Rite-Aid Buys PCS: Is This the End of an Era? Or the Beginning of One?

The obituary of Eli Lilly's 1994 acquisition of pharmacy benefit management company PCS Health Systems Inc. was written well before Lilly decided this month to bail out the managed care business by selling PCS to drug-store chain Rite Aid Corp.

The obituary on Eli Lilly & Co. 's 1994 acquisition of pharmacy benefit management company, PCS Health Systems Inc. [See Deal]. For better or worse—and to most drug companies, clearly for the better—managed care simply hasn't had the impact on the pharmaceutical industry that led executives at Lilly—as well as Merck & Co. Inc. and SmithKline Beecham —to make the leap into pharmacy benefit management five years ago.

Drug-company executives who anticipated that the widespread penetration of managed care would lead to lower prices, smaller profits, and increased generic competition, particularly for drugs in crowded therapeutic categories, have been pleasantly surprised. Instead, managed care's impact has been much less keenly felt. No one would deny that managed care has issued in an era of new pricing and product portfolio strategies for many drug companies. But, even as managed care enrollment has grown, the worst fears of industry executives—that PBMs would wield significant influence in shaping formularies, make product differentiation nearly impossible, and put an end to blockbusters—simply haven't come true.

Thus, the rationale for owning a PBM long ago ceased to have much relevance. The truth is, even successful PBMs have found little enthusiasm among their clients for imposed strict prohibitions against or controls on branded pharmaceuticals—and the current mania for direct-to-consumer advertising only underscores the importance of brand identity in pharmaceuticals today.

There are those who argue that drug companies underestimate, at their peril, managed care potential influence in the future—particularly if the US economy turns down. And Merck and SB may still find value in their own PBMs. But the notion popular in the mid 1990s that managed care's influence would force drug companies to shift their focus from drug developers to providers of coordinated pharmaceutical care died a long time ago.

With this deal, the question becomes: if drug company/PBM collaborations don't make sense, do alliances at the other end of the supply chain—i.e., with retail pharmacies? In some respects, pharmacists have been the odd-men-out in the turmoil that managed care has brought. And much of their loss of power and influence has come with the growth of PBMs. One need only consider that PBMs make more money from reducing pharmacy dispensing fees than from price rebates on branded products to see what strange bedfellows a PBM/pharmacy alliance makes.

Indeed, this deal was announced three weeks before the final dismissal of the lawsuit brought by independent pharmacists against drug manufacturers, which had at its heart the influence of managed care organizations and PBMs in the marketplace. The dismissal was anti-climactic—most of the drug companies originally named had already been sued. And the presiding judge who ordered the dismissal seemed to base his decision more on the quality of the case presented by the plaintiffs than by the merits of the issues raised by the suit. But implicit in those issues is the question raised by Rite Aid's deal for PCS: is the more meaningful alliance for PBMs not with drug companies, but with retail pharmacies?