BUSINESS

With purchase of EnvisionRx, Rite Aid gets in on the drug intermediary racket

Rite Aid's purchase of EnvisionRx gives it a $2-billion piece of the mail-order drug market

John Standley, chief executive of the Rite Aid pharmacy chain, was effusive this week in describing how consumers will benefit from his company spending $2 billion to buy EnvisionRx, a firm most people likely never heard of.

The deal, he said, will allow Rite Aid to expand its "health and wellness offerings" and enhance the company's ability "to provide a higher level of care to the patients and communities we serve."

A great advance, in other words, for the U.S. healthcare system.

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FOR THE RECORD:

Rite Aid: In the Feb. 13 Business section, a column about Rite Aid's acquisition of a pharmacy benefits manager said that the company would manage the prescriptions of 13 million people. Rite Aid said after disclosing the deal that it would manage the prescriptions of 21 million people.
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Or, more accurately, yet another big business cutting itself in for a piece of your healthcare dollar with an unnecessary service that can inflate drug prices.

Welcome to the world of pharmacy benefit managers.

"No other country has pharmacy benefit managers, and for good reason," said David Balto, a Washington antitrust lawyer and former policy director for the Federal Trade Commission. "They add complexity and obscurity to a highly concentrated market, which is a recipe for higher prices for consumers."

Pharmacy benefit managers are the middlemen that haggle with drug makers on behalf of insurers and large employers to lower the price of prescription meds.

If that was the extent of their role in the healthcare equation, perhaps they'd be useful to consumers. But these companies also dominate drug sales by running mail-order pharmacies, placing them in a unique position to profit from picking which meds will be offered to patients at affordable prices.

"The fact that pharmacy benefit managers are making billions of dollars a year is evidence that the market isn't behaving competitively," Balto said. "These are just intermediaries. They don't add anything to healthcare."

You probably already deal with a pharmacy benefit manager. The biggest player in the industry, Express Scripts, handles prescriptions for about 90 million Americans. The second-largest player, CVS Caremark, covers about 65 million people.

By purchasing EnvisionRx, Rite Aid will now manage prescriptions for about 21 million patients.

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For the Record

Feb. 13, 11:17 a.m.: An earlier version of this article said Rite Aid will manage prescriptions for 13 million patients.

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But even that relatively low number is worth $2 billion to the drugstore chain, highlighting how much money is changing hands in the tangled webs of corporate relationships that stand between the companies that produce medicines and the people who need them.

Pharmacy benefit managers would characterize things differently.

A study commissioned by the Pharmaceutical Care Management Assn., a trade group, estimated that nearly $2 trillion will be saved on prescription drugs from 2012 to 2021 thanks to the cost-cutting efforts of pharmacy benefit managers.

"PBMs also empower businesses to create jobs," said Mark Merritt, president of the association. "When PBMs save employers even 1% in prescription drug costs, businesses can redeploy that savings to cover the cost of 20,000 jobs."

Or, as is probably more often the case, they can pocket the difference.

Pharmacy benefit managers do have the potential to play a constructive role in reducing healthcare prices. Their collective bargaining strength gives them clout in wringing discounts and rebates from drug makers in return for including the manufacturer's drug on client formularies, or approved drug lists.

But it's unclear how much of those savings goes to consumers and how much is split with the insurers that those benefit managers represent.

The industry also has long faced allegations that benefit managers receive kickbacks from drug companies to choose specific drugs, thus contributing to inflated prices.

More troubling is the fact that most pharmacy benefit managers are also running mail-order drugstores and are able to lock in the business of millions of people covered by clients.

"The major source of their income is the inflated margins from their mail-order pharmacies," said William Comanor, head of pharmaceutical economics and policy studies at UCLA. "This is where they exploit their monopoly power."

Express Scripts, for example, ranks 20th on the Fortune 500. In the third quarter last year, the company's profit increased 36% to $582 million from the previous year's third quarter.

Ashley Flower, a Rite Aid spokeswoman, said EnvisionRx operates differently from other pharmacy benefit managers. She said the company charges a flat fee for its services and passes on all savings to patients.

However, Flower said, patients still may see their choices limited by which drugs are offered as preferred medications at lower prices.

That's still a problem.

"What gets on one tier or another is based on the deals that a pharmacy benefit manager can cut, rather than a drug's therapeutic value," said Geoffrey Joyce, a healthcare economist at USC.

"Clearly, not all savings are going to consumers," he said. "Another layer of profitability has been built into the system."

Balto, the former FTC official, said the only way the U.S. healthcare market will become more rational is if this country follows the lead of other developed nations and regulates drug prices.

That doesn't mean prices would be set by Washington bean counters. Rather, it would be up to drug companies to justify prices based on actual costs such as research and marketing, similar to what utilities do when setting rates.

As it stands, we've created a system that allows for-profit companies to fatten themselves on the misfortunes of the sick. The incentives reward higher prices, rather than making healthcare more efficient and affordable.

In announcing Rite Aid's purchase of EnvisionRx, CEO Standley said that, along with all the wonderful things this means for patients and communities, the deal would be good for shareholders.

That much, at least, seems undeniable.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to david.lazarus@latimes.com.

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