FTC Staff Comment Concerning the Competitive Effects of RI General Assembly Bills Containing Pharmaceutical "Freedom of Choice" and "Any Willing Provider" Provisions

1 This letter expresses the views of the FTC’s Office of Policy Planning, Bureau of Competition, and Bureau of
Economics. The letter does not necessarily represent the views of the Commission or of any individual
Commissioner. The Commission has, however, voted to authorize us to submit these comments. The specific
General Assembly Bills are 2004-H 7042, 2004-H 7047, 2004-H 7129, 2004-H 7131, 2004-H 7417, 2004-S 2015,
and 2004-S 2140. We note that the Bills were introduced after the U.S. District Court declined to find Blue Cross’
restricted network for the delivery of pharmaceutical services in Rhode Island a violation of the antitrust laws. See
Stop & Shop Supermarket v. Blue Cross & Blue Shield of Rhode Island, 239 F. Supp. 2d 180 (D. R.I. 2003).
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Competition
Bureau of Economics
April 8, 2004
Patrick C. Lynch
Attorney General
State of Rhode Island and Providence Plantations
150 South Main Street
Providence, RI 02903
Juan M. Pichardo
Deputy Majority Leader, Senate
State of Rhode Island and Providence Plantations
Room 308, State House
Providence, RI 02903
Dear General Lynch and Deputy Majority Leader Pichardo,
The staffs of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics are pleased to respond to your requests for comments on
the competitive effects of seven Rhode Island bills (the “Bills”).1 Although the Bills differ in
their details, all include so-called “freedom of choice” provisions for patients who require
pharmaceutical services, and “any willing provider” provisions directed at health insurers and
employee benefit plans that contract with pharmacies. Each of the Bills limits the ability of
health insurers and employee benefit plans to restrict the “freedom of choice” of consumers in
selecting where they will obtain pharmaceutical services, and the ability of health insurers and
employee benefit plans to contract selectively with pharmacies in Rhode Island. Instead, health
insurers and employee benefit plans must ensure “freedom of choice” for consumers among all
sources of pharmaceutical services in Rhode Island, and include in their networks any pharmacy
that is willing to accept the terms that are offered. In separate letters, you asked us to analyze

2 Federal Trade Commission Act, 15 U.S.C. § 45.
3 See, e.g., FTC Antitrust Actions in Health Care Services and Products, http://www.ftc.gov/bc/hcupdate031024.pdf;
FTC Antitrust Actions in Pharmaceutical Services and Products, http://www.ftc.gov/bc/0310rxupdate.pdf.
4 The specific states were Massachusetts (letter from Bureau of Competition to Representative John C. Bartley (May
30, 1989)), New Hampshire (letter from Office of Consumer and Competition Advocacy to Paul J. Alfano (March
17, 1992)), California (letter from Office of Consumer and Competition Advocacy to Senator Patrick Johnston (June
26, 1992)), Montana (letter from Office of Consumer and Competition Advocacy to Montana Attorney General
Joseph P. Mazurek (February 4, 1993)), New Jersey (letter from Office of Consumer and Competition Advocacy to
New Jersey Assemblyman E. Scott Garrett (March 29, 1993)), Pennsylvania (letter from Office of Consumer and
Competition Advocacy to Pennsylvania Senator Roger Madigan (April 19, 1993)), and South Carolina (letter from
Office of Consumer and Competition Advocacy to Representative Thomas C. Alexander (May 10, 1993)). letter
from Bureau of Competition to David A. Gates, Commissioner of Insurance, State of Nevada (November 5, 1986).
5 See, e.g., Transcript of Health Care Hearings 153-57 (June 10, 2003), at
http://www.ftc.gov/ogc/healthcarehearings/030610ftctrans.pdf.
6 See, e.g., FTC, Statement of Enforcement Policy With Respect to Physician Agreements to Control Medical
Prepayment Plans, 46 Fed. Reg. 48982, 48984 (October 5, 1981); Statement of George W. Douglas, Commissioner,
On Behalf of the Federal Trade Commission, Before the Subcommittee on Health and the Environment of the
2
these bills, and particularly to discuss the bills’ “impact on prices to consumers,” “cost-benefit
tradeoff,” and “possible competitive effects.”
Although several of the Bills recite that they are intended to maximize competition and
assure greater “freedom of choice,” we believe that, if enacted, any of the bills would likely have
the unintended consequences of limiting competition, undermining freedom of choice, and
increasing the costs of pharmaceutical services. Of course, to the extent that these prices rise,
they would also have the effect of increasing health insurance prices and restricting the
availability of insurance – exactly the opposite of the Bills’ intent.
Interest and Experience of the Federal Trade Commission
The FTC is charged by statute with preventing unfair methods of competition and unfair
or deceptive acts or practices in or affecting commerce.2 Under this statutory mandate, the
Commission seeks to identify business practices and regulations that impede competition
without offering countervailing benefits to consumers. For decades, the Commission and its
staff have investigated the competitive effects of restrictions on the business practices of health
care providers.3 In the late 1980s and early 1990s, Commission staff commented on similar “any
willing provider” and “freedom of choice” bills in other states.4 In addition, the recent joint FTC
/ DOJ health care hearings included testimony regarding the impact of any willing provider and
freedom of choice statutes.5
Competition among third party payers and health care providers can enhance the range of
services available to consumers and reduce health care costs. The Commission has noted that
the use of limited panels of health care providers has been an effective means of promoting
competition and lowering the price of health care services.6 The Commission has accordingly

Committee on Energy and Commerce, United States House of Representatives, on H.R. 2956: The Preferred
Provider Health Care Act of 1983 at 2-3 (October 24, 1983); Health Care Management Associates, 101 F.T.C. 1014,
1016 (1983) (advisory opinion). See also Bureau of Economics, FTC, Staff Report on the Health Maintenance
Organization and Its Effects on Competition (1977).
7 See, e.g., Medical Service Corp. of Spokane County, 88 F.T.C. 906 (1976); American Medical Association, 94
F.T.C. 701 (1979), aff'd as modified, 638 F.2d. 443 (2d Cir. 1980), aff'd by an equally divided court, 455 U.S. 676
(1982); Forbes Health System Medical Staff, 94 F.T.C. 1042 (1979); Medical Staff of Doctors' Hospital of Price
George's County, 110 F.T.C. 476 (1988); Eugene M. Addison, M.D., 111 F.T.C. 339 (1988); Medical Staff of Holy
Cross Hospital, No. C-3345 (consent order, Sept. 10, 1991); Medical Staff of Broward General Medical Center, No.
C-3344 (consent order, Sept. 10, 1991). See also American Society of Anesthesiologists, 93 F.T.C. 101 (1979);
Sherman A. Hope. M.D., 98 F.T.C. 58 (1981).
8 See letter from Office of Consumer and Competition Advocacy to California Senator Patrick Johnston (June 26,
1992) and letter from Office of Consumer and Competition Advocacy to New Jersey Assemblyman E. Scott Garrett
(March 29, 1993).
9 In 2003, approximately 172 million Americans were insured by commercial health plans. Of these, approximately
156 million were enrolled in either PPO or HMO plans. See http://www.mcareol.com/factshts/mcolfact.htm.
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taken law enforcement action against anticompetitive efforts to suppress or eliminate health care
programs that use selective contracting to create a limited panel of health care providers.7 FTC
staff has also submitted comments to government bodies about the competitive effects of various
regulatory proposals to restrict selective contracting. Two of these comments addressed “any
willing provider/freedom of choice” requirements for pharmacies.8
Description of Proposals
All of the Bills require health insurers and employee benefit plans to ensure “freedom of
choice” to consumers, and to include in their network of providers any pharmacy that is willing
to participate on the terms that are offered to other network pharmacies. Several of the Bills also
specify procedural requirements that health insurers and employee benefit plans must satisfy
before they can create a pharmacy network, or require the Department of Health to develop rules
and regulations to ensure “fair and competitive bidding.” Six of the seven Bills (all but 2004-S
2140) would prohibit mail order pharmacies from being included in these pharmacy networks.
Competitive Importance of Selective Contracting
Over the last thirty years, financing and delivery programs that provide health care
services through a limited panel of health care providers have proliferated. Virtually all private
insurers offer limited-panel programs of one sort or another, and the majority of privately
insured Americans now are enrolled in such plans. 9 These arrangements developed in response
to the rising costs associated with traditional fee-for-service health care. The programs, which
include such disparate organizational forms as HMOs, preferred provider panels, and point of
service plans, typically involve contractual agreements between the payer and participating
health care providers that limit, at least to some degree, the patient’s choice of provider for
covered services.

10 See Morrisey, “Competition in Hospital and Health Insurance Markets: A Review and Research Agenda,” Health
Services Research 36 (2001), 191-221, for a review of this literature. By statute, the Commission has no jurisdiction
over the business of insurance.
11 See, e.g., Sorensen, “Insurer-Hospital Bargaining: Negotiated Discounts in Post-Deregulation Connecticut,”
Journal of Industrial Economics 51 (2003), 469-90 (“ability of insurers to obtain discounts determined primarily by
ability of insurer to channel patients to hospitals with which favorable discounts have been negotiated”); Ellison and
Snyder, “Countervailing Power in Wholesale Pharmaceuticals,” MIT Working Paper 01-27 July 2001 (“buyers of
wholesale drugs that can use restrictive formularies obtain substantially lower prices than buyers without this
ability”); Staten et al. “Market Share and the Illusion of Power: Can Blue Cross Force Hospitals to Discount?”,
Journal of Health Economics (1987), 43-58 (“Blue Cross obtained substantial discounts only when it had numerous
hospitals with which to potentially contract”).
12 See, e.g., Wholey et al., “The Effect of Market Structure on HMO Premiums,” Journal of Health Economics 14
(1995), 81-106 (“more competition, measured by the number of HMOs in the market area, reduces HMO
premiums”). Reductions in the premiums borne by the employer ultimately can also benefit employees in the form
of wage increases. When employers bear higher nonwage employment costs (e.g., because they are compelled by
law to offer higher cost health benefits), both theory and empirical evidence show that the costs of these benefits are
4
An abundance of empirical evidence now exists demonstrating that, other things equal,
selective contracting increases the intensity of competition among providers, which is manifested
in lower prices paid by insurers to providers. The competition’s intensity increases with the
number of providers in the relevant market, and with the restrictiveness of the insurance
contracts found in the market (i.e., HMOs, which have more limited panels than PPOs, induce
more intense price competition among providers than would PPOs of equivalent size). 10 These
findings conform to economic theory. When insurers have a credible threat to exclude providers
from their networks and channel patients elsewhere, providers have a powerful incentive to bid
aggressively. Inclusion in a restricted panel offers the provider the prospect of substantially
increased sales opportunities. Without such credible threats, however, providers have less
incentive to bid aggressively, and even managed care organizations with large market shares
may have less ability to obtain low prices. 11
Restricted provider panels may also lower costs through greater efficiency, because
higher sales volumes may allow the provider to lower its unit costs. In the case of pharmacies,
for example, a preferential or exclusive arrangement may allow a pharmacy to enjoy economies
of scale from spreading fixed costs over a larger volume of sales, and the arrangement may
facilitate better business planning by making its sales volume more predictable. Moreover,
payers may seek to limit the number of pharmacies with which they contract not only to induce
more aggressive price competition among pharmacies, but also because their administrative costs
might be lower for a limited-panel program than for one requiring the payer to deal with, and
make payments to, all or most of the pharmacies doing business in a program’s service area.
Competition among plans offering different arrangements for providing pharmacy
services (including competition between plans that limit pharmacy participation and plans that
do not), would tend to ensure that the gains from these cost savings will benefit consumers of
health care services, either through lower premiums for health insurance, lower out-of-pocket
costs (for that portion of health care expenditures borne directly by consumers through
deductibles and co-payments), or improved services.12

ultimately borne by workers in the form of lower wages. See, e.g., Gruber, “The Incidence of Mandated Maternity
Benefits,”American Economic Review 84 (1994), 622-41 (“the cost of state and federal mandates stipulating that
childbirth be covered comprehensively in health insurance plans resulted in lower wages for the targeted
beneficiaries”).
13 See, e.g., Scanlon, “Impact of Health Plan Report Cards on Managed Care Enrollment,” Journal of Health
Economics, 21 (2002), 19-41; Beaulieu, “Quality Information and Consumer Health Plan Choices,” Journal of
Health Economics, 21 (2002), 43-63 (“employees respond to information on price and quality when choosing health
plans”).
14 “Any willing provider” laws therefore may have economic effects similar to “price matching” policies (whereby a
seller guarantees that he will meet the best price that a buyer can obtain elsewhere). These policies, though
seemingly procompetitive on their face, actually can result in higher prices because they reduce sellers’ willingness
to cut prices aggressively. See, e.g., Edlin and Emch, “The Welfare Losses From Price-Matching Policies,” Journal
of Industrial Economics 47 (1999), 145-67.
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Whether explicitly or implicitly, all of the bills emphasize the importance of ensuring
broad access to pharmacy services for all consumers. Not all consumers, however, will
necessarily desire such broad access if this expanded access is costly. Many employers offer a
choice between higher cost, higher benefit plans, and lower cost, lower benefit plans, and many
employees choose the latter.13 Consumer preference for such programs presumably means that,
in at least some consumers’ view, the advantages of lower premiums and/or lower out-of-pocket
costs outweigh the disadvantages of limiting the choice of provider.
Limitations on choice are unlikely to be so severe that consumers’ access to pharmacy
services is inadequate. Just as competitive forces encourage pharmacies to offer their best price
and service combination to a payer to gain access to its subscribers, competition also encourages
payers (and employers) to establish pharmacy service arrangements that offer the level of
accessibility that subscribers prefer.
Effects of “Any Willing Provider” Provisions
The Bills effectively preclude exclusive contracts between payers and a restricted panel
of pharmacies. From the perspective of a pharmacy negotiating the terms on which it is willing
to deal with health insurers and employee benefit plans, this means that a pharmacy has no
contract-based expectation of obtaining a substantial portion of the subscribers’ business, and
faces no threat of sales losses if it fails to bid aggressively for inclusion in payers’ networks.
Because any pharmacy would be entitled to contract on the same terms as all other pharmacies,
there would be little incentive for pharmacies to compete in developing attractive or innovative
proposals. Because all other pharmacies can “free ride” on a successful proposal formulation,
innovative providers may be unwilling to bear the costs of developing a proposal. Thus “any
willing provider” requirements may substantially reduce competition among pharmacies.14
Moreover, requiring “freedom of choice” and compelling programs to be open to any
willing provider may not give consumers any additional choices, if consumers may already
choose among multiple health insurance offerings – some with restricted pharmacy services and
others with more expansive pharmacy benefits. Indeed, such strategies may actually reduce the

15 Feldman et al. estimate a high firm-level demand elasticity for health insurance (-3.91 for single coverage, -5.82
for family coverage). To translate this into marginal effects, they calculate that if monthly premiums to firms
increased by $1, the proportion of firms offering health insurance to employees would decline by almost 2
percentage points (e.g., in their sample, about 61% of firms offered insurance. A $1 monthly increase in premiums
would reduce this percentage to almost 59%). See Feldman et al. “The Effect of Premiums on the Small Firm’s
Decision to Offer Health Insurance,” Journal of Human Resources 32 (1997), 635-58.
16 Vita, “Regulatory Restrictions on Selective Contracting: An Empirical Analysis of ‘Any Willing Provider’
Regulations,” Journal of Health Economics, 20 (2001), 955-966. This study controls for differences in the states’
populations, including factors such as age, ethnicity, educational background, employment background (government,
agriculture, manufacturing, etc.), income, population density, and the population growth rate.
17 Morrisey & Ohsfeldt, “Do State ‘Any Willing Provider’ and ‘Freedom of Choice’ Laws Affect HMO Market
Share?” Inquiry (2003).
18 Ohsfelt et al., “The Spread of State Any Willing Provider Laws,” Health Serv. Res. (1998); Hellinger, “Any
Willing Provider and Freedom of Choice Laws: An Economic Analysis,” Health Affairs 14:4 (1995), 297-99;
Hyman, “What’s Wrong With a Patient Bill of Rights,” 73 S. Cal. L. Rev. 221 (2000).
19 This conclusion holds even when a single payer has market power. This payer still would have a substantial
incentive to induce pharmaceutical providers to bid aggressively for inclusion in its network, as well as an incentive
to pass at least some of these savings on to consumers and employers in the form of lower prices and premiums. See
Bulow and Pfleiderer, “A Note on the Effect of Cost Changes on Prices,” Journal of Political Economy 91, 182-85
(1983) (“a monopolist will pass on some, and possibly all, of a cost reduction in the form of lower prices”).
Imposing “any willing provider” or “freedom of choice” requirements on such a firm will not reduce its market
power (only competition from other payers can do that), but would reduce competition among the providers with
which that payer must contract. There is, therefore, no reason to believe – and there is no empirical evidence to
suggest – that consumers would benefit from laws preventing that payer from contracting selectively with
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options available to consumers without providing any additional consumer benefit. We note also
that if imposing “freedom of choice” obligations on payers raises insurers’ costs, and therefore
the premiums they charge, then some employers may elect to drop health care coverage for some
or all of their employees.15
Empirical evaluations of any willing provider and “freedom of choice” provisions
indicate that these policies result in higher health care expenditures. One study found that states
with highly restrictive any willing provider/freedom of choice laws spent approximately 2%
more on healthcare than did states without such policies. 16 This finding likely reflects the fact
that these laws reduce the ability of insurers to offer less expensive plans with limited provider
panels. This interpretation is supported by another study that found that metropolitan areas with
a high intensity of any willing provider/freedom of choice regulation had HMO market shares
approximately 7% lower than comparable areas without these provisions, presumably because
such regulations diminished the ability of HMOs to offer cost savings. 17 “Freedom of choice”
provisions reduced HMO market share more than any willing provider laws.
Several scholars have noted that any willing provider and “freedom of choice” laws are
more likely to appear in states with limited managed care penetration, and suggested that these
provisions actually preempt competition among providers, instead of protecting the interest of
patients.18 In other words, such laws appear to protect competitors, not competition or
consumers. 19

pharmaceutical providers, even in these hypothetical circumstances.
20 Prescription Drug Discount Cards, U.S. General Accounting Office, GAO-03-912, September 2003, p. 11.
21 Sage, Hyman, & Greenburg, “Why Competition Law Matters to Health Care Quality” Health Affairs, 22:2 at 35
(March/April 2003).
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Restrictions on Mail Order Pharmacies
As noted earlier, almost all of the Bills would ban mail order pharmacies from inclusion
in payer networks. This restriction would almost surely reduce consumer welfare, because mail
order pharmacies often offer lower prices than other retail outlets. A recent GAO study observed
that “because it generally offers lower prices than retail pharmacies, mail order can be an
attractive option for purchasing drugs.”20 In its empirical study, the GAO study found that mail
order prices typically were substantially below the prices offered by the retail pharmacies in their
sample.
Conclusion
By eliminating an important form of competition in the market for pharmaceutical
services, the Bills are likely to increase the cost of those services. These cost increases are likely
to undermine the ability of some consumers to obtain the pharmaceutical services they need at a
price they can afford. As a recent article in Health Affairs noted, “when costs are high, people
who cannot afford something find substitutes or do without. The higher the cost of health
insurance, the more people are uninsured. The higher the cost of pharmaceuticals, the more
people skip doses or do not fill their prescriptions.” 21 Although the Bills appear intended to
broaden access to pharmaceutical services, there is a significant probability they will have the
opposite effect.
Respectfully submitted,
Todd J. Zywicki, Director
Office of Policy Planning
Susan A. Creighton, Director
Bureau of Competition
Luke M. Froeb, Director
Bureau of Economics
David Hyman
Special Counsel