(From THE WALL STREET JOURNAL) 
   By John Jannarone 

[Financial Analysis and Commentary]

They are the arteries of the prescription-drug network. Pharmacy-benefit managers earn billions pumping orders between drugstores, manufacturers and health-care providers. Can competition undermine their vitality?

With the Senate pressing benefit managers for more transparency, many fear the likes of Medco Health Solutions and Express Scripts soon could be squeezed by the private sector. Last week, Walgreen and Caterpillar said they would negotiate directly, rather than using a benefit manager as a middleman, to set prices.

But the Caterpillar deal isn't as threatening as it looks. Caterpillar will keep its benefit manager to handle rebate negotiations. That reflects the manager's close ties with manufacturers, which gives them leverage. Medco collected $4.45 billion in rebates from manufacturers last year, passing 82% of the money on to health-care providers that bought drugs. That should help benefit managers keep clients hooked.

Just as important, benefit managers have scale that ensures they are able to manage prices. Caterpillar designs its own price list, but most companies don't. With control of a price list, benefit managers can save health-care providers money by pushing manufacturers for rebates.

Benefit managers also can tweak price lists if rebates don't justify a drug's expense. Express Scripts removed cholesterol drug Lipitor from a list of preferred treatments in 2006, prompting the Lipitor retail price to surge. But when patients switched to the generic substitute Zocor, treatment costs fell by hundreds of millions of dollars, according to Ross Muken of Deutsche Bank.

Benefit managers can't ignore Walgreen's ambitions. Medco generates over a third of its revenue from mail-order prescriptions, which often undercut pharmacy prices. If Walgreen sets lower prices, Medco could lose mail business.

But Walgreen is the only major pharmacy chain likely to pose a challenge. And consolidation should give managers more clout. Express Scripts recently bought WellPoint's benefit manager, and Aetna put its on the block. That makes large benefit managers unlikely to skip a beat anytime soon.