[Senate Hearing 112-266]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 112-266

 THE EXPRESS SCRIPTS/MEDCO MERGER: COST SAVINGS FOR CONSUMERS OR MORE 
                       PROFITS FOR THE MIDDLEMEN?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            DECEMBER 6, 2011

                               ----------                              

                          Serial No. J-112-54

                               ----------                              

         Printed for the use of the Committee on the Judiciary








                                                        S. Hrg. 112-266

  THE EXPRESS SCRIPTS/MEDCO MERGER: COST SAVINGS FOR CONSUMERS OR MORE 
                       PROFITS FOR THE MIDDLEMEN?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 6, 2011

                               __________

                          Serial No. J-112-54

                               __________

         Printed for the use of the Committee on the Judiciary







                  U.S. GOVERNMENT PRINTING OFFICE
 72-806 PDF               WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001






                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York              JON KYL, Arizona
DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
            Bruce A. Cohen, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
CHUCK SCHUMER, New York              MICHAEL S. LEE, Utah
AMY KLOBUCHAR, Minnesota             CHUCK GRASSLEY, Iowa
AL FRANKEN, Minnesota                JOHN CORNYN, Texas
RICHARD BLUMENTHAL, Connecticut
       Caroline Holland, Democratic Chief Counsel/Staff Director
                David Barlow, Republican General Counsel











                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................     6
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....     5
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     4
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
Lee, Michael S. a U.S. Senator from the State of Utah............     3

                               WITNESSES

Balto, David A., Esq., Law Offices of David A. Balto, Washington, 
  DC.............................................................    16
Bettiga, Michael J., Chief Operating Officer and Executive Vice 
  President, Shopko Stores Operating Company LLC, Green Bay, 
  Wisconsin......................................................    14
Paz, George, Chairman and Chief Executive Officer, Express 
  Scripts, Inc., St. Louis.......................................     8
Snow, David B., Jr., Chairman & Chief Executive Officer, Medco 
  Health Solutions, Inc., Franklin Lakes, New Jersey.............     9
Streator, Scott E., Associagd Vice President Business 
  Development, The Ohio State University Medical Center, 
  Columbus, Ohio.................................................    11
Sutter, Susan L., Co-Owner, Marshland Pharmacies, Horicon, 
  Wisconsin on behalf of Independent Paharmacist and Member of 
  the National Community Pharmacists Association, Alexandria, 
  Virginia.......................................................    13

                         QUESTIONS AND ANSWERS

Responses of David A. Balto to questions submitted by Senators 
  Kohl, Lee and Schumer..........................................    41
Responses of Michael J. Bettiga to questions submitted by 
  Senators Grassley, Kohl, Lee and Schumer.......................    53
Responses of George Paz to questions submitted by Senators Kohl, 
  Lee, Schumer, Franken and Grassley.............................    62
Responses of David B. Snow to questions submitted by Senators 
  Franken, Grassley, Kohl, Lee and Schumer.......................    87
Responses of Scott E. Streator to questions submitted by Senators 
  Schumer, Lee and Kohl..........................................   132
Responses of Susan L. Sutter to questions submitted by Senators 
  Kohl, Schumer and Lee..........................................   142

                       SUBMISSIONS FOR THE RECORD

American Anttitrust Institute (AAI), Dan Gustafson, Advisory 
  Board Member and Albert A. Foer, President, Washington, DC, 
  November 30, 2011, joint letter................................   158
Balto, David A., Esq., Law Offices of David A. Balto, Washington, 
  DC, statement..................................................   164
Bettiga, Michael J., Chief Operating Officer and Executive Vice 
  President, Shopko Stores Operating Company LLC, Green Bay, 
  Wisconsin, statement...........................................   179
Economic Benefits of Pharmacy Benefit Managers, Jonathan Orszag, 
  Compass Lexecon, LLC and Kevin Green, Compass Lexecon, LLC, 
  joint study....................................................   188
Fein, Adam J., President, Pembroke Consulting, Inc., 
  Philadelphia, Pennsylvania, statement..........................   235
National Association of Chain Drug Stores, Alexandria, Virginia:
    2011-2012 Chain Pharmacy Industry Profile....................   246
    Steven C. Anderson, IOM, CAE President and CEO, December 13, 
      2011, letter...............................................   324
National Taxpayers Union, NTU, Duane Parde, President Alexandria, 
  Virginia, December 5, 2011, letter.............................   328
Norquist, Grover, President, Americans for Tax Reform, 
  Washington, DC, December 1, 2011, letter.......................   329
Paz, George, Chairman and Chief Executive Officer, Express 
  Scripts, Inc., St. Louis, Missouri, statement..................   330
Snow, David B., Jr., Chairman and Chief Executive Officer, Medco 
  Health Solutions, Inc., Franklin Lakes, New Jersey, statement..   339
Streator, Scott E., Associagd Vice President Business 
  Development, The Ohio State University Medical Center, 
  Columbus, Ohio, statement......................................   355
Sutter, Susan L., Co-Owner, Marshland Pharmacies, Horicon, 
  Wisconsin on behalf of Independent Paharmacist and Member of 
  the National Community Pharmacists Association, Alexandria, 
  Virginia, statement............................................   363
Towns, Edolphus ``Ed'', a U.S. House of Representative from the 
  State of New York and Alcee L. Hastings, a U.S. House of 
  Represetative from the State of Flordia, November 28, 2011, 
  joint letter...................................................   410

 
 THE EXPRESS SCRIPTS/MEDCO MERGER: COST SAVINGS FOR CONSUMERS OR MORE 
                       PROFITS FOR THE MIDDLEMEN?

                              ----------                              


                       TUESDAY, DECEMBER 6, 2011

                                       U.S. Senate,
             Subcommittee on Antitrust, Competition Policy,
                                       and Consumer Rights,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Klobuchar, Franken, Blumenthal, 
Lee, and Grassley.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good afternoon. Today we meet to consider a 
merger in an industry that is central to the way prescription 
drugs reach the market and the prices health plan sponsors and 
ultimately consumers pay for these drugs.
    Express Scripts and Medco, two of the Nation's three 
largest pharmacy benefit managers, known as PBMs, seek to 
merge, forming the Nation's largest PBM. If this merger goes 
forward, the combined company will administer 1.14 billion 
prescriptions annually and would handle 41 percent of all 
prescriptions administered by PBMs. It would be nearly two 
times larger than its nearest competitor, CVS Caremark.
    Over the past decade, PBMs have become major players in the 
health care industry. By one estimate, 90 percent of 
individuals with prescription drug coverage receive benefits 
through a PBM, and PBMs handle approximately two-thirds of all 
prescriptions written in our country. PBMs serve as middlemen 
between drug manufacturers, pharmacies, and health plan 
sponsors.
    PBMs do everything from negotiating the prices health plan 
sponsors pay for drugs to setting the prices pharmacies are 
reimbursed for dispensing drugs. They also decide which 
specific drugs make it onto formularies eligible for 
reimbursement.
    In addition to all of these functions, Express Scripts and 
Medco would control about a 60-percent share of the mail-order 
pharmacy business which ships drugs in bulk directly to 
consumers.
    Finally, these two PBMs operate ``specialty pharmacies,'' 
pharmacies that carry drugs used for the treatment of the most 
rare and challenging ailments. They would together control over 
50 percent of the specialty market after the merger.
    Express Scripts and Medco argue that this merger will be 
beneficial to health plan sponsors and ultimately consumers. 
They claim that the combined company's scale would give it 
substantial buying power to drive down drug prices. The 
merger's critics, however, worry about the consequences of 
consolidating two major rivals in this very important industry. 
They question whether the drug price savings that the PBMs 
claim they will achieve will indeed be passed along to plan 
sponsors and their benefits or whether they will just go into 
the pockets of PBM shareholders.
    This merger, as critics argue, will also reduce from three 
to two the number of large PBMs that serve the Nation's largest 
employers. Currently, 42 of the top Fortune 50 companies 
utilize Express Scripts, Medco, or CVS Caremark as their PBM. 
Reducing the number of competitive choices from three to two 
raises the dangerous possibility that these large companies 
will have little choice but to pay more for PBM services.
    The merging companies argue that there are many other PBMs 
beyond the Big Three that bid to provide PBM services to large 
employers. However, many large companies appear to prefer the 
range of services offered by the three large PBMs and do not 
seriously consider smaller PBMs.
    In this regard, it is notable that no large employer who 
privately expressed concerns to us wished to testify at today's 
hearing, often telling us that they feared retaliation from the 
large PBMs with whom they must do business.
    We are also aware of the concerns expressed by pharmacies, 
both large chain drug stores and small community pharmacists, 
of what they believe are likely harmful effects of this deal. 
Pharmacists believe that the PBMs will force consumers to use 
mail-order services and squeeze the reimbursement rates 
pharmacies receive from PBMs.
    Question: Will pharmacists be able to compete in this new 
marketplace? Will consumers suffer the loss of in-person 
services and consultations offered by traditional pharmacists? 
Or, as the PBMs contend, will this merger wring inefficiencies 
out of the system of dispensing and paying for prescriptions to 
the benefit of consumers and the health care system overall?
    We have no doubt that this merger will be good for Express 
Scripts and Medco and for their shareholders. It is very likely 
that the merging companies will be able to gain efficiencies 
from merging their overlapping operations. But while this 
merger may serve these two companies' private interests, our 
job on the Antitrust Subcommittee is to examine whether this 
merger will serve the public interest and whether it will 
benefit or hurt competition and consumers.
    There is no question that this merger will have far-
reaching and long-lasting effects on the way prescription drugs 
are paid for, sold, and dispensed. So the burden will be 
squarely on Express Scripts and Medco to convince us that this 
merger will not unduly harm competition but, in fact, will 
benefit the millions of consumers who continue to face rising 
prescription drug costs.
    Let me now turn to our Ranking Member, Senator Mike Lee, 
for his statement.

 STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE STATE OF 
                              UTAH

    Senator Lee. Thank you, Mr. Chairman.
    Each year Americans spend over $300 billion on prescription 
drugs, and that number is only growing. At a time when 
businesses are strapped for cash, many employers spend as much 
as 12 percent of their entire budgets on employee health 
benefits, including coverage for prescription drugs.
    This hearing addresses an important issue relative to the 
cost of prescription drugs in the United States. Pharmacy 
benefit managers, or PBMs, although relatively unknown to the 
general consuming public, play a prominent role and an integral 
role in our health care system. Many consumers have never heard 
of PBMs, but most, indirectly at least, interact with a PBM 
each and every time they visit a pharmacy.
    The consumer gives a co-payment and receives a medication 
while the pharmacist seeks reimbursement from a PBM for the 
remaining balance. The PBM in turn submits a claim for payment 
of the drug to the health plan sponsor, in most cases the 
consumer's employer. In this manner, over 250 million Americans 
receive prescription drug coverage from their employer, union, 
or the Government through a PBM, with consumers receiving 
medications at a local pharmacy or perhaps through the mail.
    Employers or other health plan sponsors pay PBMs a fee for 
their work in administering the details of a prescription drug 
plan. In addition, PBMs make money by keeping a portion of the 
difference between the price between what the employer pays for 
the PBM for a drug and what the PBM pays the pharmacy for 
dispensing that same drug. PBMs also keep a portion of the drug 
rebates they receive from drug manufacturers and generate 
profits from their in-house, mail-order, and specialty 
pharmacies.
    There are over 40 PBMs in the country today, but there are 
only a few large ones. Two of the largest PBMs, Express Scripts 
and Medco, have announced their intention to merge. This is a 
transaction of sufficient size to merit the review of antitrust 
enforcement agencies. It has also attracted the attention of 
this particular Subcommittee.
    I note at the outset that the very nature and value of PBMs 
is not without some dispute. Critics argue that PBMs are 
massive corporate middlemen who care only about profits. PBMs 
under this view seek to dominate the prescription drug market, 
run retail pharmacies out of business, and automate the world 
of prescription drugs until consumers have only a non-live 
person to call, basically a 1-800 number, to consult for advice 
about their medications.
    But those favorable to PBMs suggest and point out that they 
do provide a valuable administrative service without which the 
delivery of prescription drug services would be much less 
effective and would cost employer-sponsored health plans up to 
30 percent more each year.
    PBMs claim that they are intensely interested in providing 
more than just medication, that their innovative clinical 
programs reduce overall health care costs by increasing patient 
adherence to drug regimens, and improving the overall health 
approach of their clients' employees.
    Whatever one's overall view of PBMs, I hope that our 
discussion today can focus on the merits of this proposed 
merger from the perspective of antitrust. To do so, we must 
focus our attention on ensuring that the market in which PBMs 
operate is truly competitive, and in that regard, we would do 
well to remember the insight made famous by Robert Bork's 
seminal work, ``The Antitrust Paradox'': Competition must be 
understood as the maximization of consumer welfare.
    Competition ensures that consumers receive the lowest 
prices and the best services. In the context of PBMs, 
competition can drive innovation as PBMs battle one with 
another to offer prospective clients the best pharmacy network 
options and clinical management, in addition to cost savings. 
Insufficient competition may result in higher prescription drug 
prices for consumers as well as pharmacies being so squeezed 
for revenue that they are unable to provide the quality of 
services that consumers presently enjoy.
    Throughout this hearing, we must also keep in mind the 
unique challenges and opportunities present in our health care 
market. As former Secretary of Health and Human Services 
Michael Leavitt recently noted, ``Lack of coordination in 
providing health care is a major contributor to overspending. 
Recently combined health services companies understand that to 
develop the capacity to improve health care and reduce costs, 
they must scale and innovate in order to achieve needed 
efficiencies for payers and providers.''
    To properly focus our antitrust analysis for this hearing 
today and to maximize consumers' welfare in terms of prices, 
service, and quality, we must ensure that PBMs operate in a 
robustly competitive market while at the same time allowing for 
the type of consolidation and efficiency that drives innovation 
and cost savings.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Senator Lee.
    Senator Grassley.

STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM THE STATE 
                            OF IOWA

    Senator Grassley. I appreciate the opportunity to give a 
short statement. I wanted to explain to you and to our 
witnesses that sometime between 3:30 and 4, I am going to have 
to go to the other side of the Hill to work on a problem with 
military hospitals, so if I do not get a chance to ask 
questions, I will be submitting questions for answer in 
writing.
    Thank you for holding this hearing. Whether people know it 
or not, this proposed merger will affect them. Prescription 
drugs are a daily part of many folks' lives. How these drugs 
are paid for and determining who gets paid what is a complex 
process. At the heart of all of this are pharmacy benefit 
managers.
    The combination of Express Scripts and Medco would create a 
company that processes almost one-third of all PBM-administered 
prescriptions. Basically one in four individuals who receive 
prescription drugs through a health plan will be impacted. So 
this is a very important matter, and so this is why the Federal 
Trade Commission is taking a look at it, and I expect that the 
Commission will examine this merger regularly, as they should.
    Today this Committee has an opportunity to hear some 
practical concerns with the merger in a public forum. I am sure 
there will be much discussion on the legal issues that will be 
part of the Federal Trade Commission's review. However, we get 
the chance here at this hearing to listen to those who support 
and those who oppose the proposed merger. I expect the 
discussion will be very helpful and informative to us in the 
Congress as well as to the FTC, where the final decision will 
be made.
    I have heard from a large number of Iowa pharmacists who 
raise concerns. I am interested to hear about the effects that 
this merger will have on them and Iowa consumers. There are 
also transparency and competition issues that deserve 
discussion, and today is a great opportunity to do that, 
although those issues of transparency and competition have been 
around for a long period of time before this proposed merger 
came up.
    So, again, I thank you for holding this very important 
hearing, Mr. Chairman. Thank you.
    Chairman Kohl. Thank you very much, Senator Grassley.
    Senator Franken.

STATEMENT OF HON. AL FRANKEN, A U.S. SENATOR FROM THE STATE OF 
                           MINNESOTA

    Senator Franken. Thank you, Chairman Kohl, for holding this 
important hearing, and thank you so much for letting me say a 
couple words about this merger. Like Senator Grassley, I need 
to leave this hearing early, in my case to preside, and, 
unfortunately, I too may not be able to ask questions to the 
panel directly, but if that is the case, I will submit them in 
writing, and I thank you all for being here, by the way.
    This is a very large and a very complex merger, and I have 
been hearing a tremendous amount about the potential impacts of 
this merger, both positive and negative, from a wide variety of 
Minnesotans, so I wanted to say a couple of words.
    I should note at the outset that Express Scripts has a very 
large presence in my State and employs over 1,000 Minnesotans 
in very good, well-paying jobs, and this means a lot to me and 
to Senator Klobuchar. And it is something that I have been 
weighing while looking at this merger, as you can well imagine.
    But I have also heard from a significant number of 
pharmacists across Minnesota, including rural pharmacists, who 
provide the only outpatient pharmacy option in their towns, as 
well as from the Minnesota Pharmacists Association. These 
pharmacists oppose the merger and have told me that they are 
very concerned that the merger may force them to shut their 
doors.
    I have also heard from other companies with a significant 
presence in Minnesota, like Super Value, which employs 8,600 
Minnesotans. These companies are telling me that this merger 
will force more patients into mail order and will reduce 
options and resources for patients who often need the face-to-
face advice and consultation that only a pharmacy can really 
offer. And while this primary question that we are examining is 
the effect that this merger will have on competition, I cannot 
ignore the potential effect, obviously, that it would have on 
the quality of health and health care that Minnesotans receive.
    I am particularly concerned that this type of consolidation 
will leave very few options for large employers who often rely 
on the Big Three PBMs to manage and administer their complex 
prescription drug plans. The Fortune 50 and Fortune 100 firms 
cover millions of Americans. If this merger will ultimately 
mean less choice for those companies, that is something we need 
to be concerned about, and it is something that I hope the FTC 
is closely examining. In fact, I am quite certain they are.
    I have listened to Express Scripts' arguments that 
combining with Medco will translate into significant discounts 
from drug manufacturers and will ultimately mean lower rates 
from employers. We are living in a world with spiraling health 
care costs, so I am interested in hearing more about how this 
merger may make a dent in those costs. But I am most interested 
in hearing how Express Scripts can guarantee that those cost 
savings will be passed down to its customers and will not just 
result in higher profits for the company.
    This is, as I said, Mr. Chairman and Mr. Ranking Member, a 
very complex industry, and I am looking forward to hearing from 
both sides about the pros and cons of this merger. And as I 
said, if I have to leave before it is time for my questions, I 
will definitely submit questions for the record.
    Thank you again, Mr. Chairman, for holding this hearing and 
for letting me deliver this brief opening statement. Thank you.
    Chairman Kohl. Thank you very much, Senator Franken.
    Senator Blumenthal, a few words from you.

STATEMENT OF RICHARD BLUMENTHAL, A U.S. SENATOR FROM THE STATE 
                         OF CONNECTICUT

    Senator Blumenthal. Thank you very much, Mr. Chairman. I 
want to join in thanking you for this hearing, which I think 
addresses a critical area in our economy and in our health care 
industry and system. And like Senator Franken, I thank you for 
being here.
    It is a complex industry, but it will be judged by the same 
standards, antitrust and pro-competition standards, as any 
other complex industry is judged. And my guess is that you will 
have to be open to modifications in the deal that you have 
reached, as happens in many of these mergers, or proposed 
mergers at this point.
    Obviously, this industry is among the most lucrative in the 
country. It is increasingly profitable. The question is: How 
will consumers be protected from overreaching and excessive 
profits that are at the expense of competition?
    One issue is whether consumers will be driven to mail-order 
services, as has happened, for example, in Connecticut. That is 
a big concern not only to the pharmacies that may be affected 
but also to consumers who may have choices constricted. And 
ultimately competition is about choices, and the impact of this 
proposal on choices for consumers will be very, very important.
    So understanding all these issues requires an understanding 
of the concentration in the PBM market that will result, 
particularly among large employers, as well as the incentives 
for employers to affirmatively seek out mail-order options, and 
I look forward to hearing more from all the witnesses about all 
of these issues.
    Thank you very much, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Blumenthal. Now 
I will introduce our witnesses on this panel.
    First to testify will be George Paz. Mr. Paz is Chairman 
and CEO of Express Scripts, a position he has held since 2006. 
Mr. Paz first joined Express Scripts in 1998 as senior vice 
president and chief financial officer.
    Next to testify today will be David B. Snow, Chairman and 
CEO of Medco Health Solutions. Mr. Snow joined Medco in March 
of 2003 after serving as president and chief operating officer 
at Empire Blue Cross Blue Shield.
    Next we will be hearing from Scott Streator. Mr. Streator 
is the Associate Vice President of Business Development at The 
Ohio State University Medical Center. Previously he served as 
the Director and National Account Executive at Medco.
    Our next witness who will testify today will be Susan L. 
Sutter, co-owner of Marshland Pharmacies, which includes 
facilities in Horicon, Mayville, and Beaver Dam, Wisconsin. She 
has an outstanding reputation in our State, of which I am very 
much aware. She has served as president of the Pharmacy Society 
of Wisconsin and was chairperson for the Wisconsin Pharmacy 
Examining Board.
    Our next witness will be Michael J. Bettiga. Mr. Bettiga is 
the Executive Vice President and Chief Operating Officer of 
Shopko Stores Operating Company, headquartered in Green Bay, 
Wisconsin. Mr. Bettiga served as board chair of the Wisconsin 
Pharmacy Examining Board.
    Our final witness today will be David A. Balto, an 
antitrust attorney in Washington, D.C., who has previously 
served as policy director at the Federal Trade Commission. Mr. 
Balto will be testifying on behalf of Consumers Union, Consumer 
Federation of America, National Consumers League, U.S. Public 
Interest Research Group, and the National Legislative 
Association on Prescription Drug Prices.
    We thank you all for appearing at this Subcommittee hearing 
today, and I will ask you all to stand and raise your right 
hand as I administer the oath. Do you affirm that the testimony 
you are about to give before this Committee will be the truth, 
the whole truth, and nothing but the truth, so help you God?
    Mr. Paz. I do.
    Mr. Snow. I do.
    Mr. Streator. I do.
    Ms. Sutter. I do.
    Mr. Bettiga. I do.
    Mr. Balto. I do.
    Chairman Kohl. Thank you so much.
    We will turn now for opening statements, first, Mr. Paz, 
will you please restrict yourself, if possible, to 5 minutes.

STATEMENT OF GEORGE PAZ, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
           EXPRESS SCRIPTS, INC., ST. LOUIS, MISSOURI

    Mr. Paz. Mr. Chairman, Ranking Member Lee, and members of 
the Subcommittee, you have my formal testimony for the record, 
so let me briefly summarize my vision of what the combination 
of these two great companies will do. We will lower drug costs 
that are far too high and improve health outcomes for 
consumers.
    Chairman Kohl, I know you have worked long and hard in the 
Senate to make prescription drugs more affordable for 
customers. We share that goal, and this merger will do exactly 
that.
    As the big drug companies merge, as large chain drug stores 
buy up their competition and demand higher prices, we must 
become more effective representing the interests of plan 
sponsors and consumers. Patients, not profits, must come first.
    It is the plan sponsors that pay the majority of the cost 
of drugs and provide the drug benefits for our citizens. It is 
their money everyone here today should be concerned about 
protecting.
    Mr. Chairman and members of the Subcommittee, I want to 
highlight three key points: first, PBMs improve patient safety 
and adherence; second, PBMs save plan sponsors and consumers 
money; and, third, PBMs drive out waste, fraud, and abuse.
    As health care spending continues on an unsustainable 
trajectory, pharmacy benefit managers have reduced drug costs 
by 30 percent or more. Each year through innovative technology 
and products, these savings are passed on to plan sponsors and 
consumers. We negotiate with the big drug manufacturers and 
retail pharmacies across the United States to get the best 
possible price for our clients. Our business model is one of 
alignment. We make money when plan sponsors and consumers save 
money. The union of our companies will accelerate our ability 
to do just that.
    The Federal Trade Commission has found this type of 
bargaining power pro-competitive when it allows a buyer to 
reduce its cost and decrease prices to consumers. Let me be 
clear. This merger will in no way decrease the dynamic 
marketplace within which we operate.
    Mr. Chairman, we do not make decisions on behalf of our 
plan sponsors or consumers. We offer options. It is a plan 
sponsor's decision whether to promote home delivery. It is a 
consumer's decision whether to use home delivery or go to a 
retail pharmacy. In fact, the average American consumer uses 
multiple pharmacies on a regular basis. Our mission is to 
reduce the cost of prescription drugs, and that involves 
measured, tough negotiations with retail pharmacies and 
pharmaceutical manufacturers.
    The GAO found that the average price PBMs negotiated for 
drugs was 18 percent below the average cash price retail 
customers pay. Mail-order pharmacies reduce the price of 
medications by 27 percent over the cash price paid for branded 
products and 53 percent for generics.
    When you consider our role, the most frequent interaction 
we have with a consumer is at the retail pharmacies across the 
country. Before a consumer ever receives their medicine, my 
company runs over 100 safety checks through our innovative 
advanced technologies. This is critical because the PBM is the 
only one with visibility across all pharmacies used by the 
consumer.
    Our systems identify and prevent dangerous drug 
interactions across all these pharmacies. In addition, our 
contracts save retail pharmacies $7.3 billion a year in bad 
debt because we guarantee their payment.
    Finally, everyone knows that health care costs are 
skyrocketing and need to be better managed. Our continued 
investments in innovation will improve patient adherence, 
expand the use of lower-cost generics, and develop more 
efficient delivery of medicines.
    Just yesterday a new economic analysis was released showing 
Express Scripts' and Medco's innovative strategic platforms 
have reduced health care expenses by up to $87 billion a year, 
$20 billion of which accrues to the Federal Government.
    The merger of our two companies will provide significant 
opportunities for further cost savings. It is important to note 
that every 1 percentage point reduction in drug costs generates 
enough savings to fund 20,000 new jobs in the United States.
    In closing, let me say that the combined organization will 
continue to lower costs for plan sponsors and consumers, drive 
out waste, and improve safety and health outcomes. That is our 
vision, and we are committed to achieving it.
    Thank you, Mr. Chairman and members of the Subcommittee.
    [The prepared statement of Mr. Paz appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Mr. Paz.
    Mr. Snow.

 STATEMENT OF DAVID B. SNOW, JR., CHAIRMAN AND CHIEF EXECUTIVE 
  OFFICER, MEDCO HEALTH SOLUTIONS, INC., FRANKLIN LAKES, NEW 
                             JERSEY

    Mr. Snow. Chairman Kohl, Ranking Member Lee, and members of 
the Committee, thank you for the opportunity to discuss the 
proposed merger of Medco Health Solutions and Express Scripts. 
My name is David Snow, and I am the Chairman and CEO of Medco 
Health Solutions. Medco is an industry leader in advanced 
pharmacy. We employ thousands of medical professionals, 
including more than 3,000 pharmacists and more than a hundred 
nurses. We deliver a portfolio of clinical and administrative 
solutions that create value for private and public employers, 
health plans, labor unions, and Government agencies of all 
sizes, as well as older Americans served by Medicare Part D 
drug plans. We take great pride in the innovations Medco has 
created to improve clinical outcomes at reduced cost.
    Everyone recognizes that the ever rising cost of health 
care in America is unsustainable. The need is insatiable, our 
resources are not. By merging Medco with Express Scripts, we 
will significantly accelerate our ability to improve patient 
care and reduce overall costs across the health care system. So 
let me get right to what I think we all agree drives 
affordability and quality in health care: clinical excellence 
and competition.
    In our country, 50 percent of the entire population has one 
or more chronic or complex diseases. This 50 percent of the 
population consumes 96 percent of the total dollars spent on 
prescription drugs and 75 percent of the total dollars spent in 
our entire health care system. Remarkably, we know that on 
average 65 percent of patients stop following the drug 
treatment protocol their doctor prescribes within 1 year even 
though their disease is lifelong. This lack of adherence leads 
to devastating patient outcomes and avoidable costs to our 
system estimated to total more than $290 billion annually.
    We at Medco are particularly proud of the advanced clinical 
care standard we have developed specifically to address the 
needs of patients with chronic and complex conditions. This 
clinical care revolves around what we call therapeutic resource 
centers, or TRCs. Our TRCs include more than 1,000 specialist 
pharmacists who use evidence-based clinical protocols to ensure 
patients are taking the right medicines and helping them 
overcome barriers to adherence. Our pharmacists are available 
24/7 to counsel patients and to consult with physicians.
    The results are impressive. In 2010 alone, our TRCs closed 
more than 2.3 million gaps in care with an estimated $900 
million in savings from reduced hospitalizations, avoided 
emergency room visits, and the elimination of other medical 
expenses. Our larger goal as a Nation should be to save the 
$290 billion a year I mentioned earlier by addressing 
medications that are underprescribed, misprescribed, or simply 
not taken as directed.
    Many people do not realize that the only part of our 
Nation's health care system that is fully wired today is 
ambulatory prescription drugs. PBMs have accomplished this, and 
Medco's innovations have leveraged that fact. Our merger will 
only further accelerate the transition to wired health care, 
significantly improving communications among patients, 
physicians, and pharmacists.
    Now I want to briefly touch on our competitive environment. 
There are not three or four or five or even ten major PBMs. 
There are more than 40, all competing to provide differentiated 
value propositions. Today at least ten PBMs serve Fortune 50 
companies. Seventeen serve Fortune 500 companies, and at least 
nine PBMs serve large State accounts. Additionally, nine 
Fortune 500 companies operate their own PBMs for their 
employees, and all PBMs are not alike. Some are integrated with 
retail pharmacies, like CVS Caremark. Some are part of managed 
care organizations, like UnitedHealth, Aetna, CIGNA, and Prime 
Therapeutics. And others are entirely independent, such as 
Catalyst Rx, MedImpact, and SXC.
    How fierce is the competition? While Medco has enjoyed much 
success since it went public in 2003, the marketplace is 
undergoing significant change. As but one example, for our plan 
year 2012, Medco has lost $10 billion in business, losing 40 
clients to more than 15 different PBMs. These are the facts, 
and they dispel the notion that the combination of Medco and 
Express Scripts represents a threat to consumer and client 
choice. The reality is that the PBM business is extremely 
competitive today, and competition will only be enhanced, not 
diminished, by our merger.
    In conclusion, there is enormous opportunity to improve 
health care outcomes while reducing health care costs. Medco 
and Express Scripts are committed to continuing the pursuit of 
real solutions. Our efforts will only be accelerated by this 
merger.
    Mr. Chairman, Ranking Member Lee, and members of the 
Committee, thank you for receiving my testimony. I would be 
happy to address any questions you may have.
    [The prepared statement of Mr. Snow appears as a submission 
for the record.]
    Chairman Kohl. Thank you very much, Mr. Snow.
    Mr. Streator.

   STATEMENT OF SCOTT E. STREATOR, ASSOCIATE VICE PRESIDENT, 
BUSINESS DEVELOPMENT, THE OHIO STATE UNIVERSITY MEDICAL CENTER, 
                         COLUMBUS, OHIO

    Mr. Streator. Chairman Kohl, Ranking Member Lee, and 
members of the Subcommittee, my name is Scott Streator, and I 
am honored to testify on the proposed ESI/Medco merger.
    My testimony will reflect over 20 years of experience in 
health care and the PBM industry and most recently serving as a 
CEO of The Ohio State University Health Plan. This testimony is 
my own. It does not represent an official position of The Ohio 
State University. I will, therefore, provide a multifaceted 
perspective from all industry angles as a payer, a plan 
administrator, and a provider.
    In short, it is clear to me the ESI/Medco merger will 
further spawn competition that can lead to lower pharmaceutical 
costs for payers and consumers. Therefore, I am in favor of 
this merger.
    The three sources of greater competition are: one, existing 
PBMs; two, health plans; and, three, emerging business models 
as a result of health and payment reform. I will provide a 
brief summary of each of these and several key market forces.
    First, greater competition from the PBM industry. There are 
a growing number of PBM options that have evolved secondary to 
strategic acquisitions that have now developed a robust 
infrastructure. Now these PBMs can support both small and large 
employers as a result, and they are gaining market share. 
Several companies are listed in my written testimony as 
examples.
    Further, as the barriers to entry in the PBM market have 
decreased, new PBM entrants will emerge. Meanwhile, 
irrespective of the size of the PBM, end payers, like those in 
our Rx Ohio Collaborative, are developing innovative, 
transparent contracting initiatives with a single PBM to 
increase their purchasing value.
    For example, at Ohio State University, as one employer in 
our collaborative, we realized $10 million savings, or 9 
percent, and are currently experiencing a negative 0.4 percent 
per capita drug trend with Express Scripts.
    Now, while there are certain advantages of a large PBM, 
smaller PBMs and health plans can be more agile in implementing 
cost-savings programs that can far exceed discounts. While some 
estimate the combined entity could approach 50 percent of the 
specialty or biologic market, it is important to note that half 
the specialty drugs and many future FDA-approved biologics can 
only be distributed and administered at outpatient settings. 
Moreover, the pharmaceutical industry has complex distribution 
and storage requirements that has narrowed their distribution 
channels, making it less feasible to obtain a biologic at the 
community pharmacy for a consumer.
    In terms of impact on community pharmacy, PBMs contract 
with community pharmacies on behalf of plan sponsors to form a 
provider network. While plan sponsors make benefit decisions, 
not the PBM, consumers should be given choice of their 
preferred distribution channel, mail or retail. Medicare 
Advantage is one example. Medicare Advantage plans offer a 90-
day retail supply that provides competition to Express Scripts, 
Medco, and any other PBM mail pharmacy channel.
    The second source of greater competition is from health 
plans or health insurers. In today's new health reform 
environment, insurance carriers may increasingly decide to in-
source the PBM function as evidenced by UnitedHealthcare's 
recent business decision. Thus, insurance carriers like United, 
Humana, CIGNA, and various Blue Cross Blue Shields can now 
offer a competitive alternative to stand-alone PBMs by using 
their in-house PBM.
    Further, with a likelihood of insurance exchanges emerging 
for individual and small-group markets, the in-sourced PBM 
offering, coupled with the health insurer, may be an attractive 
offering to some employers.
    This leads me to my final point and third source of 
increased competition: emerging business models resulting from 
health payment reform.
    Regardless of what ultimately happens with the Affordable 
Care Act, it is clear the current fee-for-service reimbursement 
model is evolving from ``payment for volume'' to ``payment for 
value.'' How will new financial models alter the PBM landscape? 
While the answer is unclear at this time as patient-centered 
medical homes and the emerging accountable care types of 
organizations grow, managing costs of pharmaceuticals in a silo 
will be de-emphasized versus effective medication therapy 
management across the entire care continuum. Thus, both 
community pharmacy and PBMs can play a vital role, supporting 
the physician by reviewing and recommending therapies in a 
given population. We need both community pharmacists and the 
PBM industry for clinical integration of care.
    In conclusion, greater competition from PBMs and health 
plans is emerging and will continue to advance as a result of 
the proposed ESI/Medco merger. Lower costs can be generated 
with greater competition, and thus I support the proposed 
merger. Moreover, the impact of the Affordable Care Act and 
health exchanges will provide new opportunities for current and 
emerging business models.
    New reimbursement models will be shifting greater financial 
risk from insurers to the physician and hospital level. Thus, 
the PBM landscape will be altered so that the size of the PBM 
may be less important than the ability to manage and coordinate 
care at the individual and population level.
    Thank you, Mr. Chairman, Ranking Member Lee, and the entire 
Subcommittee for this opportunity.
    [The prepared statement of Mr. Streator appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Streator.
    Ms. Sutter.

 STATEMENT OF SUSAN L. SUTTER, CO-OWNER, MARSHLAND PHARMACIES, 
                       HORICON, WISCONSIN

    Ms. Sutter. Thank you. Chairman Kohl, Ranking Member Lee, 
and members of the Subcommittee, thank you for conducting this 
hearing and providing me the opportunity to share my views 
regarding the proposed Express Scripts/Medco merger. I am Sue 
Sutter from Horicon, Wisconsin, and I co-own three independent 
community pharmacies in rural Dodge County. I am representing 
the National Community Pharmacists Association, which 
represents pharmacy owners, managers, and employees of more 
than 23,000 independent pharmacies. Today I join consumer 
groups and other small business groups to oppose the proposed 
merger. If the FTC allows this merger, it will make an already 
bad situation even worse for small pharmacies and the patients 
we serve.
    The PBM marketplace today is already extremely concentrated 
with the Big Three PBMs dominating the large employer market. 
Allowing two of the Big Three to merge will result in 
unparalleled market concentration in the PBM industry with the 
merged single entity controlling anywhere from one-third to 
two-thirds of all prescriptions filled in community pharmacies. 
This market dominance and significant reduction in competition 
will result in reduced choices for Federal and State programs 
and other third-party payers, decreased patient access to 
community pharmacy services, and ultimately lead to higher 
prescription costs.
    So why are we so concerned? PBMs directly set the 
reimbursement rates for community pharmacies, and then for us 
it is take-it-or-leave-it. We are the same pharmacies that are 
in direct competition with the PBM-owned mail-order pharmacies. 
Therefore, it is no surprise these PBMs try to shift their 
patients to their mail-order pharmacies, often against our 
patients' wishes.
    Let me state this again. There is absolutely no 
negotiating. And we are not crying wolf. If Walgreen's with 
7,000 pharmacies in this country has dropped out of the Express 
Scripts network because they could not negotiate fair terms, 
how can an independent pharmacy have any chance against these 
corporate giants? And the merger will make it even harder for 
us to push back.
    Express Scripts and Medco have claimed that, merged, they 
will create greater efficiencies in the pharmaceutical supply 
chain. They claim they can do this by squeezing manufacturers 
and pharmacies. Well, you will have to speak to the 
manufacturers, but I can tell you there is nothing else left to 
squeeze with us. Our pharmacies operate on a 2- to 3-percent 
net profit margin before taxes. In fact, the number of 
independent pharmacies operating at a loss is now 25 percent.
    Even if greater efficiencies were to be created, there are 
no assurances that these savings would be passed along to plans 
and consumers. Keep in mind that the PBM industry is virtually 
unregulated and has a long record of enforcement actions 
alleging fraudulent and deceptive conduct.
    The proposed merger would create the largest mail-order 
pharmacy in the United States, accounting for close to 60 
percent of all mail-order prescriptions processed, and allow 
the merged entity to corner the market on specialty drugs. 
Currently, the top PBMs already dominate this market due to the 
fact that many times they prevent community pharmacies from 
filling these prescriptions and direct these highly lucrative 
prescriptions to their own mail-order pharmacies. This new 
merged entity would immediately own 52 percent of that market. 
There is no reason a community pharmacist cannot dispense 
specialty medications, other than that the PBMs' design state 
that we cannot. It is just the newest form of anticompetitive 
behavior we have been dealt by the PBM industry.
    This merger will put us at greater risk, yet your 
neighborhood community pharmacists are truly safety net health 
care providers for their patients. Here is just one of my own 
examples.
    Twice in the last couple of weeks, I have assisted 
transplant patients by contacting their physicians and 
dispensing a needed supply of their medications because it had 
not arrived from the mail-order pharmacy. Now, if the mail-
order pharmacy is so interested in patient care, why wasn't one 
of their pharmacists on the phone to me making sure that 
patient got the needed supply?
    In conclusion, this proposed merger would: reduce 
competition in the delivery of pharmacy benefits in this 
country; reduce patient choice; and mandate using mail-order 
pharmacy instead of their trusted community pharmacist; and, 
finally, threaten the very existence of community pharmacies.
    I appreciate the opportunity to address the Committee 
today. I will be happy to answer any questions you might have. 
Thank you.
    [The prepared statement of Ms. Sutter appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Ms. Sutter.
    Mr. Bettiga.

 STATEMENT OF MICHAEL J. BETTIGA, CHIEF OPERATING OFFICER AND 
EXECUTIVE VICE PRESIDENT, SHOPKO STORES OPERATING COMPANY, LLC, 
                      GREEN BAY, WISCONSIN

    Mr. Bettiga. Mr. Chairman, Ranking Member Lee, and members 
of the Subcommittee, thank you for the opportunity to testify. 
My name is Mike Bettiga, and I am the chief operating officer 
of Shopko, which is a retail merchandise company based in Green 
Bay, Wisconsin, which operates 149 stores throughout 13 States, 
all of which have pharmacies. Fifty-seven of these pharmacies 
serve patients in the great State of Wisconsin.
    Shopko is also a proud member of the National Association 
of Chain Drug Stores on behalf of which I am testifying today. 
Shopko is concerned about this merger both as a provider of 
pharmacy services and as an employer of 15,000 employees.
    As a pharmacist who has worked in community pharmacy for 
almost 35 years, I have grave concerns about this proposed 
merger. It would be a tipping point in PBM market 
consolidation, harming patients as well as Government and 
private health plans and employers. There is only one 
stakeholder that would benefit, and that is the new mega PBM.
    Since the proposed merger was announced, many Members of 
Congress, consumer groups, State insurance commissioners, State 
Attorneys General, and State legislators have all expressed 
concerns to the Federal Trade Commission. Indeed, just last 
week, the nonprofit American Antitrust Institute wrote the FTC 
asking it to enjoin this merger. This would be a merger of two 
of the Big Three PBMs. If approved, nearly 135 million 
Americans would rely on this mega PBM to manage their 
prescription benefits. It would control over 40 percent of the 
national prescription volume, 60 percent of the mail-order 
pharmacy market, and an excessive amount of the specialty 
pharmacy market.
    Patients in particular would be harmed. They will 
experience reduced or no choice of their pharmacy providers. 
More consumers would be forced into using the PBMs' own mail-
order facilities. They will see decreased or limited access to 
essential pharmacy services. They will experience separation of 
their prescription medication records that could result in 
potential adverse patient health outcomes. They will encounter 
disruption in normal, timely prescription service and as a 
result could potentially suffer decreased medication adherence. 
Reducing patient choice and access will lead to higher 
prescription drug costs, potential adverse patient outcomes, 
and higher downstream health care costs.
    When considering this merger, policymakers need to question 
whether or not PBMs actually reduce health care costs. There is 
little proof that PBMs pass along their purported savings to 
health plans, employers, or consumers. In fact, the PBM 
industry has been fraught with allegations of extensive 
deceptive and fraudulent practices. In recent years, cases 
brought by a coalition of over 30 State Attorneys General have 
resulted in over $370 million in penalties.
    It has been found that PBMs have accepted rebates from 
manufacturers in return for placing higher-priced medications 
on prescription drug plans' formularies, switched customers to 
the higher-priced drugs, and benefited from both the rebate 
received and the higher-priced drug payment without passing 
along this enrichment to the health plan or the employer.
    At Shopko, we are proud of our firm commitment to serving 
the needs of all the patients in our communities. However, 
being able to continue serving the prescription and health care 
needs of our customers and our neighbors has been threatened by 
the one-sided nature of pharmacy agreements with PBMs. We have 
seen firsthand the unilateral nature of these contracts. They 
are allowed to establish the basis of cost for prescription 
medications and to change that basis of cost with limited or no 
notice, especially for generic medications. Claims submitted to 
the PBM and approved are routinely reviewed retroactively, and 
payment is recouped due to inaccuracies in the PBM claims 
adjudication systems. My company experiences these and other 
PBM injustices each and every day, and this is bound to worsen 
if this proposed merger is not halted.
    Pharmacists help to ensure that patients understand their 
medications and take them as directed. Pharmacists increase the 
utilization of generics over brand-name prescription drugs. 
Pharmacists collaborate with doctors and other local health 
care providers to assist in medication decisions.
    Community pharmacies also provide critical cost-effective 
services like immunizations, disease state management and 
monitoring, and health education and screening programs. 
Together these services improve patients' health and reduce 
health care costs.
    In conclusion, PBMs already use a lack of transparency, 
failing to pass through rebates from drug manufacturers to 
consumers and other payers, inflating drug costs for health 
plans and employers, and lowering payments to pharmacies for 
their own personal financial gain. Patients would appear to be 
an afterthought. A mega PBM would have an increased ability to 
engage in similar egregious conduct to the detriment of 
consumers, payers, and pharmacy providers.
    Thank you for the opportunity to appear, and I welcome your 
questions.
    [The prepared statement of Mr. Bettiga appears as a 
submission for the record.]
    Chairman Kohl. Thanks, Mr. Bettiga.
    Mr. Balto.

  STATEMENT OF DAVID A. BALTO, ESQ., LAW OFFICES OF DAVID A. 
                     BALTO, WASHINGTON, DC.

    Mr. Balto. Chairman Kohl, Ranking Member Lee, and other 
members of the Committee, thank you for giving me the privilege 
to testify today on behalf of the Nation's leading consumer 
groups. We are here with a simple message. We are hear to 
answer Senator Blumenthal's question: How can consumers be 
protected from overreaching? Senator Blumenthal, there is only 
one way, and that is for the FTC to go to court and to block 
this merger.
    The consumers wholly agree with the testimony of Ms. Sutter 
and Mr. Bettiga. Pharmacies play a critical role in health care 
delivery, and this merger will result in higher prices, less 
consumer choice, and lower quality of care.
    Let us start off by looking at the PBM market itself. As a 
former antitrust enforcer, I know you need three things for a 
market to work well--choice, transparency, and a lack of 
conflict of interest--and in all three regards, my testimony 
demonstrates that this market receives a failing grade. How do 
we know? Look at how the profits of the Big Three PBMs have 
skyrocketed over the past few years. They say they are the best 
friend of the health care plans, but they are pocketing an 
increasing portion. Those profits have increased over $6 
billion a year. They are catching up with the health insurance 
companies in the United States.
    In terms of conflict of interest, it is the same problem, 
Senators Grassley and Kohl, you have focused on in group 
purchasing organizations. They have a conflict of interest 
because they have their own operations which they favor, 
disadvantaging consumers. That is why 30 State Attorneys 
General, including Senator Blumenthal, brought cases against 
each of these PBMs.
    The critical antitrust issue here, or one of them, is 
whether or not the market is these 30 or 40 PBMs or it is just 
the Big Three. The antitrust law is clear, though. A competitor 
is not somebody who just calls himself a competitor. A 
competitor is somebody who constrains the market, and in this 
case the market really is the Big Three.
    If you look at the second chart, you can see how the Big 
Three PBMs are phenomenally larger than the second-tier PBMs, 
and our testimony documents the advantages they have over the 
second tier PBMs.
    But do not take our opinion. Listen to what the California 
pension system said about the relevant market. Look at page 6 
of my testimony. This is what they said: ``You can count the 
PBMs that can serve organizations of our size on your hand, a 
couple of fingers, maybe three, and they are frequently the 
subject of lawsuits.'' That is what they said, and you do not 
need a Ph.D. in economics to know that when three go to two, 
consumers will be harmed and people will pay higher prices.
    Consumers care about this merger because if they live in 
rural areas served by people like Ms. Sutter, they are going to 
lose or get less service from their most trusted community 
professionals. Consumers care because they like the one-stop 
shopping they get when they go to Shopko. Consumers care 
because they can get cheaper prices when they go to supermarket 
pharmacies, like Super Value, which actually sell drugs at 
lower prices than you can get it through the PBM.
    Now, a particularly significant harm from this market is in 
the hundreds of thousands of patients who suffer from diseases 
that need specialty drugs, like hepatitis C, cancer, the 
transplant patient that Ms. Sutter mentioned. This merger gives 
these firms a dominant position in specialty. They are already 
using their market clout to keep independent specialty 
pharmacies out of the market. Giving them more clout will 
enable them to keep even more pharmacies out of the market. Why 
is that a difference? Because as far as we know, there is not a 
consumer who would prefer to deal with a 1-800 number or a 
robot instead of Ms. Sutter.
    Finally, let us deal with the question of efficiencies. 
They said there are significant efficiencies, and they came up 
with a study yesterday which said there were these astronomical 
cost savings from PBMs, and this basically recycled old 
information. What they did not tell you was what are the 
specific savings from this merger. What they did not tell you 
is how have the past mergers led to increased savings. We see 
how they have led to increased profits, but have they really 
saved consumers money?
    The law is clear. In a merger that significantly increases 
concentration, they must prove extraordinary efficiencies. 
Thirteen years ago, four drug wholesalers tried to merge, and 
they had the same efficiency arguments that these folks have, 
and the court rejected those claims for two reasons:
    First, with only two people left in the market, there was 
no guarantee those efficiencies would be passed on in lower 
prices to consumers.
    Second, competition was a better way for those efficiencies 
to come about. This is what Judge Sporkin said: ``The history 
of the industry over the past 10 years demonstrates the power 
of competition to lower cost structures and garner efficiencies 
as well.''
    It is competition that makes this market work, and we 
should not allow these two firms to extinguish that 
competition.
    Thank you, and I welcome your questions.
    [The prepared statement of Mr. Balto appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Balto.
    We will turn now to Senator Grassley for his 5 minutes.
    Senator Grassley. And I thank you, Mr. Chairman, for that 
courtesy so I can leave.
    My first questions are going to be to Mr. Paz and Mr. Snow, 
and prior to asking that question, I sent letters quite a while 
ago as part of my Physicians Payment Sunshine Act asking PBMs 
about transparency of any financial benefits that a PBM 
receives from pharmaceutical companies. So we are told that 
this merger would lead to increased efficiencies and savings 
which will be passed on to consumers. However, as has been my 
experience, for example, with GPOs, which Mr. Balto just 
announced--and Senator Kohl has been involved with that--there 
are serious questions about where savings actually flow. The 
issue of transparent becomes even more complicated when we 
consider allegations that PBMs have a conflict of interest in 
the way they operate. We are told more transparency is needed 
to ensure PBMs operate as honest brokers. If we have greater 
transparency in the process, then we would not be having this 
discussion.
    So I am interested in finding out how much transparency 
there is in the interactions between sponsors, PBMs, 
manufacturers, pharmacies, and consumers.
    So this question to either or both of you: How do you 
respond to allegations that PBMs who operate their own mail-
order pharmacies, for example, cannot serve as an honest 
broker? And, second, what can PBMs do to ensure greater 
transparency to address allegations that I have given to you? 
And, you know, the extent to which it might sound like I share 
those allegations, I want information to know whether those 
allegations are right or wrong. I am trying to get information.
    Mr. Paz. Yes, Senator. First of all, let us break it down 
into several different groups. We service our men and women in 
uniform. We are very proud to serve 10 million beneficiaries 
and active servicemembers. We administer that program on behalf 
of the Federal Government, and every component of that is 
transparent. They negotiate with us. They get the pricing, and 
it is all fully disclosed.
    With respect to Mr. Streator's plan--and most all of our 
plans--these are called passthrough plans, so we negotiate on 
behalf of the retail pharmacies. What we do, Senator, is we 
bring together the buying power of all of our plans. Our plan 
sponsors are very sophisticated buyers, but they specialize in 
automotive; they specialize in manufacturing; they specialize 
in retail and all different walks of areas for which they 
provide services.
    What we do is we bring together their drug procurement 
side, and we negotiate on behalf of all of our plan sponsors to 
go get the best prices we can from the retail pharmacies. We 
also believe that the community pharmacist is very important to 
our business. They have to survive. Our job is to make sure 
that we find that right mix between taking price down as low as 
possible so our health plans and our plan sponsors can continue 
to allow for a benefit to their employees. A 10-percent, 20-
percent health increase is not sustainable. We have got to 
address those issues and drive down prices.
    At the same time, we have to be cognizant of Ms. Sutter and 
all the other pharmacists out there that have to make a living 
and have to provide a livelihood for themselves. And so we have 
to balance those.
    As far as transparency is concerned, all of our pricing is 
disclosed to our plan sponsors. Medicare Part D, all of the 
Medicare plans, it is regulatorily required, it is statutorily 
required, that all those prices and all those price points are 
disclosed. The same way with our clients. They know exactly 
what they pay us, and they get a full accounting of all the 
drug spend.
    With respect to mail, mail is a choice. Some plans are in 
dire economic straits today in these tough economic times. As I 
said in my prepared comments, mail service can save 
significantly over that of retail. It is not our decision. We 
cannot walk into any plan and tell them to do something. They 
choose. We give them a laundry list of options, and they choose 
what they want to do in order to save money and meet the needs 
of their employees, weighing access versus cost.
    The more narrow the network, the less pharmacies in a 
network, all the way down to mandatory mail, limits the number 
of players which can drive costs even further. It is the plan 
sponsor's decision to decide where they need to be in order to 
meet the needs of that plan.
    So it is not really our choice, Senator. It is the choice 
of our plan sponsors on whether to choose mail.
    Senator Grassley. OK. I will follow up with some questions 
in writing.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Grassley.
    Mr. Paz, one of the main reasons you argue this merger will 
benefit consumers is that, because of the large size and buying 
power of what the combined company would be, you will be able 
to drive down prices even further by achieving greater 
discounts or by negotiating for higher rebates.
    Now, Express Scripts already has 90 million covered lives. 
Given your very large size, you already get substantial volume 
discounts without merging with Medco. How large do you have to 
be before you maximize your discounts with your suppliers?
    Mr. Paz. If you look at the size of the manufacturers, our 
market cap is $20 billion. We are a rather large company. Those 
of Pfizer, Merck, and others is quite a bit larger. The 
question is overall clout and the ability to negotiate. We 
believe we are well positioned to use clinical evidence and 
drive for patient safety to try to negotiate the best discounts 
available for our plan sponsors. We believe that drug price 
inflation alone on the branded side was up 10 percent. 
Specialty drugs were up 14 percent last year. If we do nothing, 
the costs of branded drugs go up well over 10 percent in any 
given year. Those issues have to be addressed, and it is our 
job to work on behalf of our clients in order to try to bring 
down those costs so that our plan sponsors continue to offer a 
benefit for their employees.
    Chairman Kohl. Well, I appreciate that, but, you know, when 
you get to be as big as you are already, I am assuming you 
drive the hardest possible bargain with your suppliers because 
you have such clout. So now let us say you add another half or 
three-quarters clout to what you have already. I am assuming 
that what you are getting now is just about as much as they are 
willing to give you based on your size as it presently exists.
    Mr. Paz. Yes, well, what we said to Wall Street, when we 
announced this acquisition is that the majority of the 
synergies in this transaction are not coming from the supply 
chain. They are coming from efficiencies. Mr. Snow addressed 
what he is doing with his TRCs, therapeutic resource centers, 
and his approach to have a disease state specific--addressing 
specific diseases such as diabetes and asthma. We approach 
consumer behaviors, and we believe putting our two programs 
together, the biggest waste that exists today is what Mr. Snow 
addressed, which is people not staying adherent to their drug 
regimens.
    We believe the savings that are going to come from our 
acquisition is around twofold: one, better health outcomes, 
keeping people out of the emergency rooms, people staying more 
adherent to their drug regimens; and, two, it is the back 
office efficiencies in areas such as systems and approaches 
where we can eliminate those costs, which are part of the 
overall health care costs. If we can eliminate those, we can 
pass those savings on as well to our plan sponsors.
    Chairman Kohl. I appreciate that, and we will get to Mr. 
Snow. And I noticed in looking at your respective P&L 
statements, your administrative costs, Mr. Snow, are 
considerably higher than yours are, Mr. Paz. I assume that you 
see a lot of efficiency in consolidation and by eliminating a 
lot of administrative costs, which is the right way to go. I am 
not being critical of that. But I heard you say just now that 
significantly increasing discounts over what you are getting 
right now is really not why you are doing this deal, and you 
are not nearly as certain as some people might think that this 
deal will result in far more discounts from your suppliers. 
There are other ways in which you hope this deal will pay off.
    Mr. Snow. That is correct.
    Chairman Kohl. OK. Ms. Sutter, I would like to ask you a 
question. We have heard reports from pharmacists that there is 
a tremendous amount of waste associated with mail-order, that 
consumers often cannot halt the shipping of drugs by a mail-
order when they no longer need them. Community pharmacists have 
told us that consumers have returned to them thousands of 
dollars worth of unused drugs that these consumers or their 
relatives receive mail-order shipments from the large PBMs. The 
pharmacists must by law discard these drugs. This costs the 
health care system substantial sums of money involved in paying 
for unused drugs.
    Has that been your experience? Is there a lot of waste in 
connection with mail-order drugs? And if so, why do you think 
this is happening, Ms. Sutter?
    Ms. Sutter. Yes, it has happened in our pharmacy, and I 
think as you can see from my written statement, we have--a 
picture will speak a thousand words as to the kind of things 
community pharmacists see. These gentlemen talk about having 
adherence programs, but to have an adherence program, just 
sending drugs every 30 days does not get to the core issue for 
these patients. I as a pharmacist and pharmacists across this 
country have been part of destroying medications with law 
enforcement drug drops to try to help patients get unneeded 
medications out. Time after time they are quoted as stating 
that 75 percent of the medications bought there are from mail-
order pharmacies.
    So the patients appear to have routine prescriptions being 
sent to them, and then when they try to call and make any 
changes to them, they are having difficulty in getting through 
to someone that understands that the medication should not be 
sent any longer.
    Chairman Kohl. OK. Mr. Snow, did you want to make a comment 
a minute ago?
    Mr. Snow. No. I will pass.
    Chairman Kohl. OK. Mr. Paz, whatever its benefits, there 
can be no doubt that this merger will eliminate one of your two 
main competitors. We know this merger will be good for your 
bottom line, but our job in this Subcommittee is to be 
concerned with consumers' bottom lines. Can you explain why it 
is necessary for you to merge with one of your chief rivals in 
order to achieve the benefits you claim will be gained by this 
merger?
    Mr. Paz. Senator, we are facing unprecedented times in 
regulatory oversight. When we look at CMS, when we look at the 
exchanges coming into place, the work we have to do and the 
costs attributed to those items are quite high. I believe by 
having better operating systems and better approaches, we will 
be able to help spread those costs and reduce the costs of 
health care over the larger book of business.
    In addition, in our opinion, it still comes down to the 
best way to save money in the health care system is to focus on 
quality, and we do. Our pharmacists do not just mail out mail-
order prescriptions. We are constantly reaching out to our 
members, looking at drug interactions, looking at interfaces. 
Actually, we call often on retail pharmacies where members pick 
up pharmacies at multiple locations--pick up prescriptions at 
multiple locations, and we see the interactions that the 
retailers cannot see, and we help those members work through 
those situations. We spend a considerable amount of time doing 
that.
    We believe all these pieces coming together will help drive 
down the cost of health care.
    Chairman Kohl. All right. Mr. Lee.
    Senator Lee. Thank you, Mr. Chairman, and thanks to all of 
you for coming today. I would like to start with some questions 
for Mr. Balto.
    Mr. Balto, I was a little surprised that you opened your 
argument, the very first substantive argument, as I understood 
it, against this merger moving forward was that PBMs have made 
substantial profits in recent years. Now, I understand that 
this has become a very popular mode of attack. I understand 
that people do not--sometimes some people like to attack a 
particular company or in this case an entire industry for 
making profits. But are you really suggesting that considerable 
profits, the existence of considerable profits is somehow 
relevant to or dispositive of our antitrust analysis for 
purposes relevant to this Subcommittee? And if so, how?
    Mr. Balto. I think it is relevant. You know, certainly we 
do not condemn a market because there are high profits. Things 
like branded pharmaceuticals, of course, there is a tremendous 
amount of risk involved and there is valuable intellectual 
property involved. I think it is important in a couple 
respects.
    First of all, I think it is tied to the factors I talk 
about in my testimony about how the market does not function 
well----
    Senator Lee. But they are not getting enough value out of 
it, the value is not being passed along to the consumer----
    Mr. Balto. If the market was truly competitive, if there 
was sufficient transparency, this is an intermediary. This is 
like a credit card or an ATM card. You would expect their 
profits to be very low if there was sufficient competition and 
transparency. So----
    Senator Lee. That is the middleman part that I referred 
to----
    Mr. Balto. Right.
    Senator Lee [continuing]. In my opening statement.
    Mr. Balto. Second----
    Senator Lee. Hang on. Let me just----
    Mr. Balto. Sure.
    Senator Lee [continuing]. Push down on that first point, 
and then you can work the second part into your answer. If that 
is the case, if this is a worthless middleman, why on Earth 
does the client base of PBMs--meaning employer-sponsored health 
plans--why do they continue to go back and back and back to 
PBMs? In other words, the reason those profits exist, as I 
understand it, is that someone has decided in corporate 
America, in a substantial portion of corporate America, that 
they can save money and thereby extend the value of their 
dollar, the value of the money that they do devote to employer-
sponsored health care plans and get more health care value out 
of their money if they use PBMs. So are you saying that they 
are just wasting their money?
    Mr. Balto. No, no. I am not saying it is a waste, but what 
I am saying is if there were--when you look at this compared to 
other intermediary markets--and I would be glad to supplement 
my answers with written answers. But if you look at this 
compared to other intermediary markets, the profits are 
fabulously higher, and, you know, I think that is--when you 
look at the lack of transparency, that is suggesting that there 
are market problems--there are problems in the market.
    Second, I think the number is important in terms of the 
efficiency argument. They have to demonstrate that the 
efficiencies will be passed on to consumers. Their profits are 
skyrocketing. That is suggesting that a large amount is not 
being passed on.
    Senator Lee. OK. But, again, the fact that they continue to 
go back to PBMs suggests that there is efficiency somewhere, 
and I do not understand you to be suggesting that the employer-
sponsored health care plans are themselves motivated by 
anything other than a sincere desire to make sure that their 
health care investment, their investment into their employee 
health plan, is not maximized.
    Mr. Balto. I totally agree, and one of the important issues 
here is transparency. Now, they say they like transparency, but 
right now Medco is fighting the State of Texas on a request for 
transparency. They continually fight efforts at transparency. 
If there were adequate transparency--and there are small PBMs 
who do provide greater transparency--then, you know, perhaps 
there would be a greater degree of competition.
    Senator Lee. OK. Help me understand that, then, because it 
is my understanding--and correct me if I am wrong--that PBM 
contracts with plan sponsors typically require a degree of 
transparency, but they also require that a significant portion 
of their savings be passed along to the end consumer. For 
example, it is my understanding that Medco's 10K reports that 
it passed through its plan sponsors 87.5 percent of 
manufacturer rebates in 2010. Do you dispute that?
    Mr. Balto. Well, it depends how they calculate rebates, 
and, you know, because so little of this information is 
transparent, I think, you know, only if you were able to 
effectively audit things. There was an important audit done by 
the Texas teachers and employers system that found that even in 
those systems where they thought they were getting the rebates 
back, they actually were not.
    Senator Lee. OK. I sense that Mr. Snow would like to 
respond to something that you have just said.
    Mr. Snow. Thank you, Mr. Lee. I would like to respond. 
Around the concept of transparency, for starters, Medco has 
been called the ``gold standard'' as it relates to 
transparency. And if you look at what we file on our 10K, we 
report every quarter every dime we make in rebates. Our clients 
always have the choice: Do they want the discounts and have us 
keep rebates, or do they just want a direct passthrough? It is 
always their choice. And you are correct, 12 percent of rebates 
we retain at our client's election. A hundred percent are 
passed back to those who elect it.
    So, by the way, in the case of this merger, our clients, 
Medco's clients, when this merger occurs, because of the nature 
of our contracts with those clients, will save $1 billion just 
because we are going to use best-in-breed contracts that we 
already have. One billion dollars goes immediately to their 
bottom lines. That is really economics. That is real savings.
    When it comes to what our clients can do, they can audit us 
anytime, contractual right to do it. And they do it. They look 
at every element of the contract, every element relative to 
rebates and pricing and claims processing. They see it all. And 
they are welcome to do that. We are transparent.
    I will also submit to you that we are regulated. For people 
to think we are an unregulated industry is really a wrong 
perception. So, for example, we are regulated by every State 
board of pharmacy in the entire country, all 50 States. We are 
regulated by every single State insurance department across the 
country. We are heavily regulated by CMS. We are a large 
participant in Medicare. We are regulated by the Medicaid laws. 
We are a heavy participant there. And, you know, we are looked 
at all the time. Our clients look at us, regulatory entities 
look at us.
    This is not the industry that people talked about being a 
black box 10 years ago. There have been fundamental changes, 
and I will tell you, it is a transparent industry where clients 
know exactly what is going on. They really do.
    Senator Lee. OK. I want to dive back into some of these 
issues if I have a second chance for questions, but I see my 
time has expired. Thank you, Mr. Chairman.
    Chairman Kohl. Thank you, Mr. Lee.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Senator Kohl, for 
holding this hearing. As we consider this merger, I am focused 
on maintaining access to pharmacies for my constituents, 
ensuring the best patient care and keeping drug prices as low 
as possible. I think that is what most people are focused on. 
And I have talked to many people in my State about community 
pharmacies, and I hear time and time again about the vital role 
that local pharmacies play, and often patients cannot reach 
their doctor, so talking to their pharmacist is very important.
    Could you talk about how this merger--I guess I would start 
with you, Ms. Sutter--would affect local pharmacists? But then 
also you raised this issue of adherence, and I wondered if you 
could elaborate on that as well. And then I will ask about how 
PBMs are also involved in that issue? Ms. Sutter?
    Ms. Sutter. Thank you. Let me first speak to the idea of 
the viability of community pharmacists. As you know, in 
Minnesota there have been several pharmacies in towns where 
they were only the pharmacy that have closed.
    Senator Klobuchar. That would be Adams, Ashby, Belgrade, 
Clara City, Collegeville, Comfrey, Erskine, Isanti, Lake 
Crystal, Lamberton, Le Center, and Orono.
    Ms. Sutter. Why, thank you.
    Senator Klobuchar. You are welcome.
    [Laughter.]
    Ms. Sutter. And let me update you on some of the data. Even 
in Wisconsin a group of--a family business for 75 years in the 
Fox Valley, 12 stores, decided to leave the retail market and 
only do long-term care. And the CEO of that family business 
said it was directly related to reimbursement issues.
    I just came from a meeting. A colleague in Lexington, 
Kentucky, closed five stores. His comment to me: ``I just could 
not deal with the Express Scripts contract. It was so 
concentrated in my area.''
    So these are things that are really happening. I came 
prepared to answer the question as to, well, will I go out of 
business if this merger goes through. My husband and I have 
been successful business people for almost 30 years. We are 
good business people. We have worked through a lot of the 
different things that present challenges to a small business 
like ourselves. But we are now facing--and I was very honest in 
my comments about the average net margin of these pharmacies. 
We will make very difficult decisions--reduce hours, lay off 
people, whatever--to try to maintain the businesses that we 
have. But at some point we will make the decision whether to 
have our life earnings remain invested in this small business 
any longer, which is totally--94 percent of my sales are 
prescription drugs. I am the only pharmacy in Horicon, 
Wisconsin. I am the only community pharmacy in Mayville, 
Wisconsin. This threat to the existence of independent 
community pharmacies is real.
    Senator Klobuchar. OK. Mr. Snow, Mr. Paz, if you could talk 
about, first of all, the adherence issue that Ms. Sutter had 
raised, but then, second, this larger issue of the closure of 
rural and independent pharmacies and how you could put 
anything--you could do anything to stop that from happening if 
you look at your networks because it is clearly an enormous 
concern.
    Mr. Paz. Just to put the record straight, there are more 
pharmacies today than there were 5 years ago across the board. 
We are up to 68,000 pharmacies throughout the United States, 
and there are more coming online constantly.
    You know, I cannot stop certain pharmacies from going out 
of business. There are 10,000 McDonald's in the United States, 
roughly, there are roughly 13,000 Starbucks in the United 
States, there are 68,000 pharmacies in the United States. There 
is a lot. Our job is to make sure that people have access to 
pharmacies, and we have to make sure that they have appropriate 
access.
    So under CMS, CMS has guidelines as to what that means, and 
we work very hard. I have no desire to force anyone out of 
business. As a matter of fact, my intention is to work on 
behalf of the community pharmacists and reimburse them at a 
higher rate than we do for the big-box retailers. We believe 
our country needs those small pharmacies, and they do not have 
the buying power, they do not have the ability to do what the 
big pharmacy chains--the Walgreens, the CVS's, the Rite-Aids--
in this world can do. So our job is to go out and negotiate and 
try to get better deals for them so that they can, in fact, 
stay in business and serve.
    At the end of the day we have to have those rural 
pharmacists in rural communities to provide those drugs. If we 
cannot do that, we do not have a business. Our clients, such as 
Mr. Streator, are going to insist that we have those 
opportunities for those pharmacists, and they are not going to 
stand by and allow us to shut those down.
    One last thing before I move on, though. I would like to 
just point out for the record that we talk a lot about these 
great increasing profits that the PBMs have. Keep in mind our 
net income profit level is still only 3 percent. So it is not 
like these are big, big numbers. We are grocery store-type 
profits, 3 percent net income profits.
    Senator Klobuchar. OK. I have two questions here at the 
end. I am sorry, Mr. Snow. If I--I have 2 minutes left, and 
maybe we could do it in writing. The second thing I want to ask 
about is access to lowest-cost prescription drugs, which is why 
I support increased usage of generic drugs. I appreciate the 
Chairman's leadership on that. Can you talk about how the 
companies could balance this incentive to maintain rebates from 
brand-name manufacturers with the goal of moving toward 
generics?
    Mr. Snow. At Medco, we have a generics-first policy, which 
means we always move to generics as appropriate because it is 
in the best interests of our clients. As George mentioned 
earlier, the way we relate with our clients is we have 
completely aligned interests. Since we pass back the vast 
majority of rebates, rebates are not a motivator to do brands 
versus generics. We are rewarded for, as Scott mentioned, 
keeping their trend line down, and we are, because of the 
things we do, able to keep trend lines in the negative 
sometimes or very low relative to the real underlying inflation 
rate going on.
    Our performance and our renewals are tied directly to our 
ability to contain their costs, and so we are motivated to go 
to generics wherever possible.
    Senator Klobuchar. And I am going to ask our other 
witnesses here in writing for their response to that as well. I 
am sorry we cannot do it here.
    [The information referred to appears as a submission for 
the record.]
    Senator Klobuchar. I just had one last question. Senator 
Franken raised the employees really across the country, and I 
heard you talk about the efficiency gains here. What effect 
would this merger have on employees of both of your companies 
in Minnesota and across the country?
    Mr. Paz. Well, as you know, Senator, as you have been 
gracious enough to come to our site, our Minneapolis is our IT 
hub, and it will only grow over the years. IT is what we do. 
Our ability, as David said during his prepared comments, we 
have a wired system. We have to get to better utilization of e-
prescribing. We have got to get to that next level. All that 
work is done in our Minnesota site.
    Now, again, certain areas, such as accounting, legal, some 
of the back-office functions, those will diminish over time, 
but we hope we could redeploy those resources, again, moving 
pharmacists into more consultative roles and helping our 
patients. That is where we are trying to go with this. We do 
not have actually numbers at this time. We have not been able 
to put our two companies together. We have to get through the 
FTC first.
    Mr. Snow. But the goal of our merger is growth. It is to 
grow.
    Senator Klobuchar. OK. Well, I know we will have some 
further questions here about the costs and also the effect this 
is going to have on independent pharmacists. I appreciate 
everyone being here. Thank you.
    Chairman Kohl. Thank you very much, Senator Klobuchar.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Mr. Chairman, and I want to 
join my colleagues in thanking you for this hearing, and thank 
you to the witnesses for your excellent, really very helpful 
and instructive testimony.
    You know, I am very concerned about this merger simply from 
the standpoint of its effect on competition. And when I look 
at, for example, the mail-order pharmacy part of the market, 
which is about one-fifth of all prescription drug sales, a $52 
billion industry, if this merger is approved, you will control 
60 percent of it. Your nearest competitor, CVS Caremark, about 
24 percent. And then the competitive landscape is like a cliff 
to your nearest competitor, about 3 percent. I think it is 
Aetna. And that power, I think, is fearsome. Under the law it 
is problematic.
    Similarly, in the specialty pharmacy market, this merger, 
if approved as you have proposed it, will result in an entity 
that controls 52 percent of the market, and obviously, as you 
know, the specialty drug market is the most lucrative growth 
area in the PBM industry. It accounts for 16.3 percent of 
prescription drug plan spending. It is growing at the rate of 
about 16 percent or more per year. And so I am interested in 
knowing what you will do to make this merger more acceptable, 
in effect what you will do to make it less problematic and more 
promising for consumers, which, after all, are the chief 
concern of our antitrust laws. Antitrust laws are designed to 
preserve competition so they can protect consumers. Mr. Snow.
    Mr. Snow. Yes, Senator, thank you for the question. A 
couple of points.
    We, too, are very concerned about the consumer. As George 
has mentioned earlier, we are very concerned that access to 
drugs is real, that they can afford them. But----
    Senator Blumenthal. Would you be willing to divest the 
specialty pharmacy market?
    Mr. Snow. Before I go there, I would rather let the FTC 
opine on the map of our deal before we talk about that. But I 
would like to point something out, and I would like to submit 
something for the record.
    If you look at mail and mail volumes at Medco, 85 percent 
of all prescriptions are retail--85 percent--and that has not 
changed for quite some time. This chart, which came out of--and 
I submitted this for the record, but it came out of an NACDS 
data book--simply shows that mail has fundamentally not changed 
in terms of numbers since 2007. The volumes are going to chain 
and big-box retailers, and, yes, the independents are losing 
scripts to the chain and big-box retailers. It is the data. It 
is not the PBMs, and it is not mail growing exponentially. In 
fact, more and more retailers are offering 90 days at retail, 
and you are seeing prices pretty much stay stable because faced 
with chronic and complex disease people who take drugs for a 
lifetime find it is easier to comply with 90-day supply, and 
you are seeing more of that going on right now. So mail is not 
as large as you indicated, and it is very stable. It is not 
growing. That is not where the new scripts are going.
    Relative to specialty, I would just refer you to Adam 
Fein's analysis which he submitted where he has done a detailed 
analysis with real data and says today the combination would 
give the Medco/Express Scripts merger 31 percent of the 
specialty business, and that is before accounting for the Medco 
losses, both UnitedHealthcare, which happens in 2013, as well 
as from the losses for 2012 that are not in his numbers, which 
takes us into the mid-to high 20's. And then if you look at the 
disease level in specialty, which I think is the right way to 
look at this, there are many, many additional competitors who 
play in specific specialty diseases who are not even counted in 
the analysis.
    So I believe the market penetration numbers you are talking 
about are not the numbers that will be looked at when looking 
at markets.
    Senator Blumenthal. So you think that those numbers are in 
error?
    Mr. Snow. Yes.
    Senator Blumenthal. Let me ask you, are there any parts of 
this business that you would be willing to divest? I know that 
Mr. Paz is on record saying that he would be unwilling to 
divest the specialty pharmacy market, for example.
    Mr. Snow. Yes. You know, I think obviously there will be a 
conversation when it is necessary. When it comes to mail, you 
know, what is important for us is we offer a continuum of 
product and service for the clients who hire us. So they are 
looking for an end-to-end service capability, and to take a 
piece of that service capability away really fundamentally 
harms the client and the patient who we are caring for across 
that continuum.
    So obviously we will talk as we need to as this process 
moves on, but our focus is going to be, Can we serve the 
customer and the patient the way we do today? And that will 
determine what we can and cannot do.
    Senator Blumenthal. Mr. Balto, would you have any 
suggestions as to how this merger should be dealt with by the 
FTC?
    Mr. Balto. Senator Blumenthal, I think the FTC should go to 
court as they did in the drug wholesaler case and in Office 
Depot/Staples and block the merger. You can look at both of 
those mergers and see consumers are better off because they 
blocked the merger.
    A divestiture of a specialty facility or a mail facility 
would not do much to restore the competitive equilibrium here. 
They are still going to have tremendous market clout, which 
they currently use, even at their limited market clout, to keep 
independent specialty pharmacies, for example, out of the 
market. Those offer an important source of service competition 
and also price competition. That would be lost if this merger 
is approved.
    Senator Blumenthal. Thank you. My time has expired. I thank 
the Chairman.
    Chairman Kohl. I only have one question. Then I will turn 
to Senator Klobuchar.
    Mr. Snow, on November 11th, the New York Times reported 
that Medco instructed drug stores to not fill prescriptions for 
the generic version of the blood pressure drug Lipitor for 6 
months beginning December 1 when Lipitor's patent expired. 
According to the story, Pfizer, the manufacturer of Lipitor, 
negotiated with PBMs for large discounts to prevent pharmacies 
from dispensing the generic version of Lipitor.
    Last week, the New York Times reported that the CVS 
Caremark PBM had instructed pharmacies that the generic form of 
Lipitor would not be covered for 29 prescription drug plans it 
managed for Medicare Part D. If true, these reports would be 
obviously very disturbing, and it is well understood that 
utilization of generic drugs, which are in many cases vastly 
less expensive, are essential to combating rising health care 
costs.
    Now, we understand that Medco has taken issue with the 
first Times story and claims that Medco was acting at the 
direction of just one client. The later Times story notes that 
Medco has now instructed pharmacists to use the generic version 
of Lipitor, but that Medco's own mail-order service will use 
Lipitor as its ``house generic.''
    So what is going on here, Mr. Snow? Has Pfizer negotiated 
discounts with Medco in order to block the generic drug from 
being utilized, either at drug stores or mail-order? And if so, 
are all of these discounts being passed on to plan sponsors and 
Medicare Part D consumers? And even if they are, will not this 
practice deter generic drug makers from attempting to enter 
markets?
    Mr. Snow. Thank you, Mr. Kohl. I appreciate that question, 
and I am happy to answer it.
    The New York Times article was very much in error, and they 
have more recently published clarifications around that, as has 
other major papers like the Wall Street Journal. What happens 
in Medco's case is we always prefer generics first. We do not 
block retailers from providing generics of any type when they 
come to market.
    There are occasions where specifically a health plan 
customer who is very big, very sophisticated will negotiate 
their own arrangement and ask us to administer it. That is what 
happened for a specific health plan that we manage. They 
negotiated a direct deal, and we administer it. But for Medco 
and 99 percent of our book of business, we dispense generics, 
and, by the way, it is not uncommon in the first 180 days when 
a new generic comes to market in that exclusive period where 
you do get competition from the brand manufacturer. But make no 
mistake about it. They do not compete by giving rebates or 
anything like that. They compete like a generic manufacturer. 
By the way, most brand manufacturers these days have a generic 
manufacturing arm, and the contracts with these firms are just 
like the generic contracts we have with generic manufacturers 
who do not manufacture brands.
    Our clients, just so you know, relative to Lipitor for the 
first 12 months are going to save over $1 billion because of 
the generic pricing we put together for Lipitor.
    Chairman Kohl. Finally, Mr. Paz, in the last few days my 
staff has received a number of reports from pharmacists that 
Express Scripts as well as other PBMs were directing them to 
fill prescriptions with Lipitor rather than its generic 
alternative. We have received this information directly. Now, 
you would dispute that?
    Mr. Paz. Two different pieces. One is what Mr. Snow just 
said. You know, Pfizer has a very good deal on the table. We go 
to our clients, and we ask them what they would prefer. In 
other words, if Pfizer was willing to negotiate the discount on 
its branded product below that of the generic--so, in other 
words, the prices are cheaper, the member pays a generic co-
pay, but the plan sponsor pays less--then we will give them 
those options. Again, it is up to the plan sponsor to decide 
how they want to put in the programs.
    The world has changed a little bit because Ranbaxy was able 
to get its approval to come to the market. There was a period--
keep in mind Ranbaxy did not get to enter the market until 
several days after the patent expiration occurred. So there was 
a period when there was only one brand product and one generic 
out there, and the brand product was actually cheaper than the 
generic. Now that Ranbaxy has entered the market, the generics 
have dropped, and the plans are moving toward the generic. Our 
job is to bring down the cost, both for the patient and the 
plan sponsor, and do what is right. We are not tied to whether 
it is a brand or a generic. We want the lowest cost possible 
for our members to drive down the cost of health care. That is 
our most important mission.
    Chairman Kohl. All right. Senator Klobuchar?
    Mr. Streator. Mr. Chairman?
    Chairman Kohl. Mr. Streator, then Senator Klobuchar.
    Mr. Streator. Yes, may I just add a few points?
    As a payer and as a health plan, let me just interject a 
perspective. When we do our due diligence with RFPs, which are 
fairly sophisticated, we are looking at any corporation or 
PBM's ability to manage drug trend or the year-over-year 
change. So this renewal factor is very important. The success 
rate of a PBM being renewed is going to be largely tied to how 
effective they manage the drug trend. So whether it is the 
brand drug for 6 months or less, the lowest net cost is what is 
important.
    Chairman Kohl. Senator Klobuchar.
    Senator Klobuchar. Thank you very much. I want to thank 
Senator Lee for letting me go ahead here. I have another thing 
I have to get to, so thank you.
    I wanted to follow up on that adherence issue that Ms. 
Sutter raised, and I think I will start with Mr. Snow and then 
maybe have Mr. Bettiga respond to this, and this is this idea 
that when you go to see your pharmacist, they are able to talk 
to you about how you take your medication and various things so 
that you get a higher rate of people actually taking their 
medication, which turns out to be one of the major health care 
problems we have right now.
    Could you talk about how this merger could affect that and 
how PBMs are involved? And then we will go to Mr. Bettiga to 
see the concerns here from a pharmacist's standpoint.
    Mr. Snow. Yes, I would be happy to. Thank you. In addition 
to patients' calling us with chronic or complex disease, they 
call our pharmacists on average four times a year looking for 
specific help relative to their benefit and/or their drug and 
their clinical situation. We have the additional opportunity 
because of the way we are organized to call the patient when we 
see that they are not doing what the doctor suggested they do 
for the disease they have. We use specially trained 
pharmacists, additional certification in the disease, so let us 
take diabetes. If we see that our patient is not following the 
fundamental ABCs of managing diabetes as their doctor 
prescribed, we will actually call them if it is something that 
is dangerous and will lead to a very bad outcome, and we will 
talk to the patient about why they are not adhering to what 
their doctor asked them to do. We will help them through their 
misunderstandings, which is often the case, about what drug is 
supposed to do what for their bodies.
    We actually help them get compliant, we monitor that 
compliance, and we are actually very good at closing what we 
call gaps in care. And there is a direct correlation between 
adherence to what the doctor said and the net cost per patient 
per year. There is a correlation. So if you get a patient 80 
percent or more compliant with what the doctor said, it has 
been shown in diabetes you can cut the cost per diabetic per 
year in half because they do not become unstable, they do not 
end up in the emergency room, they do not get hospitalized, 
they do not have the source of very negative things that happen 
to people with unmanaged diabetes like amputations and 
blindness and renal failure.
    We manage that, we look for that, we use evidence-based 
protocols in a wired health care system. And we hope the whole 
health care system gets wired one of these days because I think 
enormous opportunities for physicians and others can be 
leveraged. And, by the way, we are also using that wired 
capability to work with retail pharmacies so that they, in 
fact, can see what our pharmacists see and help with those gaps 
in care. And we are actually helping them. We are doing a 
number of pilots where we are helping them get paid for 
cognitive time with patients managing these gaps in care.
    Senator Klobuchar. OK. Mr. Bettiga, why don't you answer? 
My experience being in community pharmacies, visiting them, is 
that you hear a lot, you hear those discussions going on.
    Mr. Bettiga. Right, and we hear it every day. And I 
appreciate, the comments about wired and the work that they 
have attempted to do, but here is the reality. The reality is 
that they can provide face-to-face contact and consultation on 
a daily basis with their patients and the consumers. That is 
the end root cause of all this, and that is part of our 
concern. We provide that. At Shopko, we consult on every 
prescription, whether it is a new prescription, whether it is a 
refillable prescription, 100 percent of the time in all of our 
stores.
    My concern with this whole thing rests too with the second 
point on access. At some point in time, if accessibility is 
limited because of the practices that would go on with a larger 
entity--and pharmacies are forced to, you know, go out of 
business or whatever it may be--especially in rural underserved 
areas, what happens to that contact? What happens to that 
consultation? What happens to that relationship that an elderly 
patient may have with that pharmacist that they have known for 
years? And I would submit that you cannot replace that with an 
oral phone conversation, with somebody four States away.
    Senator Klobuchar. OK. Now, just to end here with the 
merger, because ultimately it is the FTC that is going to be 
looking at this in great detail and ruling on this merger. What 
do you think are the most important dynamics? Each of one of 
you just give a 30-second answer here, or less. What do you 
think the FTC should be looking at in evaluating this merger? 
Mr. Balto, and then we will go down the row.
    Mr. Balto. You know, I think the critical issue is: Is 
there something that can effectively restore competition here 
when the market moves from three to two? And I do not think 
that there are significant--there are significant differences 
which make a significant difference between the first and the 
second tier.
    In addition, it is the parties' obligation to demonstrate 
extraordinary efficiencies, and they have not moved very far in 
doing that so far.
    Senator Klobuchar. OK. Mr. Bettiga.
    Mr. Bettiga. The primary issue for myself in our industry 
is critical access, without a doubt, to the patients, to 
consumers, and I truly believe that with this merger, with the 
increased cost containment measures that we have put into 
effect, it is going to harm community pharmacy potentially, and 
it is going to result in decreased access, in a decrease in the 
services, and that face-to-face contact that we provide on a 
day-in, day-out basis to our consumers.
    Senator Klobuchar. OK. Ms. Sutter.
    Ms. Sutter. Well, I certainly agree with Mr. Bettiga's 
comments about access and face-to-face contact with my 
patients. I just do not quite understand this conflict of 
interest that--you know, I am on a hospital board, and, you 
know, Stark laws do not allow physicians to do this referral 
pattern in that, but it seems like we have totally ignored the 
fact that these entities can have pharmacies that are in direct 
competition to me, I am their competitor, and they set my 
rates. That is what I would like the FTC or at least Congress 
to look into. Why is that allowed in our industry, in our part 
of health care and it is forbidden, you know, within the 
hospitals and physicians?
    Senator Klobuchar. Mr. Streator.
    Mr. Streator. Payers today are under obvious increased 
pressure to reduce costs, so regardless of the FTC, there is a 
huge role for PBMs to play because right now, as you know, the 
FDA approves medications on two bases: safety and efficacy. 
There is no cost efficacy. Until comparative effectiveness, as 
a research science matures, we as plan sponsors and health 
plans and payers are relying on the pharmacy benefit managers 
to help us make those decisions and to put pressure back on 
manufacturers. Specialty medications often can exceed the cost 
of $10,000 per prescription. There are no biosimilars, and we 
do need this as payers.
    Senator Klobuchar. OK. Mr. Snow.
    Mr. Snow. I think the FTC should focus on competition. 
There are 40 PBMs. They are real PBMs. And there are ten PBMs 
serving the Fortune 50, 17 serving the Fortune 500. As I told 
you, we lost $10 billion worth of business for 2012, and 15 
different programs beat us and won that business. So I do think 
this concept of the one, two, or three is just fundamentally 
flawed, and I hope the FTC can sort that out.
    Senator Klobuchar. Mr. Paz.
    Mr. Paz. Thank you, Senator. I deal with many, many clients 
similar to Scott in his predicament, where whether it is the 
university system, whether it is the State employees, whether 
it is large employers, they are struggling today in this very 
difficult global economy. It is tough for companies to continue 
to grow and meet earnings expectations, redeploy capital, and 
hire new people.
    One of the big, big drivers of cost is medical costs. I 
believe the PBMs have come a long, long way in taking cost out 
of the equation. We have a long way to go. And I think the 
thing that the FTC should be looking at is will this merger 
continue to drive down the cost of health care for the American 
population. I believe it will. I believe they will find it 
does, and that is why I believe it will get approved.
    Senator Klobuchar. Thank you, all of you.
    Chairman Kohl. Thank you, Senator Klobuchar.
    Senator Lee.
    Senator Lee. Thank you, Mr. Chairman.
    Mr. Streator, when we look at market responses to a merger 
like this one, one of the most important inquiries often 
focuses on possible barriers to entry into a particular market. 
In this instance, we might expand that a little bit to say 
barriers to expansion. In your testimony today, you referred to 
the fact that there are a number of up and coming PBMs, and I 
am curious to see whether you think there might be any barriers 
to their expansion within this market, their progress within 
the market.
    For example, because of the fact that PBMs depend on a 
certain amount of scale in order to create profits through 
their negotiations with pharmacies and drug manufacturers, 
isn't it possible that one of the smaller PBMs might be 
rendered less capable of climbing up that ladder within the 
market as a result of this merger were it to go through?
    Mr. Streator. Senator Lee, thank you for your question. I 
can just speak from experience when we have done very 
sophisticated RFPs and bidding processes. I will not share 
specific company names, but I will share with you that when we 
have done these bidding processes, some of the smaller ones 
were right up there with the top ones. The reason we did not 
choose them at that time was because they lacked integration in 
operations. It was not the savings or the innovation. They were 
quite creative, as I mentioned in my testimony. They were able 
to be a little more nimble in some various implementations of 
clinical programs which saved a significant amount of money. 
But they lacked the infrastructure, and so they have--some that 
I read on the chart over there to the left of me, companies 
that are not even on there that are now quite attractive as a 
payer and as a health plan representative have made 
acquisitions to be able to integrate their infrastructure that 
was not there before.
    Senator Lee. So, in your opinion, it is not necessarily the 
case that if the merger were to go through that phenomenon 
would not continue to exist? Sorry for the double negative 
there. You see no reason why that trend would not remain the 
same as a result of this merger?
    Mr. Streator. Correct. I believe plan sponsors can do 
greater due diligence than just relying on brokers to tell them 
who is available in the market. There are a number of viable, 
attractive PBMs and, as I mentioned earlier, even health plan-
owned PBM offerings now. Each have a different set of 
competitive advantages, and if payers worked diligently to 
research these, I think there is ample competition, even with 
this merger.
    Senator Lee. I also wanted to talk to you more broadly just 
about concerns that I developed as a result of conversations I 
have had with local pharmacies throughout my State on an issue 
that is very important to them and the role that local 
pharmacies and individual pharmacists play in the delivery of 
health care services. Are you confident that this merger would 
not, in effect, squeeze them out? Are you confident that this 
merger is not a part of an effort to replace independent 
pharmacies and local pharmacists?
    Mr. Streator. As a payer, we have a fiduciary 
responsibility on behalf of our members. We want the best 
quality of care for the best dollar, and we need to have 
access, as I mentioned in my written testimony and my oral 
testimony today, that we need community pharmacists.
    I certainly believe with the emerging health care 
reimbursement models, this will be even more important.
    Senator Lee. OK. Thank you.
    Ms. Sutter, I have a question for you. Relating to a study 
that was conducted in 2005 by the Federal Trade Commission, the 
FTC conducted this in-depth empirical analysis and found, among 
other things, the following, and I quote: ``that the prices for 
a common basket of prescription drugs dispensed by PBM-owned 
mail-order pharmacies were typically lower than the prices 
charged by retail pharmacies.'' The study also found, 
``Competition affords health plans substantial tools with which 
to safeguard their interests. Consumers benefit as a result.''
    Do you dispute this finding of the FTC?
    Ms. Sutter. Well, I certainly would want to look at it in 
more detail. When they say my price, the community pharmacist 
price, is that usual and customary or is it an adjudicated 
discounted price?
    Our biggest concern as community pharmacists is I am 
contracted with these gentlemen's companies to fill 
prescriptions at very, very low margins. They sell my services 
to the payer and price it at some point up here, having no 
transparency to know whether it is a fair spread for their 
services. And then with their mail-order pharmacy, they somehow 
are able to just put their cost of their medication slightly 
lower. And so when you present a plan to a payer saying mail-
order is less expensive than what they got charged by Medco or 
ESI or a PBM for my services, information and data like that 
can make it look like that. What we really need to do is look 
at the transparency of what am I being paid for, the 
prescription and the services, the 100 percent of the services 
that I am providing, and what are they charging to the payer.
    In addition to that, recently one of the smaller PBMs was 
at a recent conference, and an individual asked the question of 
how often do you have payers audit their contracts, and they 
said less than 5 percent. I have also been told, yes, all this 
language is in there that they can audit their PBM, but they 
also have language in there that they have to agree to the 
auditor and that----
    Senator Lee. That who has to agree? That the PBM has to 
agree to the----
    Ms. Sutter. The PBM and----
    Senator Lee [continuing]. Identity of the auditor?
    Ms. Sutter. So I guess I would ask you to dig further into 
whether--how difficult it is for a payer to actually audit what 
they are being billed for and understanding what I am being 
paid for my services before we can really answer that question.
    Senator Lee. OK. Help me understand the point then. Are you 
suggesting that because only 5 percent of the audits that could 
be conducted, in fact, are being conducted? You think that is 
due at least in part to clauses in the PBM agreements mandating 
that the PBM agree to the auditor?
    Ms. Sutter. Well, I am certainly no expert on this, and so 
some of this is just hearing a PBM official speak to this. My 
concern is that only less than 5 percent of the payers are ever 
even attempting to take advantage of their audit abilities in 
the contract, and then we are also told that many have language 
that they both have to agree to it.
    Senator Lee. OK. So that is much of what you are referring 
to when you talk about the lack of transparency, is that most 
of the time that audit is not, in fact, being conducted.
    Ms. Sutter. Exactly.
    Senator Lee. Even though it could be, it is not, in fact, 
happening.
    Ms. Sutter. That is my understanding.
    Senator Lee. OK. Thank you.
    Mr. Streator. Senator Lee, could I interject on that as a 
payer?
    Senator Lee. Yes.
    Mr. Streator. I believe that is mainly a function of, not 
the PBM, but how effective plan sponsors negotiate with the PBM 
and then take advantage of that capability. I know we do 
routine audits during a contract year, so that is unfortunate 
that other plan sponsors do not do that, but that is surely a 
fiduciary responsibility of payers.
    Mr. Paz. For the record, Senator, we have over 450 audits 
going on as we speak.
    Senator Lee. OK. So they do happen.
    Mr. Paz. All the time. Constantly.
    Senator Lee. I see that my time has expired. Thank you very 
much.
    Chairman Kohl. Mr. Balto, according to the industry 
estimates, after this merger the combined Express Scripts/Medco 
will control about 60 percent of the mail-order business. 
Should we worry about this high level of concentration in the 
mail-order marketplace?
    Mr. Balto. I think absolutely, in part because it provides 
greater leverage for the merged firm to go and force plans and 
consumers into mail-order, which denies them the opportunity of 
using their community pharmacy.
    Chairman Kohl. All right. Ms. Sutter, we understand that 
community pharmacies have concerns about PBMs' steering 
consumers to obtain their prescriptions by mail-order. But 
isn't it beneficial for consumers to obtain their prescriptions 
in this way if they wish since it saves them a trip to the drug 
store? We could understand that pharmacies may not like that 
consumers utilize mail-order services rather than go to drug 
stores, but how does greater utilization of mail-order harm 
consumers? What is your response to that?
    Ms. Sutter. Well, I want to speak to the fact that many of 
these plan designs--there are plan designs that have mandatory 
mail requirements, and many patients do not care for that. But 
the majority of them just offer mail-order. The way they get 
patients to default to that is that they only charge two co-
pays for every three that are acquired at the community 
pharmacist. So I still have patients that appreciate and value 
my services enough to financially pay a third co-pay every 90 
days to do business with us, but there are a lot of people that 
that expense is being--they just cannot have that expense, and 
so they default to the mail-order pharmacy. So they put us on a 
very unfair playing field when they say that the consumers are 
free to go to their community pharmacy.
    I would challenge them, if they made it absolutely equal, 
where patients would choose to go to. I think I would win out.
    Chairman Kohl. Mr. Snow.
    Mr. Snow. Yes, Senator, I just would like to respond 
because there is a misunderstanding here. The PBM does not tell 
their customer how to design their benefits. Typically, when 
the customer, who is paying the bill--it actually is not us. It 
is the customer. It is the employer. It is the health plan. It 
is the State government entity. When they are paying the bill 
and they look at the difference in cost, they may choose to 
motivate the consumer with one less co-pay to choose a less 
expensive place for them, the payer. As George Paz said 
earlier, we lay out the choices for our customers to choose 
from, and they make all kinds of different choices. Everyone is 
different. But when these choices are made, it is not forced by 
a PBM.
    I can tell you, we are not the boss when it comes to 
serving our clients. We do what we are asked to do to serve our 
clients in the way they want to be served.
    Chairman Kohl. All right. Mr. Balto, one of the most 
lucrative prescription drug markets today is for specialty 
drugs that are used for the most serious medical conditions 
such as cancer. These drugs often require special handling, are 
often administered intravenously, and are generally much more 
expensive than other types of medication. Express Scripts and 
Medco combined will control over 50 percent of the specialty 
market after this merger. Should we be concerned about such 
concentration in the specialty market?
    Mr. Balto. Absolutely, and just to make things clear, you 
should be concerned whether the market share is 50 percent; you 
should be concerned whether the market share is 30 percent. 
Express Scripts and Medco, because they will have combined 150 
million covered lives, will have the kind of clout that they 
can go and force exclusivity arrangements upon manufacturers, 
which we have documented have led to increased prices; that 
they can have exclusive networks which will keep Mr. Bettiga 
and Ms. Sutter's pharmacies out of the market, other community 
specialty pharmacies out of the market; and instead of being 
able to go to your community specialty pharmacy, you are going 
to be dealing with a distant mail-order pharmacist. And the 
problems that Ms. Sutter has documented will exist in a much 
more severe fashion.
    Chairman Kohl. Mr. Paz, at a House hearing on this merger, 
you said that if you were required by the FTC to divest Medco's 
specialty pharmacy State as a condition of doing the deal, you 
would not do the deal. Is that correct?
    Mr. Paz. That is correct, Senator.
    Chairman Kohl. Why?
    Mr. Paz. Specialty pharmacy is the fastest-growing--it is 
lucrative in the sense that it is high cost. It is not our 
highest profit drivers. That still comes from generic drugs and 
moving patients into the lower-cost prescription programs. The 
specialty products in and of themselves are very important for 
our plan sponsors. These are the drugs that can cost $10,000, 
$15,000 a month for a member. They need to have their arms 
around it.
    There are many specialty pharmacies out there--which are 
part of our network, by the way--that specialize in a given 
disease state. However, there are also a lot of pharmacies that 
may only handle one person with a very limited disease.
    One of the advantages that the PBMs can have is that when 
we bring together pharmacists, doctors, and nurses that 
specialize in that disease state, we also bring in health care 
professionals and social workers to help the family. Often 
these diseases are very debilitating to a family, and helping 
that family get through the consequence of this is very, very 
important. We have these people that call on these people 
constantly and help them. It is a very important part of our 
business.
    Chairman Kohl. All right. We will turn to Senator Franken 
after this one question.
    One of the main arguments, Mr. Paz, for the merger is that, 
combined, you will be able to develop more innovation and new 
clinical tools and strategies for cutting costs. And yet we all 
know that innovation is the fruit of competition and that the 
more competitors, the more innovation, and the better the 
consumer is served. You seem to be making an argument to the 
contrary. Have you come up with a new concept for how 
capitalism works?
    Mr. Paz. Yes, when you look at UnitedHealthcare entering 
into this market in a very big way, CIGNA coming into our space 
in a very big way, Prime Therapeutics coming in in a very big 
way, innovation is key. We know our role. Our role is to drive 
down the cost of health care and improve health outcomes for 
the millions of Americans we service. We have to remain 
innovation. We have to continue to go to the market. Plan 
sponsors like Mr. Streator have many, many options. The day we 
start falling behind innovation is the day our market share 
will decline. We must stay focused on improving health care.
    Chairman Kohl. But competition is what breeds all of that 
urgency and activity. Would you suggest that if you could also 
take over Caremark and CVS that would be the best thing for 
everybody? If you control the whole market, would you then 
innovate in a way that would not be possible otherwise?
    Mr. Paz. I would tell you that there is plenty of--I do not 
think we need to buy CVS Caremark, but I would tell you that 
there is plenty of competition out there and that we are 
forced--on top of all that, Senator, CMS requires innovation. 
They are coming to us on a regular basis with new regulations 
and new requirements, and they are forcing us to go forward. We 
need to work very closely with CMS in order to come up with new 
programs, everything from e-prescribing to helping members 
access drugs to plan design change, on and on and on. It is 
required in our business.
    Chairman Kohl. OK. Mr. Balto.
    Mr. Balto. Can I go back to the conflict of interest issue 
in the specialty pharmacy area? Because I think it illustrates 
the problem here, because Mr. Paz owns a--you know, if he just 
owned a specialty pharmacy, fine, let us compete on the merits. 
But when he owns a PBM, he knows everything about his 
competitors. When his competitors get too large, he excludes 
them from the network. When his competitors get certain 
customers, he can focus and target those customers. It is those 
conflicting interests that create a tremendous problem here, 
and the merger makes it worse by combining his market clout 
with a dominant position in specialty pharmacy.
    Chairman Kohl. Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    Mr. Paz, two recent reports from the Health and Human 
Services Office of the Inspector General have found that PBMs 
are not adequately sharing savings with Medicare patients and 
that PBMs underestimate the rebates they receive from 
manufacturers, and this ultimately means higher Medicare costs 
for both beneficiaries and for taxpayers.
    You said in your testimony, ``Patients, not profits, must 
come first.'' Can you guarantee that the lion's share of the 
savings created by your merger would go to consumers?
    Mr. Paz. Under CMS regulations and the way we conduct our 
business, Senator, 100 percent of the rebates go back to the 
plan sponsors, and 100 percent of the network pricing goes into 
the plans. We make administrative fees, which are fully 
disclosed to our plan sponsors under CMS and Medicare rules.
    Senator Franken. Well, then, how is this Inspector 
General's report possible?
    Mr. Paz. I do not know the answer to that. I am not 
familiar with that. I would have to look into that. But I would 
tell you that in our business--and keep in mind we just 
completed an audit by CMS that came in and audited our 
business, and there were no issues with respect to transparency 
or passing through savings.
    Mr. Snow. The same is true for our business.
    Mr. Paz. I cannot speak to other players in the industry, 
Senator. I do not know what others may have done.
    Senator Franken. OK. Health and Human Services Office of 
the Inspector General found that PBMs are not adequately 
sharing savings with Medicare patients. I will probably follow 
up with a written question.
    Mr. Paz. If you do not mind, Senator, we will be happy to 
follow up with your office and get you some information on 
this.
    Senator Franken. I appreciate that. Thank you so much.
    Mr. Paz--I am sorry.
    Mr. Paz. My colleague just advised me that CMS actually 
disputed those findings. We will follow up with your office and 
get the information.
    Senator Franken. OK. Well, thank you.
    I am told that Senator Klobuchar mentioned earlier that 
over the past couple years 12 communities in Minnesota have 
lost their only outpatient pharmacy, and this is a huge loss 
for residents in those communities, especially because 
Minnesota winters are kind of rough, as you know. When elderly 
patients have to drive many miles in the dead of winter or have 
someone drive them to pick up their drugs, I worry. There are 
currently 141 rural communities in Minnesota that have only one 
pharmacy.
    Medicare Part D only requires that 70 percent of Medicare 
beneficiaries in rural areas have access to a pharmacy within 
15 miles. That means that 30 percent of beneficiaries could 
live more than 15 miles from their nearest pharmacy, and as I 
understand it, there is no upper limit. So that means someone 
could drive conceivably 80, 90 miles to a pharmacy.
    Do you agree this is a serious problem for health care in 
our country and in Minnesota?
    Mr. Paz. Rural pharmacies, Senator, are a very important 
part of our network. It is not only governed by CMS. CMS 
clearly sets standards. DOD also sets standards that we have to 
adhere to on behalf of our men and women in uniform and their 
beneficiaries. But our plan sponsors, just as importantly, set 
standards as well. We ought to make sure the record is 
straight. Forty percent of all prescription drugs are for acute 
medications, so even if everybody moved to mail-order, 40 
percent would still have to be filled. If you have a child with 
a toothache or you have some problem, you cannot wait to get 
something in the mail. We would never suggest that you do. 
Those drugs have to be there. They have to be accessible, and 
they have to be ready----
    Senator Franken. Right, which is----
    Mr. Paz.--and so we have to have----
    Senator Franken.--an argument, I think, that you could 
make--I think you are not making an argument that----
    Mr. Paz. I am trying to make an argument that we have to 
keep the rural pharmacies in business, that it is our job to do 
a very careful balancing.
    Senator Franken. And you think this merger will help keep 
the rural pharmacies in business, Ms. Sutter? I am sorry to--
you can feel free to answer after Ms. Sutter does.
    Ms. Sutter. The issue is that the rhetoric of these 
gentlemen just does not match the reality of what we are 
dealing with. We have got comments after comments in my written 
statement about what we are dealing with with these--40 
percent--if 40 percent are acute meds, I cannot stay in 
business only being basically subcontracted to these gentlemen. 
My patient is the center of this equation. I am with the 
physician there taking--part of the health care team taking 
care of them. They are the ones that are on the side providing 
some assistance in adjudicating a claim. This idea that 
companies like this can be at the center of resolving health 
care issues in this country is just ridiculous, quite frankly.
    Senator Franken. I think they are just different roles. But 
I, too, have received tons of calls and letters from community 
pharmacists in Minnesota who are concerned about this.
    Mr. Paz. I think when you look back, we have done several 
acquisitions over our history. In 1998, we bought Value Rx, a 
Minnesota-based company. We have done several acquisitions 
since then. Almost every time we have been accused that savings 
would not pass along to the plan sponsors. I think Mr. Streator 
and all of my clients would contend and argue that what we do, 
as Mr. Streator said in his comments, his drug trends were less 
than--were negative. They were not zero or 1 percent. They were 
negative. That means the cost of their drugs actually came down 
year over year, is to help them choose the right generics, the 
right channels, and the right outcomes in order to drive those 
costs down. And so I do----
    Senator Franken. Mr. Streator, you are at a university, is 
that it?
    Mr. Streator. Correct, the Ohio State University.
    Senator Franken. OK. That is in Columbus, Ohio.
    Mr. Streator. Correct.
    Senator Franken. That is a big community, right? So what we 
are really talking about, if I recall my question, was about 
small rural communities.
    Mr. Paz. Mr. Streator services clients all across the State 
of Ohio, even in rural areas of Ohio.
    Mr. Streator. That is correct. We have 56,000 members in 
our health plan, and they are in every county in Ohio. We also 
work in the Rx Ohio Collaborative that has over 500,000 members 
all across the country. So, yes, we do need community 
pharmacies.
    Senator Franken. Well, thank you. I appreciate all your 
testimony and all your answers, and I will get back to you with 
more because I did not have the two rounds, but I have got to 
go myself, and I appreciate all of your being here and I 
appreciate your calling this hearing, Mr. Chairman. Thank you 
all.
    Chairman Kohl. Thank you, Senator Franken.
    Mr. Bettiga, do you want to make a comment or two before we 
begin to wrap it up?
    Mr. Bettiga. Well, I would like to make a comment to what 
we were just talking about here because at the end of the day, 
while I understand that the plan sponsors may be OK in this, at 
the end of the day the rates to community pharmacies, 
especially those in the rural areas, et cetera, are dictated by 
the PBMs. And they talk a lot about past activities with 
mergers, et cetera. This is not about the past. This is about 
what happens in the future with one larger entity and what 
types of rates they will impose on retail and community-based 
practice, and what does that ultimately mean then to 
accessibility for those rural patients, those underserved 
patients that Senator Franken was referencing? And there is a 
huge concern with that because we just do not know what that 
next game is going to be.
    Chairman Kohl. Anybody else want to make a comment?
    [No response.]
    Chairman Kohl. I think we have really aired this thing very 
well, and I appreciate your coming here and giving us your very 
frank expressions of interest and concern about the direction 
of this industry.
    We will leave the record open for a week. I would again 
like to thank all of you for being here today. You have added 
an awful lot to the issue, and once again our appreciation. 
Thank you.
    [Whereupon, at 4:39 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follows.] 




                                 
