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The U.S. Government Will Like the Express Scripts-Medco Deal


Express Scripts’ Thursday morning bid for Medco surprised many. Matthew Herper concludes that “generics and Obamacare” led to the take-over. Brand-name pharma is going to be making its money off fewer drugs than in years past, and many of those will be specialty drugs for orphan diseases.

Big Pharma, distributors, and pharmacies will oppose the combination of these two giant pharmacy-benefits managers. Throughout Thursday, MHS traded at about a ten percent discount to the deal terms, reflecting skepticism that the take-over will close successfully. A number of observers have questioned whether the Administration’s energetic antitrust enforcers will favor the combination of these two giants.

I don’t see why not. My initial calculations show that the take-over won’t come close to crossing the FTC’s and DOJ’s thresholds for concern. The regulators’ guidelines for horizontal mergers define a market with a Herfindahl-Hirschman Index (HHI) lower than 1500 as “unconcentrated” and, therefore, (usually) competitive. Using data presented by the Pharmacy Benefit Management Institute, I estimate the pre-merger HHI of the PBM industry to be 695 and the post-merger HHI only 957.

Furthermore, the Administration does not like competition and fragmentation in health care. It prefers concentration and everybody following one master plan. That’s the whole point of the Independent Payments Advisory Board (IPAB), for example. If a more concentrated PBM sector can be conscripted to facilitate the government’s future rationing, especially with respect to specialty drugs, that is all to the government’s benefit.

The cost of pharmaceutical innovation will go up, but that is no concern of the government’s. It should be a concern of patients. Unfortunately, ordinary people have never heard of these companies. It’s not like the unpopular AT&T acquisition of T-Mobile, where both companies touch retail consumer directly. It will to be very difficult for opponents of the deal to provoke populist outrage against it.

Obamacare will continue to lead to concentration in many sectors of health care, until it is repealed and replaced with reforms that lead to competition and choice.

John R. Graham is Senior Fellow at The Independent Institute.

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