The Federal Trade Commission’s decision to end its eight-month investigation of the $29 billion merger between Express Scripts and Medco Health Solutions without taking action has received a surprising endorsement from The New York Times.

An editorial in the newspaper’s April 5 edition concluded that the FTC’s 3-to-1 vote to finish its inquiry into the combination of two of the nation’s three largest pharmacy benefits management companies was justified.

To support its position, The Times cited the assertion of the FTC majority — Chairman Jon Leibowitz and Commissioners Edith Ramirez and J. Thomas Rosch — that even after the deal businesses and other third-party payers will have numerous options in the PBM market. Part of the editorial’s subhead reads, “Competition appears to be alive and well.”

But, to quote T.S. Eliot, “between the idea and the reality … falls the shadow.” The Times noted that, together, Express Scripts and Medco generated $116 billion in revenue last fiscal year, only slightly ahead of CVS Caremark’s $107 billion. True enough, but the implications for competition among PBMs and the market power of the combined entity are much different when it’s remembered that $59.6 billion of CVS Caremark’s sales came from its drug store business.

Express Scripts-Medco will cover 155 million patient lives, nearly twice those handled by CVS Caremark. As Julie Brill, the lone dissenter among the FTC commissioners, pointed out, the new entity will have a 45% share of the PBM market, with CVS Caremark at 28% and the next biggest PBM, Aetna, at just 10%. The FTC majority’s assertion that there will be nine “significant” players (plus several dozen smaller companies) in the sector after the merger is dubious. With such a large disparity in market share, everyone from Aetna on down will face a steep uphill climb.

Retail pharmacy is another business that will be hurt by the merger, with Express Scripts-Medco in a position to dictate contract terms. “The FTC mostly discounted these fears,” The Times editorial read, “but added that any reduction in dispensing fees at pharmacies could benefit consumers by lowering costs.”

The problem with that theory is community pharmacy already operates on profit margins of less than 2%. Any further erosion could force many retailers to shorten store hours, curtail service or perhaps even shut down.

The threat is illustrated by Express Scripts’ ongoing battle with Walgreens. When their contract came up for renewal last year, the PBM proposed terms that executives at the drug chain said included below-market reimbursement rates and other onerous conditions that would have resulted in too much uncertainty for their business. Walgreens walked away from the proposed deal and some $5 billion a year in revenue.

Confronted with the increased clout wielded by Express Scripts-Medco, it will be very difficult, if not impossible, for retailers, few of which have the resources that Walgreens has, to take a stand for the good of the pharmacy profession. The dilemma they now face is compounded by Express Scripts-Medco’s control of 50% of the market for specialty medications and 60% of the mail-order prescription business.

Another casualty of the merger will be the nascent transformation of drug stores into true neighborhood health care centers, where such services as immunizations and diagnostic testing enhance patient access, lower costs and help the health care system cope with the growing shortage of primary care physicians.

Drug store operators have learned to be efficient, utilizing advanced technology to free pharmacists to interact with patients. But they can’t be expected to add new services at a time when pharmacy remuneration, which accounts for about 65% of sales at most chain
drug stores and even more at independent pharmacies, will come under increased downward pressure as a result of the Express Scripts-Medco merger.

In concurring with the FTC majority that “the best news to come out of the investigation is that there are a growing number of challengers to the giant pharmacy benefits managers,” The Times recognized that free market competition is the best way to stimulate innovation in health care and determine reasonable reimbursements.

Perhaps the Express Scripts-Medco merger will prove to be a catalyst for such competition. But it could just as well have the opposite effect. In case the worst happens, The Times would have done well to endorse Brill’s call for the FTC to revisit the transaction and its impact on the health care market three years from now.