Institutional Pharmacy Network, et al.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 961-0005]

Institutional Pharmacy Network, et al.; Analysis to Aid Public

Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before July 31, 1998.

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:

William Baer or Willard Tom, FTC/H-374, Washington, DC 20580. (202)

326-2032 or 326-2786.

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

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

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned 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. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for May 21, 1998), on the World Wide Web, at ``http://www.ftc.gov/os/

actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, NW,

Washington, DC 20580, either in person or by calling (202) 326-3627.

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 Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted, subject to final

approval, an agreement to a proposed consent order from Institutional

Pharmacy Network (IPN) and its five members: Evergreen Pharmaceutical,

Inc.; NCS Healthcare of Oregon, Inc.; NCS Healthcare of Washington,

Inc.; United Professional Companies, Inc.; and White, Mack and Wart,

Inc.

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 or 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 any

proposed respondent that the law has been violated as alleged in the

complaint.

Description of the Draft Complaint

A complaint that the Commission prepared for issuance along with

the proposed order alleges the following:

Evergreen Pharmaceutical, Inc.; NCS Healthcare of Oregon, Inc.; NCS

Healthcare of Washington, Inc.; United Professional Companies, Inc.;

and White, Mack and Wart, Inc., are institutional pharmacies that

compete to serve institutional care facilities, such as nursing homes.

Institutional pharmacies provide specialized services, including

providing medications in single dose packages, maintaining an

``emergency box'' at the client facility with drugs for use in

emergency situations, and providing consulting and quality assurance

services to institutional care facilities. The institutional pharmacy/

respondents together provide pharmacy services for approximately 80

percent of the patients that receive institutional pharmacy services in

Oregon.

The State of Oregon created the Oregon Health Plan (``OHP'') in

1994 to provide health care to Medicaid recipients and other needy

Oregonians. Under OHP, the state contracts with Fully Capitated Health

Plans (``Plans''), which are managed care organizations that receive a

fixed payment to care for

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OHP patients. The Plans in turn contract with providers, including

nursing homes, hospitals, physicians, retail pharmacies, and

institutional pharmacies. OHP covers about half of all institutional

care patients in Oregon.

The institutional pharmacy respondents formed IPN to offer their

services jointly. Their purpose to negotiate collectively has been to

maximize their resulting leverage in bargaining over reimbursement

rates with the Plans. Indeed, even before forming IPN, they saw ``an

advantage to negotiate from strength for reimbursement'' because they

recognized that competition among themselves would drive down

reimbursement rates. IPN neither provides new or efficient services,

nor enables its members to provide new or efficient services. Moreover,

IPN members do not share risk.

IPN has contracted with three Plans. Pursuant to each of those

contracts, each Plan pays IPN members a higher rate than it pays

institutional pharmacies that are not IPN members and that did not

negotiate collectively with that Plan. IPN also attempted to contract

with at least four other Plans. Clinical, Evergreen, IPAC, ProPac, and

UPC agreed that, before conducting individual negotiations, each member

would give IPN time to attempt to negotiate a contract. Pursuant to

this agreement, the pharmacies negotiated separately with three of the

Plans only after IPN failed to reach an agreement on behalf of the

group. IPN also negotiated with a fourth Plan that is by far the

largest purchaser of institutional pharmacy services for OHP patients.

Although this Plan sought to deal with the pharmacies individually,

they largely refused to respond and instead approached the Plan as a

group. After months of attempting to negotiate individually with the

institutional pharmacy members of IPN, and under pressure to implement

pharmacy arrangements for institutional care patients under OHP, the

Plan began negotiating with IPN. As a result of these negotiations, the

Plan agreed to pay higher rates to IPN members than it had agreed to

pay other institutional pharmacies.

The institutional pharmacy members of IPN have agreed among

themselves, and used IPN, to engage in collective negotiations over

price and other terms with the Plans and thereby to fix the fees they

charge the Plans. In so doing, IPN and its institutional pharmacy

members have fixed, stabilized, or increased the price of institutional

pharmacy services and otherwise restrained competition among

institutional pharmacies in Oregon and thereby deprived the State of

Oregon, the Plans, nursing homes and other long-term care facilities,

and OHP beneficiaries of the benefits of competition among providers of

institutional pharmacy services in Oregon.

Description of the Proposed Consent Order

The proposed order would prohibit IPN and the institutional

pharmacy respondents from entering into, maintaining, or enforcing any

agreement with any pharmacy concerning fees or fixing, raising,

stabilizing, maintaining, or tampering with any fees. The proposed

order contains a number of provisos.

Proviso (1) allows each respondent to engage in conduct (including

collectively determining reimbursement and other terms of contracts

with payers) that is reasonably necessary to operate (a) any

``qualified risk-sharing joint arrangement,'' or (b) upon prior notice

to the Commission, any ``qualified clinically integrated joint

arrangement.'' The proviso addresses the arrangements that the

respondents may enter into, rather than the overall nature of the

group, because a pharmacy network may enter into legitimate

arrangements with some third-party payers but engage in illegal conduct

with respect to others. For the purposes of the order, a ``qualified

risk-sharing joint arrangement'' must satisfy two conditions: (a)

participating pharmacies must share substantial financial risk and (b)

the arrangement must be non-exclusive. The order lists ways in which

pharmacies might share financial risk. These track the four types of

financial risk sharing set forth in the Joint FTC-Department of Justice

Statements of Antitrust Enforcement Policy in Health Care. 4 Trade Reg.

Rep. (CCH) para. 13,153 (August 29, 1996). To be a ``qualified'' risk

sharing arrangement, the arrangement must also be non-exclusive, both

in name and in fact. An arrangement that either restricts the ability

of participating pharmacies to contract outside the arrangement

(individually or through other networks) with third-party payers, or

facilitates refusals to deal outside the arrangement by participating

pharmacies, does not fall within the proviso. Although exclusive joint

arrangements are not necessarily anticompetitive, they can impair

competition, particularly when they include a large portion of the

pharmacies in a market. In light of the IPN members' large share of the

Oregon institutional pharmacy market, this definition does not permit

the respondents to form or participate in exclusive arrangements.

A qualified clinically integrated joint arrangement includes

arrangements in which the pharmacies undertake cooperative activities

to achieve efficiencies in the delivery of clinical services, without

necessarily sharing substantial financial risk. For purposes of the

order, such arrangements are ones in which the participating pharmacies

have a high degree of interdependence and cooperation through their use

of programs to evaluate and modify their clinical practice patterns, in

order to control costs and assure the quality of pharmacy services

provided through the arrangement. As with risk-sharing arrangements,

the definition of clinically integrated arrangements reflects the

analysis in the 1996 FTC/DOJ Statements of Antitrust Enforcement Policy

in Health Care and the arrangement must be non-exclusive. Because the

definition of a clinically integrated arrangement is by necessity less

precise than that of a risk sharing arrangement, the order imposes

prior notification requirements. Such prior notification will allow the

Commission to evaluate the likely competitive impact of a specific

proposed arrangement and thereby help guard against the recurrence of

acts and practices that have restrained competition and consumer

choice.

The remaining provisos allow business arrangements typical to

pharmacy markets. Proviso (2)(a) allows the proposed respondents to

contract with pharmacy benefit managers that own or are affiliated with

retail pharmacies. Provisos (2)(b) and (3) together permit price

agreements between a pharmacy and a nursing home even if the nursing

home is affiliated with a pharmacy. Provisio (2)(c) permits a pharmacy

to enter into subcontracting agreements where it is not reasonable for

a pharmacy with an agreement with a nursing home or third-party payer

to provide services by itself. Such agreements are common among both

retail and institutional pharmacies. Proviso (2)(c) also allows for

such subcontracts where the respondent that operates a long-term care

network (as UPC does) enters into an agreement with the incumbent

pharmacy provider for an institutional facility within that network.

Finally, Proviso (4) permits pharmacy agreements to operate or manage a

pharmacy.

Parts III.A and III.B of the proposed order require the respondents

to distribute the order to the Fully Capitated Health Plans and to

certain officers, directors, and managers. Parts III.C, III.D, and

III.E require each

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respondent to file compliance reports, retain certain documents, and

notify the Commission of certain changes in its corporate structure.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 98-14420 Filed 5-29-98; 8:45 am]

BILLING CODE 6750-01-M