Drug-Industry Mergers Could Be Costly For HMOs.

With deals in the works among major drug companies that could create the largest pharmaceutical companies in the world, insurers are questioning how such consolidation will affect drug prices.

Many insurers expressed concern that the drug giants won't live up to their initial promises of delivering savings to consumers.

"There is concern that they can turn around and use whatever savings are generated from economies of scale and return value to the shareholder as opposed to investing in the consumer's interest," said Scott Serota, acting president and chief executive officer for Blue Cross & Blue Shield.

Glaxo Wellcome plc and SmithKline Beecham plc reached a merger agreement in January that could create the world's largest drug maker. Despite putting up a months-long fight, Warner-Lambert Co. agreed to be acquired by Pfizer Inc., the No.2 drug company in the United States.

A merging pharmaceutical industry might mean higher drug prices, said Lee Newcomer, senior vice president of health policy and strategy for UnitedHealthcare. "It would only cause drug prices to rise if a merger actually combined all the drugs in an available class," Newcomer said. "Then, like any oligopoly or monopoly, you would expect prices to rise."

Prescription drug prices have risen 12% since 1998, according to a paper published in September by ExperTeam, an executive consulting organization based in Irvine, Calif. The paper predicted that the pharmaceutical sector would generate a 1.5% to 2% increase in costs.

Newcomer explained that each drug class is composed of a group of drugs that have a common chemical property. Some examples in the cardiac area include angiotensin-converting enzyme (ACE) inhibitors, which would be one class, and calcium channel-blockers would be another.

"If one class was under the control of one company, that would present some problems from both a pricing and a negotiating standpoint," he said.

At Humana, rising costs are also a concern. Fewer drug companies could mean a monopoly, said Jose Marques, a spokesman for Humana. "In many cases, that leads to higher prices," he said. "It will depend on what drug companies do with their new resources."

Still, Newcomer doesn't believe these mergers will hurt drug costs quite yet because a sufficient amount of competition remains within the drug classes.

Consolidation has the potential to be very positive, Serota said, if the pharmaceutical companies lower prices for consumers based on economies of scale and invest in greater innovation as a result.

Between 1993 and 1998, the average cost of prescription drugs rose 46% from $26 to $38 because of costs per basis, innovation and new drugs, he said.

Jeffery L. Pittsburg, an analyst for Pittsburg Institutional, said pharmaceutical companies will continue to merge to reduce competition and keep prices down.

Merging could keep prices on an even keel, because two companies can have one big research-and-development budget, he said. "You're not fighting each other, so there is no increased cost to pass on," Pittsburg added.