competition. If these companies are forced to fine tune their operations in order to lower their costs so they can lower their bids to 

the customers that they seek to obtain contracts from, that alone 

will generate the best cost savings through saving fraud, waste and 

abuse. 

And I was going to respond to Congressman Watt when he asked 

what would be missing if these two companies combined. What we 

will be missing is a national bidder in each of these accounts. 

When they have national accounts that they put out to bid every 

3 years, what will be missing from the competitive landscape is a 

company that is capable of making a bid on those contracts. 

Mr. LECH. In regard to fraud, waste and abuse, if I could reference the document I mention, Waste Not-Want Not, it goes on to 

show at least the waste part of it. I think we need to differentiate 

between fraud, waste and abuse. They are oftentimes lumped together. 

Fraud is fraud. If it is criminal, it is criminal. That is pretty 

black and white. That has got to be dealt with in that way. Waste 

109 

can be underuse, overuse, excessive prescribing. Abuse could be 

narcotics that are taken too much, the dosages that are right for 

the patient or wrong for the patient. But if you look at those pictures, these are things that I see, these are things that every pharmacist sees, where patients bring in bags of things that they have 

automatically been shipped from the drug mail order firms. 

Long ago when I first started testifying when I was a young 

buck, I testified in Pennsylvania in Erie with then State Senator 

Peterson, and the mail order companies at that time considered a 

drug called Accutane which now is in a REMS program, a program 

that you really need to be careful who gets it and how they take 

it and what happens to it after they get it. 

They regarded, and it was Express Scripts, they regarded 

Accutane as a maintenance medicine. 180 doses were being dispensed and a teenager was taking these for maybe a week. All this 

extra medicine with a medicine that could cause—was known to 

cause fatal birth defects. So this is pretty telling I believe as far 

as the waste that happens. I think they could do a better job of fine 

tuning that. 

Maybe a way they can do that is allow the pharmacist which 

knows which patient maybe can use a 90-day supply because of 

their ability to manage their own medicine; which medicines because of cost or danger might be drugs that shouldn’t be 90-day 

supplied, to me a pretty commonsense thing. Let’s take it a patient 

at a time and a drug at a time, and not lump it all into maintenance drugs. I think there is a problem with that because it is profit driven. 

Mr. GOODLATTE. The time of the gentleman has expired. The 

gentleman from Pennsylvania, Mr. Marino, is recognized for 5 minutes. 

Mr. MARINO. Thank you, Chairman. 

Mr. Lech, how would my legislation be a positive impact on independent pharmacies, if it would be? 

Mr. LECH. I believe it would be because the ability for—an independent pharmacy with one or two or not many locations is at a 

disadvantage when compared to other folks that may be able to negotiate certain prices, may or may not be able to negotiate prices. 

It would give us the ability to have access provided for the patients, which I think the Federal Trade Commission needs to consider. I understand from the testimony they are. I would suggest 

that a way that that could be done is to get out of the office and 

into the pharmacy and actually go see face-to-face what happens in 

those pharmacies. 

But it would give us the ability to have a fair, level playing field. 

We are not asking to be paid more money, paid more money. We 

just want to be able to compete. And there are non-price issues also 

that can be addressed. 

Mr. MARINO. I want to get a couple more questions in here. Mr. 

Paz, Mr. Snow, respectively, do you agree that that statement that 

Mr. Lech just made? 

Mr. PAZ. Again, Congressman, I am not a lawyer, but I don’t believe that allowing anybody in our—in American business to 

collude makes sense. Effectively it allows a whole bunch of people 

to come together and negotiate price against—— 

110 

Mr. MARINO. Well, isn’t that what you are doing? Isn’t that what 

you do with a group of large chains who have more stores, they get 

a cheaper price? 

Mr. PAZ. Well, first of all, they don’t necessarily get a cheaper 

price. 

Mr. MARINO. Okay. Now, are you telling me that the volume 

business that you do, I am an independent individual owning a 

pharmacy, and let’s just say X, Y and Z owns 100 stores. You are 

telling me that I am going to get drugs generally speaking at the 

same price as X, Y and Z pharmacy? 

Mr. PAZ. What I am telling you, Congressman, is that what determines price is the amount of competition in a given area. We 

have stores in Alaska, North Dakota and other areas that get paid 

much, much more than any other pharmacy. Where there is a lot 

of competition, competition sets price, as it should, in our country. 

Mr. MARINO. Okay, I understand that. You are dodging my question. 

Mr. PAZ. I am not, sir. 

Mr. MARINO. Are you telling me that as an independent, I am 

going to get the same price as somebody owning 100 stores in my 

region? 

Mr. PAZ. What I am telling you is that if you have 100 stores in 

a given region and there is a lot of competition, the plan design ultimately determines how many pharmacies—— 

Mr. MARINO. Okay, what if there are 100 stores with one company and there are three independent pharmacies. Are the independent pharmacies going to get the same price as the 100 stores? 

Mr. PAZ. I can’t answer the question blanket because it is not the 

same answer across the board. 

Mr. MARINO. You know something else? As an 18-year prosecutor, you are dodging my question and you do not want to answer it. 

Mr. Snow, do you want to answer it? 

Mr. SNOW. Sure, I would like to. Thank you. At Medco, we recognize the plight of the retail pharmacist who is an independent, does 

not have the scale, does not have the purchasing power of some of 

the bigger chains. It is not uncommon for our independent retailers 

to have higher reimbursement rates in our network than the larger 

companies who have the ability to negotiate a cheaper price, number one. 

Number two, one of the things that is in place today, and you 

may be aware of it but I just want to say it for the records, there 

are group purchasing organizations that many individual retailers 

join so that they can get purchasing scale relative to buying their 

drugs, buying the things that they put into their store, so that they 

can at least begin to create critical mass to drive the kind of price 

that their competitors do. 

Mr. MARINO. Okay, sir. I understand your answer. Thank you. 

Do either of you, Mr. Paz or Mr. Snow, do you disagree with my 

legislation? 

Mr. SNOW. I would say, sir, that as Mr. Paz said, I am not a lawyer. I would—— 

Mr. MARINO. Gentleman, stop with ‘‘I am not a lawyer.’’ 

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Mr. SNOW. I would like the independent retailers to survive. I 

would like them to have the right footing in a way that doesn’t violate antitrust. So whatever the lawyers and the FTC and Congress 

decides, I think what you are trying to do for the retail pharmacist 

is the right thing to do. How to do it, I am not as sure, but that 

is not my job. I agree with what you are trying to do. 

Mr. MARINO. Thank you. Do either of you own—your companies 

own retail pharmacies? Mr. Paz? 

Mr. PAZ. No, we do not. 

Mr. MARINO. Mr. Snow? 

Mr. SNOW. No, we do not. 

Mr. MARINO. Do you own mail order businesses related to pharmaceuticals? 

Mr. PAZ. Yes, we do. 

Mr. SNOW. We are a mail order pharmacy. 

Mr. MARINO. And am I correct in assuming that you do direct 

your customers to purchase from your mail ordering, as opposed to 

independent pharmacies? 

Mr. PAZ. If the client wants it. Again, I am not trying to dodge 

your questions, Congressman, but let me fully answer that question. 

Mr. MARINO. Thank you. 

Mr. PAZ. Some clients do not allow mail order. Some clients want 

mail order. It is a plan design decision that we administer for our 

clients. Mail order costs less than retail pharmacies. There is better 

economics of scale. We can deliver cheaper. So if a client directs us 

to, then we use mail order. If they don’t, we don’t. 

Mr. MARINO. Chairman, could I have 30 seconds, please? 

Mr. WATT. I ask unanimous consent that he have 2 additional 

minutes. 

Mr. GOODLATTE. Without objection, the very generous motion of 

the gentleman from North Carolina is agreed to. 

Mr. MARINO. Thank you, sir. 

Gentleman, you are saying that this merger—and my legislation, 

I think you are aware of this, has nothing to do really with the 

merger or no merger. Do you understand that? My legislation is to 

give the independents—be able to form a group to purchase stronger in a power situation where several individuals as opposed to one 

is purchasing drugs from any company. 

But are you saying that with this merger, and I am going to put 

you both on the spot right now, that you are guaranteeing that you 

are going to be selling drugs to the consumer at a cheaper price 

than you are selling it now? 

Mr. SNOW. Total drug costs with our book, not drug by drug, 

total drug costs will go down. It absolutely will go down. And that 

really depends on our customer’s design, what patient gets and 

what the payer retains. So we have Fortune 500 companies. As 

George said, they all specify plan design. 

Mr. MARINO. Okay, let me back up here a moment. I get your 

answer. I get your answer. I do, sir. I understand it. I have limited 

time here. But you said total cost. Now, coming from the business 

sector, I know what total cost means. It can mean anything from 

it is going to be cheaper to maintain the building, I am going to 

be able to hire somebody at less of a cost. 

112 

If I purchase drugs from you, if you are merged tomorrow, am 

I going to get them cheaper tomorrow than I will today from you 

independently? 

Mr. SNOW. Yes, you will. And can I just explain my answer? 

Mr. MARINO. Please. Go ahead. 

Mr. SNOW. Okay. The reason I said it the way I said it is that 

there are certain drugs where there is no other drug competing 

against it. It is a single type of drug in the class, meaning you have 

no leverage to gets the price down. Many of the biotech drugs are 

that way. But where there is competition and you have leverage, 

you can get better drug pricing, you can get better procurement 

prices for drugs. Absolutely. 

Mr. GOODLATTE. The time of the gentleman has expired. 

Mr. MARINO. Thank you so much. Thank you, gentlemen. 

Mr. GOODLATTE. The Chair recognizes the gentlewoman from 

California, Ms. Chu, for 5 minutes. 

Ms. CHU. Thank you, Mr. Chair. 

I am hearing from my community pharmacists who are very concerned about this merger creating even more buying power for 

PBMs. They are expressing concern that the large PBMs will leverage their market share to force pharmacies into even more unfavorable contract terms and that they will have to make the decision 

to choose between inefficient reimbursement rates or exclusion 

from the PBM networks, and that they don’t have the bargaining 

power to negotiate better contract terms so they oftentimes find 

themselves agreeing to more unfavorable terms. 

Mr. Lech, could you comment on that? 

Mr. LECH. Well, I didn’t get into the practice of pharmacy to 

eventually think that I would be forced out, whether it would be 

by a decision of myself or someone else that made that decision. 

The last thing I want to do is stop providing what I do to my patients and my customers and my consumers. And when the time 

comes, I would like to transfer that perhaps to my sons, who are 

both—one is a pharmacist and one is about to become a pharmacist, or to someone else if my sons don’t want to do that. 

But if there came a time when because of onerous restrictions, 

whether it be price or non-price, and when I say non-price, there 

are many dozens of things that could be included in that, I can’t 

deny that there may come a time when the decision to say I can’t 

do it anymore happens. And it would be certainly not what I wanted to do, but what I had to do from a business perspective. 

Ms. CHU. How much business does your pharmacy do with 

PBMs? 

Mr. LECH. With PBMs. Third party we call that, probably 90. 

These particular PBMs, if the merger were to happen, it would be 

over 50. That counts Medicare part D and all the different components of the claims process. 

Ms. CHU. Mr. Wiesner, would you want to comment on this issue 

about the contract terms? 

Mr. WIESNER. Sure. Just to go to your last question, currently 

about 90 percent of our prescription volume is paid for by a third 

party. The two gentlemen, their particular group combined together, would be one-third of our entire volume. 

113 

From the standpoint when we are talking about unilateral contracts and things of that nature, it puts us in a very precarious position. We are in that position because that is one-third of my customer base. So if I am presented with what I would deem to be an 

onerous contract, I don’t have much wiggle room. And we are 

reaching very quickly a tipping point as it relates to our cost to dispense products, which hasn’t really been discussed today but there 

have been quite a few studies, and the ability for us to at least receive that much as an equitable reimbursement for our activities. 

So I think not only my company, but many companies have kind 

of reached a point in the entire process where we are having to 

take a step back and understand, is this a viable activity we can 

continue to engage in? We want to take care of our neighbors and 

our community, but we have some real concerns along that regard. 

One last comment. There is a little bit of a difference in my 

world. There is a lot of talk about rebates from manufacturers and 

getting greater discounts with rebates from manufacturers. And 

what we are talking about are brand products for which there is 

not a generic. In my world, because these gentlemen may get a rebate, that does not mean my cost to obtain that product is going 

down. So there is two different scenarios when you are talking 

about product cost. 

Ms. CHU. I see. I would also like to ask about the transparency. 

The merger of Express Scripts and Medco would result in one PBM 

controlling one-third or 135 million of all American prescriptions, 

and so transparency will be a major concern for a company that 

will be handling such a large amount. And a concern for PBM 

transparency was recently raised in a March 2011 Office of the Inspector General report which cited concerns about the lack of 

transparency with regard to PBM rebates in the Medicare part D 

program. 

So Mr. Gustafson, I would like to know about wouldn’t the natural assumption be that this concern would grow if this merger is 

approved and won’t the level of transparency decrease post-merger 

because employers and health plans would have fewer options and 

thus not be in a position to demand greater transparency? 

Mr. GUSTAFSON. I think that is right, Congresswoman. I think 

one of the things that competition does in this marketplace, in any 

marketplace, is it forces the seller to be more transparent because 

the consumer has more choices, or in this case the plan sponsor or 

whoever the customer is in that instance. So I think that concentration in this market will allow the participants who remain to 

be less transparent, and I think that is bad for the competition levels and it is bad ultimately for the consumers. 

Ms. CHU. Okay. Thank you. 

Mr. GOODLATTE. I thank the gentlewoman. The gentleman from 

New York, Mr. Nadler, is recognized for 5 minutes. 

Mr. NADLER. I thank the Chairman. 

Mr. Gustafson, Mr. Watt discussed the issue of product markets. 

What do you see as the relevant product markets for antitrust purposes that should be analyzed as part of this merger and in which 

product markets would concentration under the merger cause the 

most concern and could divestitures in any of these market alleviate those concerns? 

114 

Mr. GUSTAFSON. Congressman, I think that there is—probably 

the FTC will ultimately decide that there is more than one market 

here. There certainly seems to be markets that—at this stage of 

our investigation that large plan sponsors is probably a market, the 

specialty drugs may very well be a market. So I think that there 

is—mail order may be a market. Probably not, but it is possibly a 

different marketplace. But ultimately I think there is more than 

one market. 

The question about whether divestitures would be a solution to 

this merger, it is probably too early to tell, but there are certainly 

some things that you could consider in terms of divestiture that 

would be useful. One is the speciality drug companies that these 

two merger partners own. Another would be the mail order businesses that they own or part of the mail order businesses, because 

both of those instances would lessen their grip on the national accounts. 

Mr. NADLER. Thank you. 

Mr. Snow, you testified that the merger would give the new combined company greater power to negotiate prices with drug companies and therefore would result in lower drug prices. 

Mr. SNOW. Correct. 

Mr. NADLER. Would you say the same principle would apply if we 

were to say that Medicare could negotiate drug prices with the 

pharmaceutical companies and if we let them negotiate the prices, 

instead of prohibiting them by law, the market power of Medicare 

would cause a great reduction in drug prices for Medicare? 

Mr. SNOW. Scale does drive better pricing. It does. 

Mr. NADLER. So Medicare would have tremendous volume pricing 

power if the law were changed to enable them to negotiate and use 

their pricing power to negotiate cheaper drug prices instead of prohibiting them? 

Mr. SNOW. Technically, yes. I would also tell you though that it 

is not uncommon for PBMs in the private sector to bump up 

against Medicaid best price when they could have done better had 

the government not set that floor. So it is a double-edged sword. 

Mr. NADLER. I didn’t follow that. 

Mr. SNOW. So there is already today Medicaid best price legislation that says that no one can negotiate a price that is better than 

Medicaid. 

Mr. NADLER. That is lower? 

Mr. SNOW. Yes. So they by definition must always have best 

price. 

Mr. NADLER. And the best price is what Medicaid pays? 

Mr. SNOW. Yes, it is what Medicaid pays and it is what the government has negotiated with that manufacturer on Medicaid. And 

all I am saying is that Medicaid best price legislation has become 

a floor below which we can’t negotiate. 

Mr. NADLER. But we prohibit Medicaid from negotiating that 

price, do we not? 

Mr. SNOW. Medicaid demands. It is the same issue. They demand 

that they get best price, which means the manufacturer says you 

can’t do better than that. If government negotiates, manufacturers 

will say, well, you know, I am going to have to keep the prices high 

115 

because I can’t afford to do this, and they basically create artificial—artificial floors below which you can’t negotiate. 

Mr. NADLER. I don’t understand what you are saying at all. Let’s 

go back to basics for a moment. I really just don’t understand what 

you are saying, and I am generally not that incomprehending— 

uncomprehending. 

We had a major political argument that said Medicare, I am not 

familiar with the data on Medicaid, but Medicare should or should 

not be able to negotiate prices, and Medicare should negotiate 

prices because with their volume pricing they can get better prices. 

That is the argument. 

You are saying that if your two companies merge because you 

have greater market power you are able to negotiate lower prices, 

which seems to be the same argument. And you said a moment ago 

that that would be a valid argument, that scale does matter. Now 

you are telling me that Medicaid has—do they negotiate the price? 

Mr. SNOW. No. They have what is called Medicaid best price. 

Mr. NADLER. So in other words, they can’t be negotiate the price. 

So that is a separate—they should be able to negotiate the price, 

would follow from your logic, to get better prices. 

Mr. SNOW. Government as a whole with their scale should. 

Mr. NADLER. Fine. That was my question. We could save a lot 

of money if government could use its scale to negotiate prices, as 

your two companies could save money by combining and using your 

power of scale to negotiate prices. Thank you. 

Now, my next question, let me ask Mr. Lech, I was going to ask 

this question and maybe it was what Mr. Marino was referring to 

before, I don’t know. But small pharmacies I understand are not 

allowed to combine—actually, Mr. Snow, small pharmacies are not 

allowed to combine to negotiate because that is a violation of antitrust. Now, it seems to me that maybe we should allow them to do 

that. Maybe that is what Mr. Marino is referring to in his legislation, to allow them to get together, because then they could get presumably a better situation. 

But you said a few moments ago, Mr. Snow, that—I think it was 

you that said it, that small pharmacies get together now in co-ops 

sort of—— 

Mr. SNOW. They do, in group purchasing organizations. 

Mr. NADLER. And that does not violate the antitrust laws? 

Mr. SNOW. No. 

Mr. LECH. But it doesn’t achieve the negotiations that you are referring to, because it is not binding on any of the pharmacies, and 

the PSAOs, I guess in a perfect world what Mr. Snow said would 

be true, that they are able to negotiate better prices. The reality 

is it is not what is seen to happen. 

Mr. NADLER. Well, let me ask Mr. Snow one last question because I see my time has expired. It went very fast. 

Given the greater concentration that would result if this merger 

went through, would you think it would be fair and right to allow 

an antitrust exemption for independent pharmacies so they could 

have a reasonable basis for negotiating with you? 

Mr. SNOW. I personally don’t believe they need it because of us, 

because as I have mentioned earlier and George has mentioned 

116 

earlier as well, we need retail pharmacies. They are an essential 

part of what we do. 

Mr. NADLER. But in terms of enabling them to survive—— 

Mr. SNOW. If you want natural competition to occur, you have to 

believe the companies are not going to do something that is not in 

their best interests. We need these retail pharmacies. As I mentioned in my oral testimony, 85 percent of all the prescriptions we 

do for all of our members come from retail pharmacies. 

Mr. NADLER. That is very nice, but it is not responsive to my 

question. My question really is, obviously you want to get the best 

price you can from the pharmaceutical companies and you want to 

sell the drug to the pharmacies, not for the lowest price possible 

from their point of view. They want the lowest price. You are the 

middleman, right? 

Mr. PAZ. Sir, we are not wholesalers, sir. The retail pharmacies 

buy their own drugs and then we reimburse them for what they 

buy. We are not the wholesaler. We only buy drugs direct that go 

through our mail order. 

Mr. NADLER. Yes, sir. 

Mr. LECH. That reverts back to the beginning of this conversation when Congressman Conyers asked who are these people and 

where do they fit in. We welcome—I wish to be able to wrap my 

arms around the PBM industry and speak with local purchasers of 

prescription insurance and talk to them as if I could trust everything that they are saying and promoting and marketing to be 

true. But in the 30 years that I have been practicing, it has gone 

the other way. And that is why we need legislation like Congressman Marino has introduced. 

I would recommend that you read the legislation first. What it 

does is it offers an exemption, but the exemption is defined. It defines a marketplace. It is not a county-wide or region-wide or every 

independent pharmacy. 

Mr. GOODLATTE. Mr. Lech, I hate to interrupt you, but the gentleman’s time has long expired. 

Mr. NADLER. I thank the Chairman for his indulgence. 

Mr. GOODLATTE. The gentleman from Florida, Mr. Deutch, is recognized for 5 minutes. 

Mr. DEUTCH. Thank you, Mr. Chairman. 

Mr. Chairman, as I brought up in a letter to the FTC Chairman, 

I have heard some real concerns from constituents in my district 

that the acquisition could result in diminished competition, could 

have a negative impact on healthcare costs, or could jeopardize the 

overall quality of patient care, and I would like to focus on two of 

those, if I may. The first is cost. 

Mr. Snow, if I understood you correctly, you said that, or if you could elaborate, there would be $1 billion passed back to consumers. I would like to understand that. And then, Mr. Gustafson, 

after Mr. Snow explains, if you could respond, because I think what 

you said earlier in your testimony was that past consolidation suggests that there will be higher prices for consumers. 

Mr. Snow, could you speak first? 

Mr. SNOW. Absolutely. Thank you. So we have contracts with clients today that have 100 percent pass-through of our pricing, of 

our rebates. So when a merger like this occurs, you actually comVerDate Aug 31 2005 16:11 Nov 18, 2011 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6601 H:\WORK\IP\092011\68401.000 HJUD1 PsN: DOUGA
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bine the best-of-breed contracting that we currently have as independent companies today. When you just look at best-of-breed contracts between the two companies post-merger, it results in $1 billion of savings that by definition under our existing contracts with 

our clients they get immediate benefit for. It goes right back. And 

when I say client, it is our employer customers and our health plan 

customers and our State government customers. 

Mr. DEUTCH. So Mr. Gustafson, could you help me make some 

sense of this, because ultimately I am concerned about the I am 

fact it is going to have on consumers. 

Mr. GUSTAFSON. What I had testified about was that when they 

claim the $1 billion in efficiencies, we need to make sure we document it, because we have had a lot of consolidation in this industry 

where promises have been made. We have a data set. We can go 

back and look. When CVS and Caremark merged, they made promises about efficiencies, and when—— 

Mr. DEUTCH. I am sorry, Mr. Gustafson. What kind of promises 

were made and what was the result? 

Mr. GUSTAFSON. Well, I am not familiar with the specifics of the 

promises as I sit here, but I know the mergers were defended on 

the basis that they would provide cost savings which would be 

passed on. And the data that I have seen suggests that the profits 

of these companies are soaring, which suggests that they are not 

passing it on, which suggests that they are taking whatever savings they get and putting them through to their bottom line. 

Mr. DEUTCH. I appreciate that. I would like, Mr. Lech, if I could 

turn to you for a moment. In your testimony you talked about the 

gradual shift of smaller and medium-sized PBMs being bought out 

by larger ones and you mentioned that the reduced competition 

hurts smaller pharmacies like yours. 

Can you speak specifically—can you help us understand what 

that looks like for your customers? Those negotiations with PBMs 

that have changed, what impact has it had on the customers, on 

the consumers? 

Mr. LECH. Well, the reason it will have a negative effect is basically because it is a take it or leave it contract. The statement was 

made earlier that, you know, we are very business-minded, savvy 

people, and if we get a contract that doesn’t look good, we are going 

to say no. Well, that is hard to do. It is not hard to do businesswise, but hard to do in a humane kind of way, to say ‘‘Congressman, I can’t fill your prescriptions anymore.’’ So access to the pharmacy of their choice and I believe also ultimately the price and the 

cost. 

What we have seen in all these claims of we are going to reduce 

costs, we are doing to reduce costs, the prescription prices keep 

going up. The sponsors of the plans keep paying more. The consumers are paying higher copays. The pharmacies are being paid 

less. So where is the money going? 

I would refer back to Mr. Gustafson’s recent answer about those 

profits are going into the corporate. 

Mr. DEUTCH. I am sorry, can you just walk through that piece 

step-by-step? The payments to the pharmacies, the copays, can you 

just take me through that a little slower? 

118 

Mr. LECH. Sure. Year after year we hear claims that the cost of 

medicine is going to go down, and we are hearing it again, and it 

was a guarantee I believe I heard, that the price will go down if 

this merger takes place. 

Well, first of all, I can’t see how that is going to happen. But as 

time goes by, year by year, prices continue to go up. So that money 

is going somewhere, okay, maybe to the manufacturers because of 

the cost. But look at all the players and what they do. 

There is the plan sponsors, let’s say the corporate employers of 

the world—of the country. Their cost to insure their folks for prescriptions are going up. The out-of-pocket expenses in the way of 

copays are rising for the consumer. The rates being paid to the providers are less. So where is the increased profit going? 

Mr. DEUTCH. And, finally, Mr. Lech, that has all happened during a period of consolidation? 

Mr. LECH. It happened as consolidation has taken place. I don’t 

know how to directly attribute it. 

Mr. DEUTCH. Thank you, Mr. Lech. Unfortunately, I am out of 

time. Thank you, Mr. Chairman. I yield back. 

Mr. PAZ. Could I answer some factual points here? 

Mr. GOODLATTE. We are going to allow some of the panelists to 

ask some additional questions, so we will give him the opportunity 

to do that if he chooses to. 

At this time we will do a second round here. I am going to ask 

a couple of questions myself and yield to Mr. Watt. And while I do 

that, I will ask Mr. Marino to take the chair since I am going to 

have to go to another meeting myself, and then he can ask his 

questions and yield to any other Members who have questions they 

would like to ask. And I have two. 

First, one to Mr. Lech. Community pharmacies have long complained about allegedly unfair practices by PBMs, and PBMs have 

long had significant influence in the prescription drug markets. 

Why will this merger make these alleged problems worse, in your 

view? 

Mr. LECH. Well, the take ‘‘take it or leave it’’ contracts can make 

it less people that I have to say take it or leave it to. It now is becoming a bigger percentage of my business, which makes it harder 

for me to negotiate. It gives me less leverage. And again, I would 

love to believe that when they say they want to work with me and 

they need me, I have not seen that. It is just talk. So as the company gets bigger, the ability for me as a provider, as a health 

care—as a pharmacy, it becomes less of an opportunity or less of 

an actuality that I will be able to—discerning against the bigger 

party. 

Mr. GOODLATTE. Mr. Paz, do you want to respond to that based 

upon your—— 

Mr. PAZ. Yes, please. 

If you go back and look at the releases that have come out of the 

Department of Defense as one case in point, we have heard testimony that, in fact, our efficiencies through mergers and acquisitions hasn’t been felt by our plan sponsors. The prices that we put 

forth in our Department of Defense contract, we have actually exceeded those. We delivered higher savings than was originally 

promised under the Department of Defense—— 

119 

Mr. GOODLATTE. What about the small pharmacies like Mr. 

Lech? 

Mr. PAZ. Again, I go back to the same statement, sir. They are 

a critical component of our offering. We do not want to see Mr.— 

Mr. Lech go out of business, nor will we put him in that position. 

What he fails to mention is that we have access standards under 

both Federal law and under client contracts which require a certain 

area you have to go to be able to find a pharmacy for the health 

and well-being of our members. We comply with all of those rules. 

Under the Federal standards and underneath, you know, our client 

contracts, he is an important component of our offering. 

Mr. GOODLATTE. Mr. Lech? 

Mr. LECH. What Mr. Paz fails to tell you is that the Department 

of Defense is a special entity, because through the mail they are 

given larger discounts. Those discounts have not passed on as 

much to me as an independent pharmacy. So the economies of scale 

are different with the Department of Defense because their contracting ability is greater than your average corporate purchaser. 

Mr. PAZ. The savings, though, is discussed—— 

Mr. GOODLATTE. I can’t go back and forth too many times. 

Mr. Gustafson, you testified that the Express Scripts-Medco 

merger reduces the number of viable providers of PBM services to 

large plan sponsors from three to two. Why aren’t Catalyst, Optum 

Rx and Prime Therapeutics, which already handled plans for Fortune 50 companies, viable providers of PBM services to large plan 

sponsors? Catalyst has won contracts for such large employers as 

Ford Motor Company, Nike, Sprint, Waste Management and Southwest Airlines. 

Mr. GUSTAFSON. They are not as big, and when these two combine, they are going to be bigger yet. And when they take that combination, they are going to be able to extract more discounts on the 

side of the pharmaceutical companies, they are going to be able to 

direct more to the mail order, they are going to have a bigger control of the specialty pharmacy products. All of that is going to make 

them more powerful vis—vis the other PBMs. 

Optum Rx is a good example because they suffer from another 

potential problem. UnitedHealth Care, their underlying parent, I 

guess it is, is a competitor of other plan sponsors. And so there has 

been a fair amount written about the reluctance of Cigna or Aetna 

or someone like that to use a PBM like Optum Rx because of the 

potential issues with respect to data access, things like that. 

But I think the question that we ought to address in this is how 

big is big enough? I mean, if we were talking about a merger of—— 

Mr. GOODLATTE. Under the antitrust law that is not the issue 

that we address. The issue that you address is do they have market 

power that would preclude others from being able to enter the marketplace and offer competitive plans that would maintain the competition that is, in the view of—certainly in my view—in view of 

the law as it is written, is a desirable thing to have? 

Mr. GUSTAFSON. Sure. I agree with that. What I was suggesting 

was how big is big enough with respect to the efficiencies they 

claim they can garner by getting together and being bigger? At 

some point, you know, there are no more efficiencies that can be 

120 

gained by getting bigger. They only become able to extract the 

power that they have—— 

Mr. GOODLATTE. Well, that is the underlying issue, not how large 

they have to be and still maintain their efficiency. 

But let me yield to the gentleman from North Carolina Mr. Watt 

and see if he has any additional questions. 

Mr. WATT. Well, I have got all kinds of questions. I am not sure 

what they have to do with the merger, but I am just trying to be 

a little bit clearer on how this industry fits together. 

Somebody help me if I am leaving out somebody. You have got 

pharmaceutical companies, you have got plans. Those are the insurers, right, or self-employed—self-insured employers, right? 

Mr. LECH. Payers. 

Mr. WATT. Payers. You have got independent pharmacies. That 

is Mr. Lech. You have got chain pharmacies. That is Mr. Wiesner 

and CVS and Rite Aid and—— 

Mr. SNOW. Walgreens. 

Mr. WATT. Walgreens. You have got PBMs, and you have got customers. 

Mr. SNOW. You also have big box pharmacies. Walmart, Target, 

Costco. 

Mr. WATT. Retail stores. 

Mr. SNOW. Grocery stores. 

Mr. WATT. Somebody explain to me quickly how all of these 

things fit together. I mean, or does it vary from case to case? I 

know that the pharmacy companies, pharmaceuticals, make the 

drugs, right? I mean, they got the patents. 

Mr. SNOW. Uh-huh. 

Mr. WATT. The plans insure people. They cover them. They pay 

somebody for the drugs. And so between them and the customers, 

we have independent pharmacies, chain pharmacies, PBMs, retail 

big box stores. 

Mr. LECH. You missed a layer, kind of. You have the manufacturers, you have the payers, you have the pharmacies, and you have 

the consumers. In between—— 

Mr. WATT. Well, there are some layers here that—within the 

pharmacies, independent pharmacies, chain pharmacies, retail 

stores, PBMs. And I don’t know how PBMs relate to independent 

pharmacies, chain pharmacies, retail stores. Somebody explain to 

me the role that PBMs plays in this. 

Mr. PAZ. Congressman, I would be happy to do that. The PBM 

is a consultant to the plan’s sponsor. Companies are constantly 

looking at their costs, and they are offering other drugs. There are 

drug manufacturers that make the drugs, and there are pharmacies that dispense the drugs. There are doctors who write for the 

prescription. 

Mr. WATT. I forgot about the doctors. 

Mr. PAZ. It is a very complicated process. We can even get even 

a little more if we want to throw wholesalers in there that sell to 

the pharmacies, but we will leave them out for now. 

So what our job is to do, our main job, is to help a plan sponsor 

meet the needs that it has to meet the health care requirements 

for its employee base. So, for example, a company that is in dire 

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economic straits that has to cut out costs has to take some fairly 

tough measures in order to—— 

Mr. WATT. So you work for the plans? 

Mr. PAZ. We work for the plans. 

Mr. WATT. You are not in the space except that you own specialty pharmacies and mail order. 

Well, maybe I should ask this question: Well, would this merger 

still be viable if FTC required divestiture of your mail order and 

specialty drug—I mean, would this still be a desirable merger? 

Mr. PAZ. It depends to what degree that takes place. 

Mr. WATT. All of it. I mean, you say you work for—— 

Mr. PAZ. Right. 

Mr. WATT. I don’t have any agenda here. When I used to practice 

law, I say this quite often in this Committee—when I practiced 

law, I never asked a question that I didn’t know the answer to. I 

have the freedom now to ask questions that I don’t know the answer to. I don’t know the answer to this. 

Mr. PAZ. Mail order is a very important component to our offering. It helps us drives down costs for those clients that need that 

type of offering. There is also—— 

Mr. WATT. This would not be a desirable merger if the FTC says 

you have got to get rid of your mail order. 

Mr. PAZ. That is correct, Congressman. 

Mr. WATT. And would it be a desirable merger if the FTC says 

you have to get rid of your—what is the other thing? 

Mr. PAZ. Specialty. 

Mr. WATT. Specialty. 

Mr. PAZ. It would not, sir. 

Mr. WATT. That wasn’t a trick question. I wasn’t trying to trip 

anybody up. I was just trying to figure out how all this fit together. 

Mr. PAZ. Thank you. 

Mr. WATT. I think I understand it better, unless somebody got 

some other just angle that I need to understand. 

Mr. WIESNER. Not really a different angle, just a couple of comments to piggyback on some of your comments. 

When you are referring to a chain pharmacy, NACDS, of course, 

the National Association of Chain Drug Pharmacies has a large 

membership. Overwhelmingly that membership consists of very 

small regional chains. So they are not the large national chains 

that people think about. 

Mr. WATT. You are not CVS and Walgreens. 

Mr. WIESNER. They are members of NACDS, but if you look at 

my company, we are a regional chain located in one State. I believe 

in your State, there is a small chain that is located only in your 

State. 

Mr. WATT. Who is that? 

Mr. WIESNER. Kerr Drugs. So if you think of it in that terms, we 

are faced many, many times with the exact same challenges that 

Mr. Lech and independent pharmacies are. We do not necessarily 

have that large scale, but we are an important part of those communities in that particular regard. 

Mr. WATT. My time has expired. Is it Carr, or is it Kerr, K-ER-R? 

Mr. WIESNER. K-E-R-R. 

122 

Mr. WATT. They pronounce it Kerr? 

Mr. WIESNER. Yes. 

Mr. WATT. I thought I had seen it K-E-R-R, but then you said 

Kerr. I never associated that with K-E-R-R. 

Mr. WIESNER. Is it possible to make one last comment? 

Mr. MARINO. [presiding.] Surely. 

Mr. WIESNER. Sure. I think it is really important to understand 

the different channels for drug distribution. We are talking a lot 

about retail pharmacy, we are talking about mail-order pharmacy. 

We are also talking about specialty drugs. 

Specialty we need to really keep on the radar screen for costs. 

The new products that are coming forth in the future, the vast majority of those are going to be specialty drugs. They may or may 

not be available in your community pharmacies. So that is an important ingredient to the success of any PBM as to how they manage the specialty program, and it is also a great revenue source. 

So I don’t want specialty drugs to go unnoticed in this particular 

conversation. 

And each of those different channels, whether they be retail community pharmacy, mail order which they own, or specialty which 

they own, exist under different contractual agreements. So what I 

receive at my level versus theirs is different. 

Mr. WATT. Stop. 

May I ask one? 

Mr. MARINO. Take all the time you need, Mr. Watt. 

Mr. WATT. I know he wants all the time he wants. There is an 

ulterior motive here, but that is all right. That is good. We all understand. 

Ms. Kanwit, FTC has the authority, I presume, under the statute 

to require divestiture, right? 

Ms. KANWIT. They have remedies, sir. They have a guideline, not 

only merger guidelines, but a remedies guideline, along with the 

Department of Justice, and so they can look at some divestiture 

issues in an appropriate context. But it is very detailed about when 

they can look and what the implications of divestiture might be for 

the merged entity, yes. 

Mr. WATT. Mr. Gustafson, what is your take on the divestiture 

question I raised before? And then I am going stop and yield back. 

Mr. GUSTAFSON. I think it is certainly something that the FTC 

should look at. I mean, what makes this potential combination a 

concern is the fact that they do have the mail-order operations and 

the specialty pharmaceuticals, because it increases the leverage 

they have in the marketplace. And so I think it is certainly an option that the FTC ought to explore. But I think that you heard that 

they are not interested in this merger if they have to be divested 

of those services. 

Mr. WATT. Can they explore it, Ms. Kanwit? 

Ms. KANWIT. I have a response to that. Specialty is really critical, 

as you just heard Mr. Paz and Mr. Snow comment. I mean Teva 

just came out with a multiple sclerosis drug which would cost upwards of 42-, $45,000 a year. We are talking very, very expensive 

drugs. One of things PBMs do that the FTC has found is drive 

down costs by negotiating with pharmaceutical companies. So if 

you want a PBM to go and negotiate for lower costs, you certainly 

123 

want them negotiating on things like specialty drugs, which, by the 

way, many of which are coming down the pipeline right now and 

are really going to be critical in the decade coming ahead. 

Mr. WATT. Can they do that as an independent PBM as opposed 

to an owner of a specialty drug? 

Ms. KANWIT. There are PBMs out there that do nothing but specialty, specialty companies. 

Mr. WATT. I yield back. The more questions I ask, the more questions I have. So I am going to stop. 

Mr. MARINO. Thank you, Mr. Watt. 

I am going yield myself a couple minutes. Mr. Wiesner, what 

type of transparency would you as a pharmacist like to see concerning clarity for PBMs? 

Mr. WIESNER. Transparency is a large issue. If we look back on 

past history and past behavior, as I indicated in my testimony, 

there have been lots of allegations. Lots of State attorney generals 

that have brought charges against various PBMs. And that all 

stems from the fact that they are not transparent in their explanation of what their true costs are. They are not transparent in the 

rebate process. They basically have two contracts. One is with the 

buyer, the payer of their services; the other is with provider, the 

retail pharmacy. In each of those cases, those are all hidden costs 

in their particular organization. 

The allegation, of course—or not allegation. The assumption is 

that they are driving down costs. If they are driving down costs, 

as a gentleman said a little bit earlier, they would be able to return 

$1 billion based on 100 percent transparency. 

I guess my question is why can’t we have 100 transparency at 

all times? Why do we have to have 80 percent at times and 100 

percent at others. 

Mr. SNOW. Could I respond to that? 

Mr. MARINO. Sure. 

Mr. SNOW. I offer clients when we go to market, they have 

choices. They can get the price discounts and we keep portions of 

rebate, or they get 100 percent of rebate. It is equal to the same 

net cost to them. It is their choice. 

In our business, benefit design, contract structure is 100 percent 

always our client’s choice. And by the way, everything they choose 

is auditable, so there is transparency. Some of the things that are 

being talked about are history from a long time ago that has since 

been rectified because of the actions that occurred 10 years ago. 

Mr. MARINO. Mr. Snow, would I as a consumer have that ability 

to obtain that information and to explore that transparency? 

Mr. SNOW. At a consumer level, what we do today, we have 

taken this very far, we have smartphone technology. You can 

download the app for free where you, in fact, can, with your technology, look at the cost of your drugs, at the various locations of 

those drugs; you can look at the cheaper alternatives; you can discuss it with your doctor at the time of prescribing. We show them 

their copay, their coinsurance, what the net savings would be on 

an annual basis if they ask their physician to use an equivalent 

drug that was generic. 

We are making every step we possibly can to lever technology to 

create a well-informed consumer, because we believe that also 

124 

helps the health care system reform itself if, in fact, the consumers 

become a prudent buyer of care. We are committed to that. 

Mr. MARINO. I have a question concerning—and I am going to be 

fair on this. Mr. Snow, I think it was you that said you wanted— 

did you enter a document into the record, a report of some nature, 

or was it Mr. Paz? 

Could you explain to me what that document is and who prepared it? 

Mr. PAZ. Yes. It is a document that basically looks at the cost 

of drugs, and if, in fact, for every 1 percent of waste we can take 

out of the system, we can—it equates to 20,000—— 

Mr. MARINO. Who prepared it? 

Mr. PAZ. A group called PCMA, the Pharmaceutical Care Management Association. 

Mr. MARINO. Is that in any way linked with your organizations, 

or is it a representative? 

Mr. PAZ. We belong to that just like they belong to NACDS. 

Mr. MARINO. Okay. Now, Mr. Lech, being fair, you entered something into the record, correct? What was that? 

Mr. LECH. I entered in pictures that were sent in, actual pictures, of medications that were in consumers’ houses, of medication 

that was sent to them at times not requested. 

Mr. MARINO. Okay. Who prepared that report? 

Mr. LECH. The pictures were put together by NCPA from their 

members, but the information came from consumers. 

Mr. MARINO. Okay. Thank you. 

Mr. Paz, as a consumer, would I have a choice in purchasing 

from PBMs, your company that is consolidated, specialty drugs and 

mail-order drugs from where they are purchased from or where 

they are sent from? Do I have that choice, or is it your mail-order 

company that I have to purchase those drugs from? 

Mr. PAZ. In the majority of the cases, there are a few that you 

would you would not have a choice, but the majority of the cases, 

you would have that choice. 

Mr. MARINO. Is that offered to the consumer? 

Mr. PAZ. Yes. The consumer decides which pharmacy to go to. 

The consumer decides whether or not they want to use mail order. 

That is all a consumer choice. 

Mr. MARINO. Thank you. 

0Mr. Lech, your hand has gone up there. 

Mr. LECH. You know what the option is if they don’t use a mail 

order? 

Mr. MARINO. What is that? 

Mr. LECH. They will pay full price. 

Mr. PAZ. No, sir, that is not correct. They pay a copay. They pay 

a copay at Mr. Lech’s pharmacy, or they pay a copay at my pharmacy, mail order. There is no difference. 

Mr. MARINO. I don’t want to get into a debate here, but it is 

noted. 

I have no further questions. Mr. Watt? 

Mr. WATT. I have no further questions. 

Mr. MARINO. No further questions. I see no one else sitting here. 

Lady and gentlemen, I want to thank you very much for being 

here. I was a little longer than we anticipated. 

125 

I have some housekeeping to take care of. Without objection, all 

Members will have 5 legislate days to submit to the Chair additional written questions for the witnesses, which we will forward 

and ask the witnesses to respond as promptly as they can do so 

that their answers may be made a part of the record. 

Without objection, all Members will have 5 legislative days to 

submit any additional materials for inclusion in the record. 

With that, again I thank the witnesses, and the hearing is adjourned. 

[Whereupon, at 5:56 p.m., the Subcommittee was adjourned.] 

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