RxCare of Tennessee, Inc; Consent Agreement With Analysis To Aid Public Comment

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FEDERAL TRADE COMMISSION

[File No. 951-0059]

RxCare of Tennessee, Inc; Consent Agreement With Analysis To Aid

Public Comment

AGENCY: Federal Trade Commission.

ACTION: Consent Agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair acts and practices and unfair methods of competition, this

consent agreement, accepted subject to final Commission approval, would

bar the leading provider of pharmacy network services in Tennessee from

having ``most favored nation'' clauses in its pharmacy participation

agreements. The draft complaint accompanying the consent agreement

alleges that RxCare's use of these clauses discourages the pharmacies

from discounting and thereby limits price competition among the

pharmacies in their dealings with pharmacy benefits managers and third-

party payers.

DATES: Comments must be received on or before March 29, 1996.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary

Room 159, 6th St. and Pa Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Michael D. McNeely, Federal Trade Commission, S-3231, 6th and

Pennsylvania Avenue, NW, Washington, DC 20580. (202) 326-2904.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the following consent agreement containing a consent order to

cease and desist, having been filed with and accepted, subject to final

approval, by the Commission, has been placed on the public record for a

period of sixty (60) days. Public comment is invited. Such comments or

views will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR

4.9(b)(6)(ii)).

Agreement Containing Consent Order

The Federal Trade Commission (``Commission''), having initiated an

investigation of RxCare of Tennessee, Inc. (``RXCare''), and its

parent, the Tennessee Pharmacists Association (``TPA''), and it now

appearing that RXCare and TPA, hereinafter sometimes referred to as

``proposed respondents,'' are willing to enter into an agreement

containing an Order to remedy the alleged lessening of competition

resulting from proposed respondents' practices and providing for other

relief:

It is hereby agreed by and between proposed respondents, by their

duly authorized officers and attorneys, and counsel for the Commission

that:

1. Proposed respondent RxCare is a corporation organized, existing,

and doing business under and by virtue of the laws of the State of

Tennessee with its office and principal place of business located at

1226 17th Avenue South, Nashville, Tennessee 37212.

2. Proposed respondent TPA is an unincorporated trade association

organized, existing, and doing business under and by virtue of the laws

of the State of Tennessee with its office and principal place of

business located at 226 Capitol Blvd., Suite 810, Nashville, Tennessee

37219-1893.

3. Proposed respondents admit all the jurisdictional facts set

forth in the draft of complaint.

4. Proposed respondents waive:

a. Any further procedural steps;

b. The requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

c. All rights to seek judicial review or otherwise to challenge or

contest the validity of the Order entered pursuant to this agreement;

and

d. Any claim under the Equal Access to Justice Act.

5. This agreement shall not become part of the public record of the

proceeding unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with the draft of

complaint contemplated thereby, will be placed on the public record for

a period of sixty (60) days and information in respect thereto publicly

released. The Commission thereafter may either withdraw its acceptance

of this agreement and so notify the proposed respondents, in which

event it will take such action as it may consider appropriate, or issue

and serve its complaint (in such form as the circumstances may require)

and decision, in disposition of the proceeding.

6. This agreement is for settlement purposes only and does not

constitute an admission by proposed respondents that the law has been

violated as alleged in the draft of complaint or that the facts as

alleged in the draft complaint, other than jurisdictional facts, are

true.

7. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Sec. 2.34 of the Commission's

rules, the Commission may, without further notice to the proposed

respondents, (1) issue its complaint corresponding in form and

substance with the draft of complaint and its decision containing the

following Order in disposition of the proceeding, and (2) make

information public with respect thereto. When so entered, the Order

shall have the same force and effect and may be altered, modified or

set aside in the same manner and within the same time provided by

statute for other orders. The Order shall become final upon service.

Delivery by the U.S. Postal Service of the complaint and decision

containing the agreed-to Order to proposed respondents' addresses as

stated in this agreement shall constitute service. Proposed respondents

waive any right they may have to any other manner of service. The

complaint may be used in construing the terms of the Order, and no

agreement, understanding, representation, or interpretation not

contained in the Order or the agreement may be used to vary or

contradict the terms of the Order.

8. Proposed respondents have read the draft of complaint and Order

contemplated hereby. Proposed respondents understand that once the

Order has been issued, they will be required to file one or more

compliance reports showing that they have fully complied with the

Order. Proposed respondents further understand that they may be liable

for civil penalties in the amount provided by law for each violation of

the Order after it becomes final.

Order

I

It is ordered That the following definitions shall apply herein:

A. ``RxCare'' means RxCare of Tennessee, Inc.; its predecessors,

divisions, subsidiaries, affiliates, joint ventures, successors, and

assigns; and all directors, officers, employees, agents, and

representatives of the foregoing;

B. ``TPA'' means the Tennessee Pharmacists Association; its

predecessors, divisions, subsidiaries, affiliates, joint ventures,

successors, and assigns; and all directors, officers, employees,

agents, and representatives of the foregoing;

C. ``Third-party payer'' means any person or entity that provides a

program or plan pursuant to which such person or entity agrees to pay

for prescriptions dispensed by pharmacies to individuals described in

the plan or program as eligible for coverage (``coveraged

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persons'') and includes, but is not limited to, health insurance

companies; prepaid hospital, medical, or other health service plans,

such as Blue Cross and Blue Shield plans; health maintenance

organizations; preferred provider organizations; and health benefits

programs for government employees, retirees and dependents;

D. ``Participation agreement'' means any existing or proposed

agreement, oral or written, in which a third-party payer, prescription

benefit manager (PBM), pharmacy service administrative organization

(PSAO), or other firm agrees to reimburse a pharmacy firm for the

dispensing of prescription drugs to covered persons, and the pharmacy

firm agrees to accept such payment from the third-party payer, PMB,

PSAO, or other firm for such prescriptions dispensed during the term of

the agreement;

E. ``Pharmacy firm'' means any partnership, sole proprietorship,

corporation, or other entity that owns, controls or operates one or

more pharmacies; and

F. ``Most Favored Nations Clause'' or ``MFN'' means any agreement,

understanding, or course of dealing between RxCare or TPA and any

pharmacy firm under which, in the event the pharmacy firm accepts or

agrees to accept from another third party payer, PBM, PSAO or other

firm a lower reimbursement rate than the lowest RxCare reimbursement

rate, the pharmacy firm must thereafter accept a reduction in its

reimbursement rate for any or all RxCare contracts in which it

participates. The term ``Most Favored Nations Clause'' includes, but is

not limited to, any price protection clause, buyer protection clause,

prudent buyer clause, consumer protection clause, meet or release

clause, best price clause, or meeting competition clause.

II

It is further ordered That RxCare and TPA shall forthwith cease and

desist, directly or indirectly, from:

A. Entering into, maintaining, or enforcing a Most Favored Nations

Clause in any participation agreement with any pharmacy firm or by any

other means or methods;

B. Auditing any pharmacy firm for the purpose of enforcing a Most

Favored Nations Clause; or

C. Inducing, suggesting, urging, encouraging, or assisting any

person or entity to take any action that if taken by RxCare or TPA

would violate this order.

III

It is further ordered That RxCare shall, within thirty (30) days

after the date this Order becomes final:

A. Remove all Most Favored Nations Clauses from its agreements with

pharmacy firms;

B. Distribute a copy of this Order, the attached Appendix, and the

complaint to each pharmacy firm with which RxCare has a participation

agreement; and

C. Publish the Appendix to this Order in the RxCare Update and on

the ``RxCare Network News'' page of the Tennessee Pharmacist, or any

successor publication(s).

IV

It is further ordered That, for the purpose of determining or

securing compliance with this Order, RxCare and TPA each shall:

A. Within sixty (60) days after the date this Order becomes final,

submit to the Commission a verified written report setting forth in

detail the manner and form in which they intend to comply, are

complying, and have complied with this Order;

B. One year (1) from the date this Order becomes final, annually

for the next four (4) years on the anniversary of the date this Order

becomes final, and at other times as the Commission may require, file a

verified written report with the Commission setting forth in detail the

manner and form in which they have complied and are complying with this

Order. Respondents shall include in their compliance reports all

written communications, internal memoranda, and reports and

recommendations concerning compliance with this Order;

C. For a period of ten (10) years after the date this Order becomes

final, permit any duly authorized representative of the Commission:

1. Access, during office hours and in the presence of counsel, to

inspect and copy all books, ledgers, accounts, correspondence,

memoranda and other records and documents in the possession or under

the control of respondents relating to any matters contained in this

Order; and

2. Upon five days' notice to respondents and without restraint or

interference from it, to interview officers, directors, or employees of

respondents; and

D. For a period of ten (10) years after the date this Order becomes

final, notify the Commission at least thirty (30) days prior to any

proposed change in TPA or RxCare such as dissolution, assignment, sale

resulting in the emergence of a successor corporation, or the creation

or dissolution of subsidiaries or any other change in the corporation

that may affect compliance obligations arising out of the Order.

V

It is further ordered That this Order shall terminate twenty (20)

years from the date this Order becomes final.

Appendix

[Date]

Announcement

The Tennessee pharmacists Association (TPA) and RxCare of

Tennessee, Inc. (RxCare), have entered into a consent agreement with

the Federal Trade Commission. Pursuant to this consent agreement,

the Commission issued a consent order on [Date] providing that

RxCare and TPA may no longer enforce a most Favored Nations (MFN)

clause in the RxCare network provider agreements. The MFN clause

requires that if a participating pharmacy accepts a lower

reimbursement rate than the lowest RxCare rate, the pharmacy shall

accept its lower reimbursement rate for all RxCare contracts in

which it participates. As a result of the consent order, RxCare will

not require that pharmacies in its network that enter into any

agreement at a lower reimbursement rate than the RxCare

reimbursement rate shall accept such lower reimbursement rat for

RxCare contracts.

For more specific information, TPA or RxCare pharmacy network

members should refer to the FTC consent order itself. TPA and RxCare

will provide a copy of the consent order to each pharmacy firm with

which RxCare has a participation agreement.

Baeteena Black,

Pharm. D., Executive Director, Tennessee Pharmacists Association.

Gary Cripps,

Pharm. D., Chairman and President, RxCare of Tennessee, Inc.

RxCare, 951 0059

Analysis of Proposed Consent Order to Aid Public Comment

The Federal Trade Commission has agreed to accept, subject to

final approval, a proposed consent order settling charges that

RxCare of Tennessee, Inc., and the Tennessee Pharmacists Association

(TPA) violated Section 5 of the Federal Trade Commission Act.

The proposed consent order has been placed on the public record

for sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received and will decide whether it

should withdraw from the agreement or make final the agreement's

proposed order.

The purpose of this analysis is to facilitate public comment on

the proposed order, and it is not intended to constitute an official

interpretation of the agreement and proposed order, nor to modify in

any way their terms.

The proposed consent order has been entered into for settlement

purposes only and does not constitute an admission by RxCare or TPA

that the law has been violated as alleged in the complaint.

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Description of Complaint

The complaint prepared by the Commission for issuance along with

the proposed order alleges the following:

TPA is the largest association of pharmacists in Tennessee.

Among TPA's goals is to ``define and promote appropriate

compensation to pharmacists for patient care.'' TPA owns RxCare.

RxCare is a pharmacy network, i.e., a group of pharmacies that

offer their services to pharmacy benefit managers (PBMs) and to

third-party payers (such as managed care plans, insurers, and

employers who pay for prescription drugs provided as part of

employee health benefit plans). Third-party payers pay for about

half of all prescriptions in Tennessee.

The complaint further alleges that RxCare is the leading

pharmacy network in Tennessee, providing PBM and/or network services

to managed care plans and PMBs accounting for approximately 2.4

million residents of Tennessee, who represent more than half of

Tennessee citizens with third-party pharmacy benefits. Because the

RxCare network is the largest source of third-party business for

Tennessee pharmacies, there is a strong incentive for those

pharmacies to participate in the RxCare network. The RxCare network

includes approximately 95% of Tennessee pharmacies.

According to the Commission's complaint, RxCare's agreements

with the pharmacies in its provider network include a ``most favored

nation'' or ``MFN'' clause. This clause requires that if a network

pharmacy accepts a reimbursement rate lower than its RxCare

reimbursement rate, the pharmacy shall accept the lower

reimbursement rate for all RxCare business. Each pharmacy in the

RxCare network agrees to this clause as a condition of remaining

within the network and RxCare enforces this clause against

pharmacies that have accepted lower reimbursement rates from other

payers. In addition, RxCare has discouraged pharmacies from

participating in rival networks seeking to offer prices below the

RxCare reimbursement level. RxCare did so by urging pharmacies to

refrain from such participation and by warning that acceptance of

such rates could trigger the MFN clause.

The complaint further alleges that, because RxCare represents

such a large portion of their business, most Tennessee pharmacies

would incur an unacceptable revenue loss if violating the MFN clause

caused them to accept reduced reimbursement rates on all of their

RxCare business. Thus, the MFN clause has provided a mechanism to

diminish significantly the incentives of RxCare network pharmacies

to discount their rates to third-party payers seeking to offer

network services with lower reimbursement rates. The MFN clause has

also enabled the pharmacies to assure each other that they will not

compete by selectively discounting their rates. Further, the

complaint alleges that third-party payers in states other than

Tennessee frequently offer reimbursement rates below the RxCare

reimbursement rate and that the MFN clause has caused payers to pay

higher rates in Tennessee than in other states.

The complaint alleges that RxCare's adoption and enforcement of

the MFN clause has injured consumers by restricting price

competition among pharmacies in Tennessee, effectively establishing

the RxCare network rate as a price floor for most Tennessee

pharmacies and inhibiting the entry of lower-priced pharmacy

networks.

There are judicial decisions upholding the use of MFN clauses

against antitrust challenges. See, e.g., Blue Cross and Blue Shield

United of Wisconsin v. Marshfield Clinic, 65 F.3d 1406 (7th Cir.

1995); Ocean State Physicians Health Plan, Inc. v. Blue Cross and

Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), cert.

denied, 494 U.S. 1027 (1990). The Commission notes that these cases

rest on facts that differ significantly from those giving rise to

this enforcement action. Cf. Marshfield, 65 F.3d at 1415 (``Perhaps

* * * these clauses are misused to anticompetitive ends in some

cases; but there is no evidence of that in this case''). In

particular, the conduct challenged in the present enforcement action

involved a combination of competing sellers using its market power

to stabilize prices.

In Ocean State, the First Circuit Court of Appeals rejected a

rival HMO's claim that Blue Cross and Blue Shield of Rhode Island

violated Section 2 of the Sherman Act by requiring its participating

physicians to adhere to a MFN clause. The court concluded that the

MFN clause was not unreasonably exclusionary, despite the finding

that Blue Cross possessed market power. Ocean State, 883 F.2d at

1110. The court in Ocean State reasoned that a health insurer's

unilateral decisions about what it will pay providers do not violate

the Sherman Act and stated that Blue Cross, ``like any buyer of

goods or services,'' may lawfully ``bargain with its providers for

the best price it can get.'' Id. at 1111.

In Marshfield, defendant Marshfield Clinic (a multi-specialty

medical group practice) required independent physicians contracting

with its subsidiary HMO to adhere to a MFN clause. The Seventh

Circuit Court of Appeals, in holding that the Clinic's use of the

MFN clause did not violate Section 1 of the Sherman Act, appears to

have focused on the Clinic's role as a purchaser of physician

services and found no evidence to warrant the conclusion that the

MFN clause was used as a device to stabilize prices. 65 F.3d at 1415

(MFN clauses ``are standard devices by which buyers try to bargain

for low prices * * *. The Clinic did this to minimize the cost of

physicians to it * * *.''). In addition, the court concluded that

the Clinic's HMO lacked market power, finding that less than 50

percent of physicians in the market were HMO providers and that the

HMO did not represent enough of each physician's business to impede

selective discounting. Id. at 1411 (``The 900 independent

contractors derive only a small fraction of their income from these

[Marshfield] contracts'').

In the present case, however, the Commission found reason to

believe that a group of competing sellers exercised market power

through use of an MFN clause, and that the evidence, analyzed under

a full rule-of-reason inquiry, demonstrated that the RxCare MFN

clause, on balance, has harmed consumers. In particular, the

Commission found reason to believe that:

The MFN clause, in conjunction with the high percentage of

Tennessee pharmacies' participation in the RxCare network and the

substantial amount of third-party business arising from

participation in that network, has made it possible for RxCare to

exercise market power. Under these conditions, the MFN clause

effectively created a price floor by discouraging discounting. In

addition, RxCare sought to use the MFN clause to stabilize prices.

For example, RxCare sought to persuade payers to increase their

reimbursement rates to the RxCare level. The evidence, as a whole,

was sufficient to demonstrate that the anticompetitive effects of

the MFN clause outweighed any potential efficiencies.

Description of the Proposed Consent Order

The proposed order would prohibit RxCare and TPA from entering

into, maintaining, or enforcing any MFN clause, including auditing

any pharmacy for the purpose of enforcing an MFN clause.

The proposed order would require RxCare to remove all MFN

clauses from its contracts with pharmacies, to distribute the order

and accompanying complaint to network pharmacies, and publish the

order and related documents. The order would also require RxCare and

TPA to file compliance reports, retain certain documents, and notify

the Commission of certain changes in its corporate structure.

Donald S. Clark,

Secretary.

Concurring Statement of Commissioner Mary L. Azcuenaga in RxCare of

Tennessee, Inc., File No. 951-0059

I join in the Commission's decision to accept for public comment

a consent order requiring the Tennessee Pharmacists Association

(``TPA''), a trade association of pharmacists, and its affiliated

provider of pharmacy network services, RxCare of Tennessee, Inc., to

eliminate the most favored nation clause from its provider network

contracts. I write separately to emphasize that this order does not

call into question the general lawfulness of most favored nation

clauses.\1\ Although most favored nation clauses usually raise no

competitive concerns, in this case, the clause was used in

furtherance of a horizontal agreement to stabilize the reimbursement

rates for retail pharmacy services, as alleged in paragraph eight of

the complaint.

\1\ Although this point, among others, is made in the Analysis

To Aid Public Comment, I express no opinion on that analysis, which

by its own terms ``is not intended to constitute an official

interpretation'' of the Commission's action.

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Statement of Commissioner Christine A. Varney in the Matter of RxCare,

File No. 951-0059

RxCare, a pharmacy network established and owned by the

Tennessee Pharmacists Association, contracts with health plans to

provide prescription drugs to the plans' subscribers. I have voted

to issue the complaint and accept the consent order in this matter

because I agree that the most favored nations clause, in this case,

may have

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lessened competition. But, in doing so, I want to emphasize that joint

ventures by retail pharmacists can be precompetitive by injecting

new competition into the market for pharmacy benefit management

services.\2\ I believe many of RxCare's programs can be

procompetitive. The matter before the FTC concerns only one aspect

of RxCare's pharmacy benefit management programs--its imposition of

a most favored nations clause. By working on an expedited basis,

staff has been able to identify this concern quickly and, by working

closely with RxCare, has resolved it in a mutually agreeable

fashion.

\2\ See Prepared Remarks of Christine A. Varney, ``Responses to

the Managed Care Revolution: A Competition Policy Perspective,''

Conference of the National Ass'n of Retail Druggists, March 27,

1995.

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[FR Doc. 96-1497 Filed 1-28-96; 8:45 am]

BILLING CODE 6750-01-M