Professional Documents
Culture Documents
Made By:
Group 1L
Harsh Sharma Snehal Lokare
Pankaj Ranjan Vaishali Mathpal
Vikas Goyal
2 Agenda
Case Background
Industry Background
What is PBM ?
Sources of Income
Our Insights & Analysis
Effect on Customer
Customers who used formulary drugs had more benefit from PBMs
Customers who were not on regular drugs ended up paying more than before for
the same drug in case the drug wasn’t covered in the formulary. This happens
especially when physician prescribes a specific brand name which is not on the
formulary of PBM
Vertical Integration
Comments from Roy Vagelos, former Merck CEO
“In classic terms of competition, we could see that the power of
the buyers was growing…PBMs were…bringing together the
person who chooses the drug and the person who pays for the
drug.”
“Having salespeople visit doctors’ offices does not allow us to
reach PBMs, HMOs, or plan sponsors -- the major players in the
emerging market.”
Merck bought Medco as a response to managed care
Strategic attempt to capture market power
Follow-up on patients with chronic illness who may stop taking
prescribed meds
Position Merck drugs favorably on formulary
e.g. lower patient copay, or lower cost to plan sponsor
10 Motivation
Project Paradigm, studied the changing industry environment
Redefine their role, not just as purveyors but as providers of healthcare
solutions
Views on the effectiveness of drug therapy. team drawn to an alliance with or
the acquisition of a PBM
With R&D expenses that running at 8% of sales, any process that lessened
development risk, impact on profits
By 1993, Project Paradigm considering the advantages of acquiring a PBM
Merck’s move to become part of Medco’s formulary was important,
willingness to enter the Pharmacy benefit environment
11 Industry Reactions
Reacted strongly against Merck’s association with Medco
Independent pharmacies shrunk from 33000 to 25000 lost business to PBM’s
and HMO’s
Despite the vehement response from druggists, many discounted a potential
threat to Merck-Medco
Shortly after acquisition, two of Merck’s key competitors, Eli Lilly and
SmithKline also purchased PBM’s
No single company has a sufficient broad product line to fulfil customers’
needs
Despite the difficulties Merck remained pleased with Medco
12 Merck-Medco Evolves
Increased covered lives by 6%, 40% in drug spending
Merck’s share Medco’s $9 billion drug spend has risen to 15 %, up from
approximately 10% prior to the merger
Merck’s corporate growth target of 15% to 20%
Merck-Medco’s health management programs targeted a potential patient population
of about 50 million patients
Health management is where Merck-Medco can add real value and where the margin
opportunities exist
Merck-Medco invested heavily in Information systems, spent in excess of 50$ million
on its customer service and 120$ in IT
Name reflects the change-used to be Medco “Containment Services,” now Merck-
Medco “managed Care.”
13
Questions and Answers
1. What was the rationale for PBMs?
1
Patient Pharmacy
2 3
1 4
Doctor 4
Wholesaler
PBM
1
2
Insurer/HMO 3
Pharmaceutic
2 3 4 al
1 2 Manufacturer
Employer 2 3 4
Monetary/Transactio DUR/formular
4 Disease
3 manageme
1 Service/prescript on flow 2 n flow y
PROGRAM DESIGN:
Program
Information
Provided to High Risk
physician and Education,
patient Counselling, Case
Patient
Patient Management
identified
completes Referral
through STRATIFY
drug questionnaire
claims
Physician gives
HbA1c Rx Mod/Low
Risk
Newsletter, 1-
800 Infoline
2.Strategic fit of Merck-Medco
Needs of Merck
A R&D firm looking for Increased sales of their drugs
Advantages:
Medco Containment services Inc. a firm that specialised in integrated drug
benefit plans and pharmacy services to managed care markets
Marty Wygod, saw an opportunity to revolutionise the distribution system
through centralised mail service distribution that would save the cost
associated with intermediaries margins
Merck found that Medco’s clients base was complementary to chronic care
drugs
Their clients were predominantly Fortune 500 companies, Blue Cross/ Blue
Shield plans, insurance carriers, Federal, State, and local governments, and
union plans which covered their enrolees for life
These clients would be more interested in chronic care therapies which,
although more expensive in the short term, would likely save cost over the
life of patient
3. What does Medco bring to Merck? What are the advantages and
20 disadvantages?
(contd.)
Coding of new
Mail Service Pharmacy prescriptions
Delivery “Edits”/Protocols
for incomplete or
Data Entry inconsistent data
Prescription
Filling
Pharmacist
Check
Shipping
4. What does Medco get from the Merck acquisition?
22
Acquisition would eliminate key information gaps in the drug delivery system
Acquisition of Medco - Step for a new paradigm for pharmaceutical industry
Vision to create the world’s first coordinated pharmaceutical care
Merck - America’s most admired company, 7th straight time in Fortune magazine,
a repeat winner of Best sales Force in the Industry
6/8, Recruiting Top Salespeople, Quality of training, Opening New Accounts,
Holding Accounts, and Reputation Among Customers
No company had better exemplified the drug industry’s resistance to managed
care than Merck
Merck had sales of $9.6 billion, Medco had sales of $ 1.8 billion
Medco growing at 35% a year by riding the very trend that had threatened to
capsize Merck
5.Future of Health management
Health management: Specific planned programs for treatment of chronic
diseases
Programs developed based on existing medical research suggesting better
therapy and low cost treatment
A rarely found marketing strategy of More for less
This is what customers always want
Using this program customer was saving 440$ per year on an average
Future of Health management(Cont.)
Targeted population of 50 million patients
Era of rising medical costs, in 1973 HMO act – to respond to that
Increase in HMO and decrease in Hospital and private care after
that