Medco Merk Harvard Business Case

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Pharmacy Benefit Management (PBM) is rooted in the healthcare reforms of the early 1990s. As the traditional fee-for-service system transformed to a managed care system, heavy emphasis was placed on cost control (Pg. 4). As a result, PBMs immerged to reduce pharmaceutical costs and optimize the use of medications. At first their focus was on claims processing, but over the years, they leveraged their pharmacy network to negotiate discounted rates on pharmaceuticals. This allowed the PBMs to gain power in the healthcare industry, and with the use of drug utilization reviews, disease management and formularies (especially), they tightened their grip. In a sense, pharmaceutical manufacturers needed to go through these PBMs to access certain markets.

Drug manufacturers need to regain access to these markets to protect themselves in a dynamic industry. In just a few years, from the early to the mid-1990s, the healthcare industry witnessed dramatic changes within its supply chain. Even if a merger did not bring about short term profits, like Eli Lilly and PCS, it still eliminates a deadly threat. Merck’s competitors were gaining ground by being placed on Medco formularies (Pg.16). If one of these companies were to get complete control, it could replace most of Merck’s products with its own. In a way, this acquisition was an investment to properly position Merck in an unpredictable future. If this future held a system in which the most drugs were sold through PBMs, or not, Merck would be positioned to continue their successful business. As one Merck-Medco put it “Our business is constantly changing.” (Pg. 19). This merger had to occur to create a company flexible and agile enough to adapt to a changes. Merck had a strategic vision to become embedded as part of a total healthcare solution. To obtain the coordinated pharmaceutical care most industry executives envision for the future, the company needed to acquire a PBM. The network and data...
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