Pharmacy Benefit Managers as Conflicted Countervailing Powers

On December 16, 2006, Express Scripts, the third largest PBM, announced a competing bid for Caremark. This horizontal merger of two of the Big 3 PBMs would be competitive if the combined company acted as a “countervailing power” as envisioned by economist John Kenneth Galbraith.PBM countervailing power can be used in the negotiation of rebates with brand name drug manufacturers (Pharma) and in the negotiation of reimbursements with retail pharmacies. While it is possible that large resellers can be countervailing and pro-competitive, we believe that this particular merger would be anti-competitive. The economist George Stigler was skeptical of Galbraith's optimism that an intermediate market countervailing power would behave asymmetrically – a powerful buy-side opponent to up-steam oligopolists, but a benevolent agent of down-stream consumers. Our analysis of the evolution and current behavior of large independent PBMs confirms Stigler's skepticism