Pharmacy Benefit Managers: Early Results on Ventures with Drug
Manufacturers (Letter Report, 11/09/95, GAO/HEHS-96-45).

Pursuant to a congressional request, GAO reviewed mergers between
pharmacy benefit managers (PBM) and pharmaceutical manufacturers,
focusing on: (1) PBM role in the health care industry; (2) the mergers'
objectives and effect on competition; and (3) the extent to which PBM
have given preference to their manufacturer partners' drugs.

GAO found that: (1) drug manufacturers have allied with PBM to help
maintain their profits in an increasingly competitive marketplace; (2)
PBM help health plan sponsors administer prescription drug benefits and
help them contain their overall drug costs; (3) manufacturers rely on
their PBM partners to help them develop new programs for treating
specific diseases and increase the market share for their drugs; (4)
critics of PBM alliances are concerned that the companies involved could
act to restrict competition among manufacturers for inclusion on PBM
formularies; (5) variations exist in the extent to which PBM have given
preferences to their manufacturer partners' drugs; and (6) the Federal
Trade Commission monitors PBM alliances to help ensure that PBM maintain
competitive processes that allow other manufacturers to compete for
low-cost designation for their drugs on PBM formularies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-96-45
     TITLE:  Pharmacy Benefit Managers: Early Results on Ventures with 
             Drug Manufacturers
      DATE:  11/09/95
   SUBJECT:  Pharmaceutical industry
             Competition limitation
             Cost control
             Drugs
             Unfair competition
             Monitoring
             Employee medical benefits
             Health insurance
             Sales promotion
             Cost effectiveness analysis

             
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Cover
================================================================ COVER


Report to the Honorable
Ron Wyden, House of Representatives

November 1995

PHARMACY BENEFIT MANAGERS - EARLY
RESULTS ON VENTURES WITH DRUG
MANUFACTURERS

GAO/HEHS-96-45

Pharmacy Benefit Managers

(101316)


Abbreviations
=============================================================== ABBREV

  ACE - angiotensin-converting enzyme
  APhA - American Pharmaceutical Association
  AWP - average wholesale price
  DPS - Diversified Pharmaceutical Services
  DUR - drug utilization review
  FTC - Federal Trade Commission
  HMO - health maintenance organization
  NACDS - National Association of Chain Drug Stores
  NSAID - nonsteroidal anti-inflammatory drug
  P&T - pharmacy and therapeutic (committee)
  PBM - pharmacy benefit manager
  SSRI - selective seretonin reuptake inhibitor

Letter
=============================================================== LETTER


B-257388

November 9, 1995

The Honorable Ron Wyden
House of Representatives

Dear Mr.  Wyden: 

Some of the largest pharmaceutical manufacturers have recently merged
or formed alliances with some of the largest companies that manage
prescription drug benefits for health plans, called pharmacy benefit
managers (PBM).  These ventures represent a recent trend in the
pharmaceutical marketplace that involves vertical integration--
manufacturers merging or allying with companies that represent buyers
of the manufacturers' products.  The ventures gained immediate
attention from industry observers not only because of their size but
also because of concerns about their effect on competition in markets
for drug manufacturers' products and PBMs' services.  Some industry
observers contended that the ventures would reduce competition in
both markets because the PBMs involved would give preference to their
manufacturer partners' drugs over those sold by competing
manufacturers.\1 Such preference could include collaboration between
a manufacturer and PBM partner to ensure that the manufacturer's
drugs were the most economical for the PBM's customers. 

Because of these concerns, you requested that we study the mergers
and alliances to determine (1) the role of the PBMs in the health
care industry; (2) the objectives of these ventures; (3) specific
concerns about the effect of these ventures on competition in markets
served by drug manufacturers and PBMs; and (4) the extent, if any, to
which the PBMs have given preference to their manufacturer partners'
drugs. 

To address the study's objectives, we reviewed pertinent literature,
interviewed officials of companies involved in recent mergers and
alliances, and obtained documents from the companies related to these
ventures.  (See app.  I for additional information on the study's
scope and methodology.) We also contacted Wall Street analysts,
pharmaceutical economists, health plan sponsors, and pharmaceutical
trade associations, such as the National Association of Chain Drug
Stores (NACDS) and the American Pharmaceutical Association (APhA). 
Further, we obtained information from Medco Containment Services,
Inc.  and Diversified Pharmaceutical Services, Inc.  (DPS) on
formularies they managed before and after their mergers with Merck &
Co., Inc.  and SmithKline Beecham Corporation, respectively. 

Our work was performed between June 1994 and September 1995 in
accordance with generally accepted government auditing standards. 


--------------------
\1 For the purpose of this report, "partner" refers to any
manufacturer or PBM involved in a merger or alliance. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Drug manufacturers have merged or allied with PBMs because they
believe that the PBMs' market power will help maintain the
manufacturers' profits at a time when their drugs face increased
competition.  The role of PBMs in health care has evolved from simply
administering prescription drug benefits for health plan sponsors to
helping them contain their overall drug costs.  Representing millions
of health plan enrollees, PBMs have developed formularies for many
large health plans and have been able to obtain significant rebates
or discounts for their customers from both drug manufacturers and
pharmacies. 

To bolster profits, manufacturers are relying on their PBM partners
to help them increase market share for their drugs and develop new
programs for treating specific diseases.  To increase market share,
manufacturers anticipate that their partner companies will include
their drugs on formularies--a listing of preferred prescription drugs
by therapeutic class often with cost designations--that the PBMs
manage.  The manufacturers will also join their PBM partners in
developing cost-effective treatment programs for specific diseases
that affect many of the health plan enrollees the PBMs cover and
eventually sell such programs as products in the health care
marketplace. 

Critics of the mergers and alliances have focused on how PBMs may
help their drug manufacturer partners increase market share. 
Manufacturers can increase the sales and market share of their drugs
by obtaining their inclusion, as well as a low-cost designation, on
their PBM partners' formularies.  A primary concern is that the
companies involved in these ventures will collaborate or act to
prohibit other manufacturers from effectively competing for inclusion
or low-cost designation of their drugs on the PBMs' formularies.  The
Federal Trade Commission's (FTC) review of the merger between Eli
Lilly and Company and PCS Health Systems, Inc.  resulted in a consent
agreement between FTC and Lilly that established safeguards against
such behavior. 

Our review of changes in the formularies managed by Medco and DPS
showed differences in the extent to which these PBMs have given
preference to their respective partners' drugs.  Of the eight
products that represent almost all Merck sales of brand-name products
to Medco enrollees, only one was on Medco's formulary in January
1993.  In May 1993, 2 months before reaching their decision to merge
and 6 months before closing their merger, Merck and Medco established
an agreement to add the remaining seven products to Medco's
formulary.  After the merger, from 1994 to 1995, four of these eight
drugs faced less competition after non-Merck products were dropped
from Medco's recommended formulary.  From January 1994, several
months before its merger with DPS, to January 1995, SmithKline
Beecham experienced little change in the number and cost designation
of its drugs on DPS' recommended formulary. 

The changes in Medco's formulary that favor Merck drugs do not
necessarily demonstrate that Medco automatically gave preference to
Merck drugs without considering competitors' products.  Because
Medco's negotiations with Merck and with other manufacturers are
proprietary, we could not verify how Merck drugs achieved their
inclusion and cost designations on Medco's formulary.  However, the
extent to which Medco gave preference to Merck products supports
FTC's decision to continue monitoring the Merck/Medco merger and
other ventures between drug manufacturers and PBMs.  Such monitoring
will help to ensure that the PBMs maintain competitive processes that
allow manufacturers, other than their partners, to compete for
inclusion and low-cost designation for their drugs on the PBMs'
formularies. 


   BACKGROUND
------------------------------------------------------------ Letter :2

PBMs administer the prescription drug part of health insurance plans
on behalf of plan sponsors, such as self-insured employers, insurance
companies, and health maintenance organizations (HMO).  In 1989, PBMs
managed prescription drug benefits for about 60 million people.  In
1993, they managed drug benefits for about 100 million, or almost 40
percent of the U.S.  population.\2 Should this rate of growth
continue, by the end of 1995 PBMs will provide services for health
plans covering about 50 percent of the population. 

While the number of people covered by PBMs has increased
significantly, the market for PBMs' services continues to involve a
small number of firms.  Although there are over 40 PBMs in the United
States, some estimates suggest that the 5 largest manage benefits for
over 80 percent of the health plan enrollees covered by PBMs.\3 They
include PCS Health Systems, Medco, Value Rx, DPS, and Caremark
International Inc.'s Prescription Service Division.  All five PBMs
were included in our study. 

A common technique PBMs use to manage pharmacy care is formulary
development.  A formulary is a list of prescription drugs, grouped by
therapeutic class, that are preferred by a health plan sponsor. 
Drugs are included on a formulary not only for reasons of medical
value but also on the basis of price.\4 PBMs provide physicians and
others with printed formularies that often use dollar sign
designations to identify drugs according to their relative cost
within a therapeutic class.  For example, "$" can signify a low-cost
product, while "$$$$" can signify a higher-cost product.\5

Both the inclusion of a drug on a formulary and its cost designation
can affect the utilization of a manufacturer's products.  PBMs and
the health plan sponsors they represent encourage physicians to
prescribe lower-cost formulary drugs over both nonformulary drugs and
higher-cost formulary drugs for health plan enrollees.  The extent to
which the PBMs and their sponsors are successful in obtaining
physician compliance with formularies can increase the sales and
market share within a therapeutic class of a prescription drug,
particularly for products on the formulary with the lowest cost
designations.  Because of this potential effect on the sales and
market share of a drug, manufacturers offer PBMs rebates on drugs
that face competition in return for both inclusion on a formulary and
a low-cost designation. 

Because of the relationship between formularies and drug sales, FTC
has reviewed the recent mergers on antitrust grounds to determine
their potential impact on competition in the markets involved.\6
Although FTC did not challenge mergers between Merck and Medco or
SmithKline Beecham and DPS, it did challenge the merger that followed
between Lilly and PCS Health Systems.  FTC entered into a consent
agreement with Lilly that established safeguards against the merger's
potential anticompetitive effects and also stated that it would
continue to monitor the integration of drug manufacturers and PBMs. 


--------------------
\2 Sanford C.  Bernstein & Co. 

\3 Sanford C.  Bernstein & Co.; Deloitte & Touche LLP. 

\4 "The Changing Environment for U.S.  Pharmaceuticals:  The Role of
Pharmaceutical Companies in a Systems Approach to Health Care,"
Boston Consulting Group (Apr.  1993), p.  18. 

\5 Jeannie Mandelker, "Formularies:  Balancing Cost and Quality,"
Business & Health, Special Report (1995), p.  25. 

\6 FTC's role in antitrust enforcement is based on (1) section 5 of
the Federal Trade Commission Act, authorizing the Commission to
review the actions of companies that may result in "unfair methods of
competition in or affecting commerce"; and (2) section 11 of the
Clayton Act, authorizing the Commission to enforce compliance with
certain provisions of that act, including section 7, which prohibits
acquisitions, the effect of which "may be substantially to lessen
competition, or tend to create a monopoly."


   PBMS CONTAIN CUSTOMERS' DRUG
   COSTS
------------------------------------------------------------ Letter :3

PBMs manage prescription drug coverage on behalf of health plan
sponsors.  Their objective is to provide high- quality pharmaceutical
care at the lowest possible cost.  PBMs are a relatively new type of
firm that became a major market force only during the late 1980s. 
Their precursors were firms that provided prescription claims
processing or mail-service pharmacy on behalf of insurers.  While
PBMs continue to provide these services, many provide additional
services, such as formulary development and management, the
development of pharmacy networks to serve health plan enrollees,
negotiating drug rebates with manufacturers, generic substitution,
and drug utilization review.  Many PBMs are also developing products
called "disease management" programs, which will attempt to provide
the most cost-effective treatments for specific diseases.\7

PBMs represent health plans and their enrollees in dealing with other
participants in the prescription drug market.  For example, a PBM
negotiates with drug manufacturers to obtain rebates for a plan
sponsor.  PBMs also negotiate with retail pharmacies to obtain
discounts on prescription drug prices and dispensing fees for health
plan enrollees.\8 In exchange for such services, a PBM may receive a
percentage of manufacturer rebates or a fee per prescription.  Figure
1 shows the typical network in which a PBM and other participants
operate. 

   Figure 1:  The PBM Network

   (See figure in printed
   edition.)

PBMs we studied operate in networks that are structured similarly to
the network shown in figure 1 and use several similar techniques to
help control their customers' drug costs.  These techniques are
applied in providing services related to formularies, pharmacy
networks, claims administration, drug utilization review, and disease
management. 

PBMs use formularies to help control drug costs by (1) encouraging
the use of formulary drugs through compliance programs that inform
physicians and enrollees about which drugs are on the formularies;
(2) limiting the number of drugs a plan will cover; or (3) developing
financial incentives to encourage the use of formulary products. 
Although PBMs develop formularies that they recommend to customers,
health plan sponsors may work with them to develop customized
formularies.  In developing formularies, PBMs rely on pharmacy and
therapeutic (P&T) committees, consisting of pharmacists and
physicians, to analyze the safety, efficacy, and substitutability of
prescription drugs.  PBMs then rely on the recommendations of the P&T
committee to determine the number of drugs to include on the
formulary to give physicians a sufficient number of treatment
options. 

Formularies can be open, incentive-based, or closed.  Open
formularies are often referred to as "voluntary" because enrollees
are not penalized if their physicians prescribe nonformulary drugs. 
Thus, under an open formulary, a health plan sponsor provides
coverage for both formulary and nonformulary drugs.\9 Unlike an open
formulary, an incentive-based formulary provides enrollees financial
benefits if their physicians prescribe formulary drugs.  Under this
arrangement, the health plan sponsor still reimburses enrollees for
nonformulary drugs but requires them to make higher co-payments than
for formulary drugs.  A closed formulary takes these financial
incentives one step further by limiting coverage to formulary drugs
only.  Therefore, if an enrollee's physician prescribes a
nonformulary drug, the enrollee may have to pay the full cost of that
prescription.  However, the health plans cover nonformulary products
when physicians determine that they are medically necessary for their
patients. 

PBMs we studied reported that the vast majority of formularies they
manage are open.  For example, Medco officials told us that of the
more than 2,000 plans Medco represents, only 4 of the plans
(comprising just 3 percent of the enrollees covered by Medco) have
adopted either an incentive-based or closed formulary.  In another
example, DPS officials determined that of about 90 formularies DPS
manages (mainly for HMOs), about one-third are incentive-based or
closed.  However, officials of these PBMs expect that a greater
number of health plan sponsors will adopt incentive-based and closed
formularies in the future because of their potential to help reduce a
plan's drug costs.  Incentive-based and closed formularies increase
competition among drug manufacturers with competing drugs to get
their drugs on PBMs' formularies. 

PBMs also contract with networks of pharmacies to obtain discounts
per prescription for the health plan enrollees PBMs represent.  For
each prescription, a PBM typically reimburses participating
pharmacies according to a formula based on a drug's average wholesale
price (AWP) less a percentage, plus a dispensing fee.\10 PBMs also
encourage pharmacies to support other cost-reduction techniques, such
as substituting a generic for a name brand when appropriate.\11
Pharmacies accept set levels of reimbursement and other PBM
cost-reduction techniques in order to attract or retain the potential
customer base represented by a PBM's millions of enrollees. 

In addition, PBMs we studied can reduce their customers'
administrative costs by using on-line computerization to verify
claims and process payments.  This is highly efficient compared with
methods that rely on mailed-in claims.  PBMs provide their customers'
enrollees with magnetically encoded cards that a pharmacist uses to
confirm their health plan membership and to access the PBM screen on
the pharmacy's computer terminal.  This screen lists the drugs on a
plan's formulary, any requirements for enrollee co-payments, and
allows the pharmacist to request payment on-line from the PBM after
dispensing a prescription. 

PBMs we studied also conduct retrospective and prospective drug
utilization review (DUR) both to enhance the quality of
pharmaceutical care and to potentially generate savings.\12

Under retrospective review, PBMs study the drug utilization
statistics of a customer's enrollees to identify any instances in
which physicians prescribed potentially inappropriate medications. 
If PBMs identify inappropriate patterns of prescribing or
consumption, they will attempt to contact and educate physicians
about more appropriate and potentially cost-effective treatments. 
Under prospective review, PBMs use a computer link with network
pharmacists to review each prescription before it is dispensed. 
Prospective DUR helps PBMs to identify whether there is a generic or
formulary alternative to the prescribed drug and whether the drug
will duplicate an existing prescription or will adversely interact
with other drugs the patient is using.  If a nonrecommended,
redundant, or potentially harmful drug is identified, the pharmacist
is notified on the computer screen.  PBMs we studied are working to
add physicians to this on-line network to help reduce prescribing
errors by communicating DUR results, as well as patients' medical
histories, as care decisions are being made. 

PBMs we studied also plan to help contain spending for chronic
conditions, such as asthma and diabetes, by developing "disease
management" programs to manage the care of enrollees with these
illnesses.  To develop these programs, PBMs are evaluating various
treatment options, or therapies, discussed in existing medical
research to identify those that are associated with better therapy
management as well as low overall spending.  PBMs then intend to
educate both health plan enrollees and their physicians about these
more cost-effective treatments and to monitor the degree of their
compliance with related protocols over time.  For example, officials
of one PBM explained that when an enrollee enters its program for
diabetes, the PBM notifies the enrollee's physician and provides both
the enrollee and the physician information on its disease management
protocol.  Regarding one such treatment, the PBM seeks to help reduce
the risk of complications and costly additional care by encouraging
enrollees to monitor their glucose levels and to adjust their insulin
intake more frequently than is commonly recommended.\13


--------------------
\7 See pp.  8-11 for additional information on these services. 

\8 See pp.  7 and 8 for additional information on such discounts. 

\9 According to APhA, during 1994, over 90 percent of formularies
managed by PBMs were open. 

\10 Drug manufacturers suggest a list price that wholesalers charge
pharmacies.  The average of the list prices, collected for many
wholesalers, is called a drug's AWP.  The dispensing fee covers a
pharmacy's labor and overhead costs, such as pharmacists' salaries,
drug packaging, rent, and utilities. 

\11 The involvement of pharmacists in PBM efforts to switch such
prescriptions have raised questions about how independent pharmacists
should be.  A recent agreement reached between Merck/Medco and 17
state attorneys general requires that Medco pharmacists disclose
their affiliation with Merck in connection with such activities. 
Officials of the PBMs studied emphasized that they do not require, or
provide special incentives for, generic drugs manufactured by their
partner companies. 

\12 For additional information on the application of DUR, see
Prescription Drugs:  Automated Prospective Review Systems Offer
Potential Benefits for Medicaid (GAO/AIMD-94-130, Aug.  5, 1994). 

\13 See pp.  10 and 11 for additional information related to disease
management. 


   MANUFACTURERS SEEK TO INCREASE
   MARKET SHARE AND DEVELOP
   DISEASE MANAGEMENT PROGRAMS
------------------------------------------------------------ Letter :4

The growth of PBMs and other industry developments have forced drug
manufacturers to find ways to prevent profits from declining.  At the
same time that more drugs on the market face competition, purchasers
have become more price-focused and organized.  In particular, PBMs
and other buyers have been able to use formularies to obtain
significant rebates from manufacturers.  Rather than lose market
share, manufacturers have provided discounts on drugs that face
competition to obtain inclusion and low-cost designation on PBMs'
formularies.  Furthermore, many manufacturers believe that, in the
future, pharmaceutical care will involve disease management. 
Currently, prescription drugs are managed separately from other
components of health care.  This approach may result in higher
overall spending for a health plan sponsor than the management of all
aspects of care for plan enrollees with similar illnesses. 

In response to a changing environment, large pharmaceutical
manufacturers have vertically integrated into the market for PBM
services.  Merck was the first manufacturer to acquire a PBM partner
when it purchased Medco in November 1993.  In 1994, SmithKline
Beecham acquired DPS and Lilly acquired PCS.  Rather than acquire a
PBM, Pfizer, Inc.  contracted to form strategic alliances with two
PBMs, Caremark International\14 and Value Rx--plus Value Rx's parent
company, Value Health, Inc.  Table 1 provides information about each
merger or alliance.  (See app.  II for additional information on the
companies involved in these ventures.)



                          Table 1
          
          Companies Involved in Recent Mergers and
                         Alliances

                                         Covered
                                           lives     Price
                Manufactur              (million  (billion
Date            er          PBM(s)            s)        s)
--------------  ----------  ----------  --------  --------
November 1993   Merck       Medco             42      $6.6

May 1994        SmithKline  DPS               14       2.3
                Beecham

May 1994        Pfizer      Value Rx          32        \a
                            Caremark          13

November 1994   Lilly       PCS               56       4.0
----------------------------------------------------------
Note:  The number of lives covered by each PBM may be overstated
because of double counting that results from some health plan
enrollees being covered by more than one PBM. 

\a Alliance terms were undisclosed. 

The manufacturers believe that merging or allying with a PBM will
provide competitive advantages that will enable them to maintain
profits.  Among other things, each venture provides the manufacturer
access to the PBM's formularies, which can help a manufacturer
increase market share while developing programs to compete in a
market for disease management products.  For example, formulary
access can help to increase the market share of a manufacturer's
drug, particularly if it was not on the PBM partner's formulary
before a merger or alliance.  Market share can be further enhanced if
the manufacturer gives the PBM sufficient price discounts to gain a
low-cost designation for its drug on the PBM's formularies. 
According to representatives of several PBMs, their contacts with
physicians to encourage them to prescribe drugs that are on
formularies and have low-cost designations usually result in the
physicians' compliance.  Because of the increase in market share
resulting from formulary inclusion and low-cost designation,
manufacturers may also reduce the sales and marketing costs for a
product. 

The manufacturers also believe that PBMs will provide them the
cornerstones of disease management programs, namely the abilities to
uncover the most cost-effective treatments for various diseases, such
as asthma and diabetes, and to ensure that patients comply with them. 
Specifically, the manufacturers and their PBM partners seek to
contain health plan sponsors' overall health care costs by
establishing programs to encourage more cost-efficient care for
patients with particular illnesses.  The extent to which prescription
drugs, particularly those sold by the manufacturer partners, will be
used in these disease management programs will depend on their
cost-effectiveness as part of overall treatment.\15

However, because the ventures are new, it is too soon to determine
whether each manufacturer has achieved its objective of enhancing
profits by increasing market share and marketing disease management
programs.  Among the manufacturers we studied, only Merck has
acknowledged an increase in its share of the drug sales managed by
its PBM partner.  In addition, the manufacturers and their PBM
partners are in varying stages of developing disease management
products and the success of these products is not yet known.  Medco
has six disease management programs either fully operational or in
the pilot stage, including programs for diabetes and asthma.\16 The
other PBMs have launched either diabetes or asthma programs. 
However, all the PBMs are developing additional programs to treat
these illnesses and others, including depression, ulcers, and
cardiovascular disease. 


--------------------
\14 Caremark's relationship with Pfizer is a part of Caremark's Drug
Alliance Program, which also includes Rhone-Poulenc Rorer, Inc.,
Bristol-Myers Squibb Company, and Lilly. 

\15 A number of drug manufacturers are developing their own
independent disease management programs, and not all PBM disease
management programs are developed in concert with a manufacturer. 

\16 Other Medco programs cover chronic obstructive pulmonary disease,
allergic rhinitis, smoking cessation, and hypercholesterolemia. 


   CONCERNS ABOUT REDUCED
   COMPETITION
------------------------------------------------------------ Letter :5

Critics of the recent mergers and alliances believe that the ventures
will reduce competition in markets for pharmaceutical and PBM
services.  This concern is based on several contentions.  First,
competition in the pharmaceutical market would be reduced as aligned
PBMs and their manufacturer partners collaborate to ensure inclusion
and low-cost designation for the partners' drugs over competitors' on
the PBMs' formularies.  This preference for a partner's products
would preclude other manufacturers from effectively competing with
its products on the formularies managed by the PBM partner.  Such
preference would be exacerbated as the PBMs move to more restrictive
formularies.  Second, competition in the market for PBM services
would be substantially lessened as the aligned PBMs would be able to
obtain their partners' products at extremely advantageous prices over
nonaligned PBMs.  This would give additional market power to the
aligned PBMs, which already cover most health plan enrollees, and
make it more difficult for new PBMs to enter the market or for
smaller, existing PBMs to stay competitive. 

Several industry analysts contend, however, that it is too soon to
determine the overall effects, either negative or positive, of the
ventures on competition in the markets for either pharmaceutical
products or PBM services.\17 For example, these analysts contend that
it is not possible to determine in the short term how competitive new
or existing PBMs may be in this market.  They believe that the PBM
market may become more competitive as health plan sponsors begin to
analyze the effectiveness of PBMs that represent them.  They noted
that if the PBMs that are the largest now do not continue to perform
for their customers in controlling drug costs, the customers can
switch to other PBMs. 

Industry analysts are more concerned, however, about the influence
drug manufacturers may have on their PBM partners' formulary
decisions.  They believe that any collaboration between aligned
companies, or actions taken by a PBM partner, to ensure competitive
advantages for the manufacturer partner's drugs over competitors'
could reduce competition significantly in the manufacturer partner's
market, such as the market for an individual therapeutic class of
drugs.  Competitive advantages can be gained by eliminating
opportunities for other manufacturers to compete for inclusion and
low-cost designation for their drugs on the PBM partner's
formularies. 

FTC reviewed the recent mergers to determine their potential impact
on the markets for drug manufacturers and PBMs.\18 It issued a
complaint against the Lilly/PCS merger and determined that safeguards
were necessary to ensure that Lilly and PCS maintain a competitive
process for determining which drugs to include on PCS' formulary and
the drugs' cost designations.  Accordingly, FTC entered into a
consent agreement with Lilly, requiring that (1) PCS maintain an
"open" formulary, defined as one that includes any drug that PCS' P&T
committee deems appropriate; (2) PCS appoint an independent committee
to oversee this formulary, consisting of a majority of persons
outside of either Lilly or PCS; (3) Lilly and PCS establish
safeguards that prevent each from sharing nonpublic information
concerning other drug manufacturers' and other PBMs' bids, proposals,
contracts, prices, rebates, discounts, or other terms of their
mergers; and (4) PCS accept all discounts, rebates, or other
concessions offered by other manufacturers and reflect these when
determining the ranking of products on the open formulary. 

Manufacturers we studied and their PBM partners told us that they had
established safeguards similar to those accepted by Lilly.  Like PCS,
the other PBMs indicated that they offer an open formulary, which the
majority of payers adopt.  With one exception, the PBMs also noted
that they had already established independent P&T committees.\19
Furthermore, officials for each PBM said that they had established
"fire walls" that prevent the PBMs from providing their manufacturer
partners with confidential price information, such as bids from other
manufacturers.\20 Industry observers agree that these fire walls are
the most essential part of the Lilly/PCS agreement for ensuring a
competitive bidding process.  Officials from each PBM also told us
that they continue to consider bids from manufacturers whose drugs
compete with drugs sold by their respective partners.  Since the
Lilly agreement, Medco has developed written policies that establish
and govern fire walls as well as other safeguards that are intended
to address FTC's concerns. 

Critics of the Lilly/PCS merger have contended that the safeguards
established by FTC in the consent agreement are inadequate to address
their concerns about the venture's potential anticompetitive effects. 
For example, before final approval of the consent agreement, NACDS
contended that the agreement did not address the issue of aligned
PBMs having the option to develop closed formularies that could favor
their manufacturer partners' drugs and exclude those sold by
competitors.  Furthermore, NACDS believed that the fire walls were
inadequate to prevent the exchange of sensitive competitive
information between aligned companies, including market shares for
specific drugs.  In addition, NACDS expressed concern that the
agreement did not address the merger's potential effect on drug
prices paid by retail drug stores and consumers. 

In addition to approving the Lilly consent agreement, FTC said that
it would continue to monitor several aspects of vertical integration
of drug manufacturers and PBMs.  Such monitoring includes whether and
to what extent products of drug manufacturers, especially those not
vertically integrated with PBMs, are prohibited (foreclosed) from
formularies managed by aligned PBMs.  The monitoring also includes
whether and to what extent the vertical integration of drug
manufacturers and PBMs results in anticompetitive interaction among
integrated companies as well as any increase in drug prices or
reduction in choice of drugs for consumers. 

Determining whether PBMs involved in these ventures maintain fire
walls and refrain from collaborating to give preference to their
manufacturer partners' drugs requires access to proprietary
information.  Such information includes the process used by a PBM to
consider which drugs are to be added to or deleted from a formulary,
the reasons for changes, and whether competitive bids were sought and
considered.  To obtain such information requires an extensive right
of access, such as that given to FTC. 


--------------------
\17 Economic analysis can help determine conditions under which
vertical integration may restrict or enhance competition.  However,
these industry analysts contend that because the ventures are so
recent, the empirical data necessary for such an analysis, including
changes in drug prices and health plan drug costs, are currently
limited. 

\18 FTC has the authority to review again mergers that have been
consummated.  It has made public statements that it will continue to
monitor these markets.  (See pp.  13 and 14 for information on these
statements.)

\19 Caremark was the exception.  Company officials contended that an
independent committee was unnecessary because they consult many
sources outside the firm on formulary development and health plan
sponsors ultimately determine which drugs to include on the
formulary. 

\20 DPS officials specifically noted that SmithKline Beecham
voluntarily adopted such a fire wall in response to FTC's review of
its acquisition of DPS. 


   FORMULARY CHANGES SHOW MIXED
   RESULTS ON PBM PREFERENCE FOR
   PARTNERS' DRUGS
------------------------------------------------------------ Letter :6

Absent proprietary information from PBMs related to formulary
development, changes in formularies can be reviewed to determine
whether there are signs of potential problems.  For example, if a
pattern developed in which a manufacturer partner's drugs received
the lowest-cost designations on its PBM partner's formularies, it
would raise questions from competing manufacturers and others about
the process used by the PBM to make such formulary decisions. 

We reviewed formularies managed by Medco and DPS several months
before and after their mergers to determine any changes in the
preference given to their respective manufacturer partner's products. 
Two months before concluding its agreement to merge with Merck, Medco
increased its preference for Merck drugs by adding a number of
Merck's large-dollar-volume products to its formulary and dropping
several drugs that competed with Merck's drugs.  In contrast, the
number of SmithKline Beecham's products on DPS' formulary and their
cost designations changed little. 


      MERCK GAINS ACCESS TO MEDCO
      FORMULARY
---------------------------------------------------------- Letter :6.1

In January 1993, few Merck products were on Medco's recommended
formulary.  Of the eight Merck products that represent almost all
Merck sales to Medco enrollees, only Proscar was on Medco's
formulary.\21 However, according to Medco officials, Merck and Medco
established an agreement to add the remaining seven products to
Medco's formulary during May 1993, 2 months before reaching their
decision to merge and 6 months before closing their merger. 
Specifically, these products were Prinivil and Vasotec, two
cardiovascular drugs known as ACE inhibitors;\22 Mevacor and Zocor,
two cholesterol-lowering agents; Prinzide and Vaseretic, two
antihypertensive combination drugs; and Pepcid, an antiulcer drug
known as a histamine H2 receptor antagonist.  Including these
products increased the number of drugs in their respective
therapeutic classes on the formulary, except for Prinivil and
Prinzide, which replaced their chemical equivalents, Zeneca's Zestril
and Zestoretic. 

Table 2 shows changes to Medco's formulary from 1994 to 1995 that
could benefit the sale of Merck products.  For example, between 1994
and 1995 one cardiovascular drug, Monopril, was dropped from the
formulary.  This change left Prinivil and Vasotec with fewer
competitors on the formulary and Prinivil with one, rather than two,
competitors with the lowest cost designations.  Not only have
cardiovascular drugs been Merck's top-selling class of drugs in
worldwide sales, but Vasotec has been Merck's number one sales
product.  Table 2 also shows that, by 1995, Zocor and Mevacor faced
fewer competitors after three non-Merck products were dropped from
the cholesterol-lowering class.  As with the cardiovascular class of
drugs, Merck has dominated worldwide sales in the
cholesterol-lowering class. 



                          Table 2
          
             Medco Formulary Changes, 1993-1995

Class/
product       1993      1994      1995      Manufacturer
------------  --------  --------  --------  --------------
ACE inhibitors
----------------------------------------------------------
Zestril       $$                            Zeneca

Monopril      $$        $$                  Bristol-Myers
                                            Squibb

Lotensin      $$        $$        $$        Ciba

Accupril      $$        $$$$      $$$       Parke-Davis

Capoten       $$$$      $$$$      $$$$      Bristol-Myers
                                            Squibb

Prinivil                $$        $$        Merck

Vasotec                 $$$       $$$       Merck


Antihypertensive combinations
----------------------------------------------------------
Hydropres\a   $         $         $         Merck

clonidine     $$        $         $         generic

hydralazine/  $$        $         $         generic
HCTZ

Zestoretic    $$                            Zeneca

methyldopa/   $$        $         $         generic
HCTZ

propranolol/  $$        $         $         generic
HCTZ

Capozide      $$$       $$$$                Bristol-Myers
                                            Squibb

Prinzide                $$        $$        Merck

Lopressor               $$        $$        Ciba
HCT

Timolide                $$        $$        Merck

Vaseretic               $$$       $$        Merck

Corzide                 $$$       $$$$      Bristol-Myers
                                            Squibb

Ziac                              $$        Lederle

Lotensin HCT                      $$        Ciba


Cholesterol-lowering agents
----------------------------------------------------------
nicotinic     $         $         $         generic
acid

clofibrate    $         $                   generic

Colestid      $$        $$$       $$$       Upjohn

Lopid\a       $$$$      $$$       $$        Parke-Davis

Pravachol     $$$$      $$$$                Bristol-Myers
                                            Squibb

Questran,     $$$$      $$$$                Bristol-Myers
Questran                                    Squibb
Light

Lorelco       $$$$      $$$$      $$$       Marion Merrell
                                            Dow

Zocor                   $$$$      $$$       Merck

Mevacor                 $$$$      $$$$      Merck


H2 antagonists
----------------------------------------------------------
Tagamet\b     $$$       $$$       $$        SmithKline
                                            Beecham

Zantac        $$$$      $$$$$     $$$$      Glaxo

Pepcid                  $$$       $$$       Merck

Axid                    $$$$      $$$       Lilly

Axid (GERD)             $$$       $$$       Lilly
----------------------------------------------------------
Notes:  Dollar sign designations are relative indicators within a
therapeutic class (that is, $$ in one class is not the same absolute
value as $$ in another class).

Dollar signs in bold indicate a change in dollar status from the
prior year.

Generic drugs may be sold by multiple manufacturers. 

\a Generic available in 1994. 

\b Generic available in 1995. 

In contrast to these gains, however, Merck products in the
antihypertensive combinations and H2 antagonist classes were, by
1995, less competitive on the basis of cost designation.  Table 2
shows that since 1994 the number of other manufacturers'
antihypertensive combination drugs that compete with Prinzide and
Vaseretic increased from eight to nine.  Also, most of these products
retained the same or a lower cost ranking than both Merck products. 
Likewise, because a competing product (cimetidine, the generic
version of Tagamet) achieved a new, lowest cost designation, Merck's
Pepcid now shares the second to lowest dollar-sign designation with
Lilly's Axid, rather than the lowest cost ranking among H2
antagonists. 

Some industry observers believe that the gains made by Merck in the
cholesterol-lowering and ACE inhibitor classes are indications that
Merck has influenced Medco to prohibit some competing drugs from its
formulary.  For example, in a letter to FTC, one law firm commented
that Medco's formulary excluded Sandoz's Lescol, a
cholesterol-lowering agent, even though Lescol was sold on the market
at a substantially lower price than other cholesterol-lowering agents
and other PBMs have Lescol on their formularies.  Other questions
concern why Medco's 1995 formulary favors Merck products so much more
than DPS' 1995 formulary.  For instance, while Medco lists only one
ACE inhibitor in addition to Merck's Prinivil in the lowest cost
category, DPS lists three additional products.  Also, DPS included
not only Merck's Mevacor and Zocor in the cholesterol-lowering class
but also two competitors, Bristol-Myers Squibbs' Pravachol and
Sandoz's Lescol. 

In response to these concerns, Medco officials told us that Merck's
products were included on Medco's formulary through careful and fair
P&T committee and other company deliberations that considered both
the medical value and costs of competing drugs.  They added that
Medco did not exclude any drugs from its formulary because they
compete with large-dollar-volume Merck products. 


--------------------
\21 According to Medco officials, these eight drugs accounted for
about 90 percent of Merck's brand-name product sales to Medco
enrollees. 

\22 ACE is an acronym for angiotensin-converting enzyme. 


      LITTLE CHANGE IN DPS
      FORMULARIES
---------------------------------------------------------- Letter :6.2

Before the SmithKline Beecham/DPS merger in May 1994, DPS' formulary
contained SmithKline Beecham's four largest-dollar-volume outpatient
drugs.  Distributed among four therapeutic classes, these were
Augmentin, an antibacterial penicillin drug; Tagamet, an H2
antagonist; Relafen, a nonsteroidal anti-inflammatory drug (NSAID);
and Paxil, an antidepressant referred to as a selective seretonin
reuptake inhibitor (SSRI).  Tagamet was in a higher cost category
than one competitor, while Paxil shared the same cost designation
with the two others listed in its class.  Augmentin and Relafen not
only faced generic competition but also, along with others, had the
highest cost designation among brand-name products in their
respective classes. 

Table 3 shows that following the merger, the number and cost
designation of SmithKline Beecham's large-dollar-volume products on
DPS' formulary remained largely unchanged.  For example, Famvir, an
antiviral therapy introduced during the third quarter of 1994, was
added to the formulary for 1995, but Tagamet's generic equivalent is
now available.  In addition, although table 3 shows that Paxil lost
one competitor and gained a lower cost ranking than the remaining
product, the table also shows that Relafen gained both an additional
competitor and a higher cost designation.  Furthermore, table 3 shows
that Augmentin continued to have the same number of competitors and
the highest cost designation in its class. 



                          Table 3
          
              DPS Formulary Changes, 1994-1995

Class/product               1994    1995    Manufacturer
--------------------------  ------  ------  --------------
Penicillins
----------------------------------------------------------
penicillin VK               $       $       generic

ampicillin                  $       $       generic

amoxicillin                 $       $       generic

dicloxacillin               $       $       generic

Augmentin                   $$$$    $$$     SmithKline
                                            Beecham


Oral antiviral
----------------------------------------------------------
amantadine                  $       $       generic

Zovirax (herpes simplex     $$$     $$$     Burroughs
dosage)                                     Wellcome

Zovirax (herpes zoster                     Burroughs
dosage)                                     Wellcome

Videx                       $$$$    $$$$    Bristol-Myers
                                            Squibb

Hivid                       $$$$$   $$$$$   Roche Labs

Retrovir                    $$$$$   $$$$$   Burroughs
                                            Wellcome

Zerit                               $$$$$   Bristol-Myers
                                            Squibb

Famvir                                     SmithKline
                                            Beecham


SSRIs
----------------------------------------------------------
Prozac                      $$$$    $$$$    Lilly

Paxil                       $$$$    $$$     SmithKline
                                            Beecham

Zoloft                      $$$$            Pfizer


H2 antagonists<
----------------------------------------------------------
Zantac                      $$$     $$$$    Glaxo

Tagamet\a                   $$$$    $$$     SmithKline
                                            Beecham

Axid                        $$$$    $$$$    Lilly

Pepcid                              $$$$    Merck


NSAIDs (2nd line)
----------------------------------------------------------
Children's Advil            $       $$      Wyeth-Ayerst

indomethacin                $       $       generic

meclofenamate               $       $$      generic

naproxen                    $$      $$      generic

Anaprox\a                   $$      $$$     Syntex

Daypro                      $$      $$$     Searle

piroxicam                   $$      $$$$    generic

sulindac                    $$      $$$     generic

Lodine                      $$$     $$$$    Wyeth-Ayerst

Relafen                     $$$     $$$$    SmithKline
                                            Beecham

tolmetin                    $$$             generic

ketoprofen                          $$$     generic

Oruvail                             $$$$    Wyeth-Ayerst
----------------------------------------------------------
Notes:  Dollar sign designations are relative indicators within a
therapeutic class (that is, $$ in one class is not the same absolute
value as $$ in another class).

Dollar signs in bold indicate a change in dollar status from the
prior year.

Generic drugs may be sold by multiple manufacturers. 

 indicates that a product is substantially more expensive than other
products. 

\a Generic available in 1995. 


   CONCLUSION
------------------------------------------------------------ Letter :7

Our review of changes in Medco and DPS formularies is but one way to
help assess how the independence of PBMs may have changed since their
mergers with manufacturers.  PBMs in our study contend that they
remain independent of their manufacturer partners in serving their
customers, particularly in containing their customers' overall drugs
costs.  Although Medco's preference for Merck products increased
substantially 2 months before their merger agreement, the results of
our review of formulary changes do not necessarily mean that changes
in Medco's, or any other aligned PBM's, formularies were the result
of anticompetitive behavior on the part of the PBMs or manufacturers. 
However, changes in formularies can serve as an indicator that
additional questions may be warranted about the processes aligned
PBMs use in making formulary decisions.  Given FTC's antitrust role,
its access to proprietary information, and its experience in
reviewing recent mergers, our findings support FTC's decision to
continue monitoring ventures involving drug manufacturers and PBMs to
assure participants in the PBM and prescription drug markets that
these markets remain competitive. 


---------------------------------------------------------- Letter :7.1

A draft of this report was reviewed by officials of Merck, Medco,
SmithKline Beecham, DPS, Lilly, FTC, and two leading analysts of the
pharmaceutical industry.  In general, they agreed with the
information presented in the report.  Where appropriate, the report
reflects their technical comments. 

We will make copies of this report available upon request.  The
report was prepared by John C.  Hansen, Assistant Director, and
analysts Joel Hamilton and Patricia Barry.  Please call Mr.  Hansen
at (202) 512-7105 if you or your staff have any questions about this
report. 

Sincerely yours,

Jonathan Ratner
Associate Director
Health Financing Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To address the study's objectives, we first determined the role of
PBMs in the health care industry.  We reviewed pertinent literature
and interviewed officials of companies involved in the ventures. 
These companies included Merck & Co., Inc., SmithKline Beecham
Corporation, Eli Lilly and Company, and their respective PBM
subsidiaries:  Medco Containment Services, Inc., Diversified
Pharmaceutical Services, Inc., and PCS Health Systems, Inc.  We also
interviewed officials of Pfizer, Inc.  and its allied partners,
Caremark International, Inc.  and Value Rx.  In addition, we met with
several Wall Street analysts familiar with the PBM market to obtain a
history of its evolution. 

Second, to determine the objectives of the ventures, we again
interviewed officials of the companies in our study.  We also
reviewed internal documents, press releases, and annual reports
provided by these officials that helped expand on their comments. 

Third, to understand specific concerns about the mergers and
alliances, we contacted nonaligned PBMs, health plan sponsors, and
pharmaceutical economists.  We also interviewed officials of
pharmaceutical trade associations, such as the National Association
of Chain Drug Stores and the American Pharmaceutical Association.  We
asked these sources about changes to the pharmaceutical industry
following the mergers and alliances as well as their views on the
conditions established by FTC in its consent agreement with Lilly. 
In addition, we reviewed public comments FTC received regarding
Lilly's acquisition of PCS and asked officials of the companies in
our study whether they had policies or procedures that would meet the
conditions set forth in the consent agreement. 

Fourth, to assess the extent to which PBMs may have given preference
to their manufacturer partners' drugs over competitors' drugs, we
compared formularies for DPS and Medco before and after the mergers. 
We compared formularies that existed several months before each
merger to 1995 formularies to determine changes to (1) the drugs
listed and (2) the cost designation of the manufacturer partner's
drugs versus other manufacturers' drugs.  We reviewed formulary
changes for DPS and Medco because they were the PBMs involved in
mergers for the longest period of time and, therefore, had had the
most time to make any formulary changes. 

Our work was performed between June 1994 and September 1995 in
accordance with generally accepted government auditing standards. 


ADDITIONAL INFORMATION ON THE
MERGERS AND ALLIANCES
========================================================== Appendix II

The various manufacturer and PBM ventures are similar in that each
one provides a manufacturer access to a PBM's formularies and
aggregate data concerning its enrollees.  This enables the
manufacturer to improve its marketing strategies, enhance market
share, and develop disease management programs.  The mergers and
alliances are described below. 


   MERCK/MEDCO
-------------------------------------------------------- Appendix II:1

On November 18, 1993, Merck & Co., Inc.  purchased Medco Containment
Services, Inc.  for $6.6 billion.  Headquartered in Whitehouse
Station, New Jersey, Merck manufactures human and animal health care
products.  During 1993, it had net revenues of $10.5 billion, making
it the largest company in terms of U.S.  pharmaceutical sales. 
Principal products include Prinivil and Vasotec, two cardiovascular
products; Mevacor and Zocor, two cholesterol-lowering agents; and
Pepcid, an antiulcerant. 

At the time of its acquisition, Medco, based in Montvale, New Jersey,
was the second largest PBM, covering more than 33 million lives and
managing about 95 million prescriptions or $4 billion in drug
expenditures annually.  During 1995, Medco expects to manage benefits
for about 40 million people and remain the second largest PBM. 

Immediately after the merger, Medco operated as a subsidiary of Merck
under Medco's existing senior management.  In January 1994, Merck and
Medco formed the Merck-Medco U.S.  Managed Care Division, which
initially included a unit that marketed Merck products to managed
care organizations as well as Medco, which marketed PBM services to
health plan sponsors.  The Merck managed care product unit was
transferred back to Merck's Human Health Division in October 1994. 
The Merck-Medco Managed Care Division now consists of Medco only and
no longer has any responsibility for managed care product sales.  In
early 1995, Merck formally adopted a policy under which Medco
operates independently of Merck.  Merck markets its pharmaceutical
products through its U.S.  Human Health Division. 


   SMITHKLINE BEECHAM/DPS
-------------------------------------------------------- Appendix II:2

Following the Merck/Medco merger, SmithKline Beecham Corporation, the
U.S.  operating subsidiary of United Kingdom-based SmithKline Beecham
plc, announced on May 3, 1994, that it would acquire Diversified
Pharmaceutical Services, Inc.  (DPS) from United HealthCare
Corporation for $2.3 billion in cash.  Based in Philadelphia,
SmithKline Beecham manufactures therapeutics for human and veterinary
use and was the seventh largest manufacturer in terms of U.S. 
pharmaceutical sales for 1993.  Its products include Tagamet, an
antiulcerant; Relafen, a nonsteroidal anti-inflammatory drug; Famvir,
an oral antiviral; and Paxil, an antidepressant. 

Bloomington, Minnesota-based DPS was founded in 1976 as a wholly
owned subsidiary of United HealthCare Corporation, an operator of
HMOs, preferred provider organizations, and other health care
organizations.  During 1993, DPS was the third largest PBM, managing
pharmaceutical benefits for about 14 million people or $2 billion in
drug expenditures.  Following its acquisition, DPS continued to
operate as an independent company under its existing senior
management. 

In addition to acquiring DPS, SmithKline Beecham will maintain, for a
minimum of 6 years, a two-part relationship with United HealthCare
that SmithKline Beecham believes provides advantages over other
manufacturer/PBM partnerships.  First, SmithKline Beecham will have
exclusive rights to the medical records of United HealthCare's 1.6
million members.  When integrated with drug utilization data, such
data could substantially augment studies concerning cost-effective
drug treatments and the development of disease management programs. 
Second, United HealthCare plans to continue to use DPS as its PBM for
its own managed care operations, encourage affiliated plans to rely
on DPS, and not compete with DPS in the pharmacy benefit management
business. 


   LILLY/PCS
-------------------------------------------------------- Appendix II:3

In November 1994, Eli Lilly and Company purchased PCS Health Systems,
Inc.  from McKesson Corporation for $4 billion in cash.  Located in
Indianapolis, Indiana, Lilly manufactures pharmaceuticals, medical
devices, diagnostic products, and animal health products.  In 1993,
Lilly had net revenues of $6.45 billion and the fifth highest level
of U.S.  pharmaceutical sales.  Its pharmaceutical products include
Prozac, an antidepressant; Axid, an antiulcer agent; and Iletin and
Humulin, antidiabetic agents. 

Based in Scottsdale, Arizona, and founded in 1968, PCS Health Systems
was formerly a wholly owned subsidiary of McKesson Corporation, the
world's largest distributor of pharmaceuticals and related health
care products.  Originating as a claims processor, PCS has
consistently ranked as the largest PBM.  At the time of its
acquisition, it administered pharmaceutical benefits on behalf of
roughly 1,300 customers who accounted for over 50 million lives and
as much as $9 billion in drug expenditures. 

Under the terms of the agreement, PCS will continue to operate as an
independent company under its existing senior management.  Also,
McKesson will continue to have access to certain PCS capabilities and
services, such as its information systems.  In addition, Lilly has
agreed to develop a series of strategic alliances with the remaining
McKesson pharmaceutical distribution businesses. 


   PFIZER/VALUE HEALTH
-------------------------------------------------------- Appendix II:4

On May 3, 1994, Pfizer, Inc.  announced a strategic relationship with
Value Health, Inc., the parent company of Value Rx.  New York-based
Pfizer is a multinational producer and distributor of health care,
animal health, food science, and consumer products.  During 1993, it
had net sales of $7.5 billion and ranked eighth among manufacturers
in terms of U.S.  pharmaceutical sales.  Its health care products
include Feldene, an anti-inflammatory agent; Procardia, a
cardiovascular agent; and Zoloft, an antidepressant. 

Value Health is a provider of specialty managed care benefit programs
and health care information services.  It comprises six companies,
including Value Health Sciences and Value Rx Pharmacy Program.  Value
Health Sciences, located in Santa Monica, California, is a provider
of clinical software and physician review services.  Value Rx, a PBM
located in Scottsdale, Arizona, and Bloomfield Hills, Michigan, was
the sixth largest at the time of the announcement, covering about 11
million lives. 

Although the financial terms of the various contracts were not
announced, the relationship has three parts.  First, in return for
rebates, several Pfizer drugs will be included on Value Rx's drug
formularies.  Second, Value Health Sciences has agreed to develop
programs, such as clinical protocols, physician and patient education
materials, and outcomes analyses, to increase physician and patient
use of Pfizer products.  Third, Value Health and Pfizer each
contributed $50 million to fund a new company to establish disease
management programs.  Value Health has emphasized that, unlike an
acquisition, this contractual relationship does not affect its
operating independence. 

In a related event, during May 1995, Value Health announced its
acquisition of Diagnostek, Inc.  for $480 million.  Headquartered in
Albuquerque, New Mexico, and founded in 1983, Diagnostek is a
provider of diagnostic-imaging centers, PBM services, and pharmacy
services to institutions such as hospitals and nursing homes.  Just
before the merger, its PBM business unit covered approximately 16
million lives.  Because of the acquisition, Value Rx will now cover
approximately 32 million lives, making it the largest independent PBM
and the third largest overall. 


   PFIZER/CAREMARK
-------------------------------------------------------- Appendix II:5

Pfizer also partnered with Caremark International, Inc.  during 1994. 
Headquartered in Northbrook, Illinois, and incorporated in 1992,
Caremark International operates in two business segments:  patient
care and managed care.  The managed care segment includes Caremark's
Prescription Service Division, a PBM and mail-service pharmacy.  In
1994, it ranked fourth among PBMs, managing benefits on behalf of
1,100 customers who together covered about 13 million lives. 

Pfizer's relationship with Caremark is a part of Caremark's Drug
Alliance Program.  Established in April 1994, this program involves
contractual relationships with four major pharmaceutical
manufacturers:  Pfizer; Rhone-Poulenc Rorer, Inc.  of Collegeville,
Pennsylvania; Bristol-Myers Squibb Company; and Eli Lilly.  Although
the amount Caremark received from each partner was not disclosed,
each relationship gives the manufacturer access to both Caremark's
formulary and the drug utilization statistics of its covered lives. 
By partnering with four manufacturers, Caremark will receive rebates
on products in over 85 percent of the therapeutic classes on its
formulary.  It also expects to gain advantages in the development of
disease management programs by merging the research capabilities of
each manufacturer. 


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============================================================ Chapter 0

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