Does ESI need Medco deal to happen? It sure looks like it

WHAT IT MEANS AND WHY IT'S IMPORTANT — In his July 20 letter to benefit consultants, Walgreens president of pharmacy, health and wellness Kermit Crawford made a direct appeal to plan sponsors to either “select a PBM that includes Walgreens” or consider “direct arrangements with plans currently using Express Scripts, to the extent permitted by their contracts.” The letter also included an attached “template agreement that can be used to implement such direct arrangements where permitted,” for consideration.

(THE NEWS: PBM giants Express Scripts, Medco to merge. For the full story, click here)

Walgreens believed that the short-term loss of the ESI business would be far less than the long-term impact of accepting ESI's proposed terms. ESI believed it could live without Walgreens, boasting that it has another ESI network pharmacy store on average within half-mile of any Walgreens pharmacy. “While perhaps technically true, Walgreens has 40+ percent market share in many major cities,” noted pharmacy economics consultant Adam Fein in his Drug Channels blog. “And how could Express Scripts service a client where Walgreens has a worksite pharmacy?”

Further, Fein observed, if Walgreens chooses to remain in other PBM networks, such as Medco and Caremark, ESI will be at a major disadvantage during the next PBM selling season.

Of course, all of this was before the July 21 bombshell announcement that ESI would attempt to merge with PBM giant Medco in a $29 billion deal that would find the new company 59%-owned by ESI shareholders, and led by ESI CEO George Paz, who would become chairman and CEO.

But that’s not exactly a slam-dunk, either. ESI tried and failed to wrestle Caremark away from CVS in 2007, but was unable to convince antitrust regulators and its own shareholders before CVS could pull the trigger. That was former President Bush’s Federal Trade Commission. These days, you likely can expect a much more cynical assessment from antitrust regulators who will wonder if the combined entity would stifle competition. Under ObamaCare, the government becomes the largest healthcare payer in America, so you better believe regulators will have their “I smell a rat” detectors set on high. Then there’s pharma, which will spend now to avoid being nickled and dimed later by a bigger, badder ESI-Medco combination. Then, there’s retail pharmacy — within 24 hours both the National Association of Chain Drug Stores and the National Community Pharmacists Association had come out against the deal, citing that there is no way the combined ESI-Medco would maintain a level playing field between retail and its own giant mail order business.

According to estimates, the new company would control anywhere about 40% of retail prescriptions processed, and almost half of the U.S. mail order pharmacy business.

It appears that it may be some time before the situation is resolved, and that there will be some uncertainty out there going into the next PBM selling season. It is expected that the deal if it were to be approved, wouldn't officially close until the first half of 2012. The first half of 2012 ends about a year from now. That oddly enough could give Walgreens even more leverage here, as big payers will be left with a choice of gambling on the new ESI-Medco combination, opting for CVS Caremark instead, or working directly with Walgreens. You can bet that Walgreens will amp up the message and keep the pressure on with payers and benefit consultants.

So, does Walgreens needs ESI? Maybe not. But it sure looks like ESI needs the Medco deal to happen.