Nation's Largest Prescription Benefit Managers Violate
Alexandria, Virginia - August 19, 2003

Suits Against Medco, AdvancePCS Come Days
Before Merck Spin-Off of Medco

The nation's two largest prescription benefit managers (PBMs) – companies that administer prescription drug benefit plans for plan sponsors such as insurance companies, HMOs and employers – are violating the antitrust laws to the detriment of some 140 million Americans and at the expense of retail pharmacies across the nation, according to two separate lawsuits filed today in federal court in Philadelphia.

The defendants, each named in one of the suits, are Medco Health Solutions, Inc., a subsidiary of Merck & Co., Inc., and AdvancePCS. Medco administers prescription benefit plans covering over 63 million Americans and is the largest PBM in terms of net revenues. AdvancePCS administers plans covering over 75 million Americans and is the largest PBM in terms of the number of people covered. The suit against Medco also includes Merck as a defendant on the grounds that Medco is merely the alter ego for Merck in promoting its brand name drugs.

The lawsuits allege that each of the defendant PBMs has illegally reduced or eliminated competition on price, service and consumer choice that would otherwise thrive among the plan sponsors that each PBM represents. Each PBM allegedly does so by acting as a common agent for the plan sponsors in their dealings with retail pharmacies including negotiating and fixing reimbursement levels and rates, restricting the level of service offered to customers, and arbitrarily limiting the ability of retail pharmacies to compete on a level playing field with the PBM's mail order pharmacy.

"It would be blatantly illegal for insurance companies or employers to agree on the rates they pay to pharmacies and the restrictions they place on consumers," said Michael Freed of the Chicago law firm of Much Shelist Freed Denenberg Ament & Rubenstein, a spokesman for the plaintiffs. "Medco and AdvancePCS have abused their role as PBMs for many major insurance companies, Blue Cross plans, HMOs and large employers to accomplish the same result. And, it is just as illegal."

The class action lawsuits were brought on behalf of pharmacies across the nation. The Pharmacy Freedom Fund, a coalition of several thousand independent pharmacy owners, and the National Community Pharmacists Association, representing the owners of 24,000 pharmacies across the country, joined in the suits.

Specifically, the lawsuits allege that, acting as the common agent for plan sponsors, the PBMs limit competition by:

  1. Setting reimbursement rates for pharmacies far below the rates that would apply in a competitive market;

  2. Fixing and artificially depressing the prices to be paid to pharmacies for generic drugs;

  3. Prohibiting retail pharmacies from providing more than a 30-day supply of drugs while the PBMs' own mail order pharmacies routinely provide a 90-day supply;

  4. Requiring retail pharmacies to charge an effectively higher co-pay than the co-pay that the PBMs' own mail order pharmacies charge; and
  5. Imposing one-sided contracts and added costs and inefficiencies on retail pharmacies.
Medco and AdvancePCS profit directly from this anticompetitive conduct in several ways. First, they have pushed reimbursement rates so far below a competitive level in recent years that they have created a "spread" between what they bill the Plan Sponsor and what they pay the pharmacy. According to the Pharmacy Benefit Management Institute, the average fee that PBMs pay to community retail pharmacies for dispensing a brand name drug was $2.21 in 2001, down from $2.50 in 1995, a decline of 11.6% in nominal terms and 24% when adjusted for inflation.

Second, they operate mail order pharmacy operations that compete with retail pharmacies (and other mail order pharmacies) for refill and follow-on prescriptions. By precluding retail pharmacies from offering a 90-day supply of drugs or lower co-pays, the PBMs place artificial limits on consumer choice in order to divert business from community pharmacies to the PBMs mail order pharmacies. "The mail order pharmacies of Medco or AdvancePCS refuse to compete fairly with community pharmacies on cost and service for consumers," said John Rector, Senior VP of NCPA. "Why not allow consumers to choose and permit community pharmacies to compete?"

The suit comes days before Merck plans to spin-off Medco as a separate unit. Both Medco and Advance PCS have come under governmental and consumer pressure in recent years for, among other things, refusing to reveal their financial arrangements with drug companies from whom they get rebates. This conflict of interest was also cited in today's lawsuit against Medco. The suit alleges that Merck has exerted control over the core of Medco's PBM operations, as reflected by Medco's admitted preference for Merck products. That control will continue for at least four more years because, under an agreement signed last year, Merck required Medco to give Merck's patented products preferential treatment for five years or face potentially huge liquidated damages.

© Copyright National Community Pharmacists Association. All Rights Reserved

205 Daingerfield Road
Alexandria, VA 22314
T: 703.683.8200 F: 703.683.3619