Flaws in ESI-Medco efficiency claims over proposed merger

David A. Balto, an antitrust attorney in Washington and former Policy Director of the Federal Trade Commission, released a white paper today exposing the flaws in efficiency claims made by Express Scripts, Inc. (ESI) and Medco Health Solutions, Inc. (Medco) with respect to their proposed merger. Last year, the two pharmacy benefit management (PBM) companies announced plans to merge in a $29 billion deal that is currently being reviewed by the Federal Trade Commission (FTC) to determine whether it complies with antitrust law. A final decision is expected early this year.

In response to antitrust concerns, ESI and Medco have suggested the merger will lead to remarkable cost savings to consumers of over $1 billion annually. However, the Merger Guidelines and the law are clear that merging parties carry the burden of showing "extraordinary" efficiencies when they are used to offset competitive harm resulting from the transaction – and unfortunately, no such efficiency justification exists, much less one demonstrating extraordinary efficiencies.

"The Merger Guidelines and the law are clear that only a countervailing efficiency argument demonstrating 'proof of extraordinary efficiencies' could justify the approval of this transaction," the paper states. "When called upon to explain the benefits of this transaction for consumers, proponents of the deal have offered contradictory explanations that fail to meet the standard required under the Clayton Act."

Throughout the paper, Balto examines ESI/Medco's argument that the merger would create substantial cost saving efficiencies and lays out the argument's flaws, including the notion that potential cost savings are relevant without evidence that they will be passed on to consumers. Balto also examines the PBM industry as a whole and how further consolidation would amplify the lack of transparency and competitiveness that already exist in the PBM market.

"PBMs are not the panacea analysts such as Compass Lexecon claim they are, and the merger of the second and third biggest PBMs is certain to result in harm. Suggestions that the current state of affairs in the PBM industry is healthy and competitive are misplaced, but worse is the suggestion that the merger will lead to further consumer benefit rather than harm," the paper continues.

The merger has been investigated by the House Judiciary Subcommittee on Intellectual Property, Competition and the Internet and will the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights. The Federal Trade Commission (FTC) will ultimately determine whether or not the deal will move forward.