FTC Staff Comment to the Hon. H. Craig Lewis Concerning Pennsylvania S.B. 675 the Pharmaceutical Services Freedom of Choice Act

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UNITED. STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLEVELAND REOlONAL OFFICE
June 29, 1990
V900024
COMMISSION 	AUTHORIZED
The Honorable H. Craig Lewis
Sena te of Pennsylvania
The Commonwealth of Pennsylvania
The State Capitol
Harrisburg, Pennsylvania 	1712()'()()30
Dear Senator Lewis:
The staff of the Federal Trade Commission is pleased to present its views on
Pennsylvania 	Senate Bill 675, entitled the 	"PharmaceuticalS'ervices Freedom 	of
Choice Act.Ht This bill, if enacte~ would require any health insurance policy 2 or
employee benefit plan that covers pharmaceutical services to offer those services
through 	certain 	types 	of 	arrangements 	with 	pharmaceutical 	providers 	that 	are
specified in the bilL 	Under the proposal, plans or policies that now offer, or wish to
offer, pharmaceutical services 	through" contractual 	arrangements 	with 	a 	limited
number of pharmacies would be required to allow all other pharmacies to participate
on the same terms, and to allow subscribers to obtain pharmaceutical services from
any pharmacy willing to participate as a provider under the terms of the plan or
policy. 	While S.B. 675 appears intended to g'.1arantee consumers greater freedom to
choose where they obtain covered pharmacy services, the proposed legislation appears
likely 	to 	have 	the 	unintended 	effect 	of 	denying 	consumers 	the 	benefits 	of
cost-reducing arrangements in the provision of pharmaceutical services.
1 	These comments represent the views of the staff of the Cleveland Regional
Office and the Bureau of Competition of the Federal Trade Commission. and do
not 	necessarily 	represent 	the 	views 	of 	the 	Commission 	or 	any 	individual
Commissioner.
2 	While 	the 	proposed 	provisions of S.B. 675 	apply 	to 	both 	health 	insurance
policies and employee benefit plans. we do not comment on the aspects which relate
to heal th insurance policies.

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The Honorable H. Craig Lewis
Senate of Pennsylvania 	- 	Page 2.
L 	INTEREST AND EXPERIENCE OF THE STAFF OF THE FEDERAL
TRADE COMMISSION
The Federal Trade Commission is empowered under 15 U.s.C § 41 et seq., to
prevent unfair methods of competition and unfair or deceptive «cts or practices in
or 	affecting 	commerce. 	Pursuant 	to 	this 	statutory 	mandate, 	the 	Commission
encourages competition in the licensed professions. including the health professions~
to the maximum extent compatible with other state and federal goals. 	For more
than a decade, the Commission and its staff have investigated the competitive effects
of restrictions on the business arrangements of hospitals and state-licensed health
professionals.
The Commission has observed that competition among health care benefit
programs and health care providers can enhance consumer choice and the availability
of services, and lower the overall cost of health care. 	In particular, the Commission
has noted that the use by prepaid health care programs of limited panels of health
care providers is an effective means of promoting-competition among such providers.3
The Commission has taken law enforcement action against anti-competitive efforts
to 	prevent 	or 	eliminate 	health 	care 	programs. 	such 	as 	Health 	Maintenance
Organizations (HMOs)l which involve selective contracting with a limited panel of
health care providers. 	The staff of the Commission, on 	reques4 has submitted
comments 	to 	federal 	and 	state 	government 	agencies 	explaining 	that 	various
3 	Federal Trade Commission, Statement of Enforcement Policy With Respect
to Physician Agreements to Control Medical Prepayment Plans, 46 Fed Reg. 48982,
48984 (October S, 1981); Statement of George W. Douglas, Commissioner, On Behalf
of 	the 	Federal Trade Commission, Before the Subcommittee on Health and the
Environment of the Committee on Energy and Commerce, United States Hou'se 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. Federal Trade Commission, Staff
Report on the "Health Maintenance Organization and Its Effects on Competition
(1977).
4 	See. e.g., American Medical Association, 94 F.T.C. 701 (1979), affd as modified,
638 F2d 443 (2d Cir. 1980), affd by an equally divided court, 455 US. 676 (1982) [order
modified 99 F.T.C. 440 (1982) and 100 F.T.C 572 (1982)t 	Medical Service Corp. of
Spokane County, 88 F.T.C. 906 (1976) (consent order); Forbes Health System Medical
Staff, 94 F.T.C.l042 (1979) (consent order); Medical Staff of Doctors' Hospital of Prince
George's County, No. C-3226 [FTC consent order issued Apr. 14, 1988. 53 Fed. Reg.
18.273 (May 23, 1988)t Eugene M. Addison. M.D., No. C-3243 (FTC consent order issued
Nov. 15, 1988~

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The Honorable H. Craig Lewis
Senate of Pennsylvania 	Page 3.
regulatory 	schemes 	would 	interfere 	unnecessarily 	with 	the 	operation 	of 	such
arrange men ts.5
IL 	HEALm 	CARE FINANCING AND DELIVERY SYSTEMS THAT LIMIT
PROVIDER 	PARTICIPATION 	AND 	SUBSCRIBERS' 	CHOICE 	OF
PROVIDERS
During the last twenty years, in response to increasing demand from employers
and consumers for alternatives that could moderate the increases it 	health care costs
associated 	with 	traditional 	fee-for-service 	medicine, 	health 	care 	financing 	and
delivery programs have proliferated that either directly provide, or arrange for the
provision of, covered health care services through a limited "panel" of health care
providers. 	Among these programs, which typically involve contractual agreements
between the payor and "participating" health care providers, are health maintenance
organizations and preferred provider organizations. Even commercial insurers, which
do not generally contract with providers, and Blue Cross or Blue Shield plans, whic~
while generally contracting with providers, do not severely limit the number of
providers who may participate in their programs, now frequently also offer programs
5 	The Commission'S staff submitted comments with respect to a state prohibition
on exClusive provider contracts (a means of limiting a plan's provider panel) between
HMOs and physicians, noting that such a prohibition could be expected to hamper
prO-COrhpetitive and beneficial activities of HMOs, and deny consumers the improved
services that such competition would stimulate. 	Letter from Jeffrey 1. Zuckerma~
Director, Bureau of Competition, Federal Trade Commission, to David A. Gates,
Commissioner of Insurance, State of Nevada (November 5, 1986). 	Similarly, the staff
submitted comments to the Department of Health and Human Services suggesting
that,- in view of the pro-competitive and cost-containment benefits of HMOs and
PPOs, proposed 	Medicare and Medicaid 	anti-kickback 	regulations should 	not be
written or interpreted so as to prohibit various common contractual relationships that
HMOs and PPOs have with limited provider panels. Comments of the Federal Trade
Commission's 	Bureaus 	of 	Competition. 	Consumer 	Protection, 	and 	Economics
Concerning the Development of Regulations Pursuant to the Medicare and Medicaid
Anti-Kickback Statute at 6-13 (December 18.1987). The staff also submitted comments
to 	the 	Massachusetts House 	of Representatives concerning legislation similar to
S.B. 675. under which all pharmacies would have the right to contract on the same
terms with a carrier, and noted that such a provision might reduce competition in
both the pharmaceutical services and prepaid health care programs. raise costs to 	.
consumers, and restrict consumers' freedom to choose health benefit programs. Letter
from 	Jeffrey 	1. 	Zuckerman, 	Director. 	Bureau 	of 	Competition. 	Federal 	Trade
Commission, to Representative John C. Bartley (May 30. 1989, commenting on S. 526).

The Honorable H 	Craig Lewis
Senate of Pennsylvania 	Page 4.
that do limit provider participation. 	By having a range of such programs available,
payors 	are 	attempting 	to 	meet 	the 	needs 	and 	preferences 	of 	their 	customers.
Consumers select different program options depending on their personal preferences
and anticipated health needs.·
The popular success of programs that limit provider participation is likely due
to their perceived ability to help control the large and rapid increases in the costs of
health care services, and to subscribers' desire for the broader coverage and lower
out-of-pocket payments that these cost savings make possible. 	Competition among
prepaid health care programs that limit provider participation, as well as programs
that do not, should ensure that ~""'st savings generated by these programs are passed
on to consumers. 	This is true 'for all types of health care 	providers, including
providers of pharmaceutical services.
Pharmacies 	that 	compete 	for 	the 	prescription 	business 	of 	patients, 	and
subscribers of prepaid health care programs that cover prescription drugs represent
an increasingly important source of business for pharmacies.6 Pharmacies, pharmacy
chains or groups of pharmacies, may acquire this segment of business by seeking
access 	to 	subscribers 	in 	a 	payor's 	program. 	Pharmaceutical 	providers 	seek
preferentia~ or even exclusive, access to a program's subscribers. Such arrangements
may 	facilitate business planning by making the volume of sales more predictable
and may reduce transaction costs by reducing the number of insurance providers
with whom they are dealing or may reduce marketing costs otherwise necessary to
generate the same business. Payor.s.offer such preferential or exclusive arrangements
to selected pharmacies, and include incentives in their subscriber contracts (e.g., lower
deductibles and co-payments) for subscribers to use the selected pharmacies or, in
some cases (such 	as in 	many HMO contracts), pay for services only if they are
obtained at a contracting pharmacy.
6 	In 1987, payments by private insurance for "drugs and medical sundries" were
$4.7 billion of the $34.0 billion total spent for those items that year. 	S. W. Letsch.
et al.. NaJional Health 	Expenditures, 1987, 10 HEALTH 	CARE FINANCING 	REVIEW 109, 115
(Winter 	1988). 	Industry 	representatives 	estimated 	that 	about 	one-third 	of 	the
$23.6 billion consumers were expected to spend on prescription drugs in 1989 would
be paid for by third-party programs. 	Statement of Boake A. Sells, Chairman and
Chief Executive Officer, Revco Drug Stores, Inc.. quoted in 11 DRUG STORE NEWS 109
(May 1, 1989). 	Total expenditures for drugs and medical sundries are projected to
increase to $42.1 billion by 1990. 	Division of National Cost Estimates, Office of the
Actuary, Health Care Financing Administration, Department of Health and Human
Services. Neuio/Zal Health Expenditures, 1986-2000, 8 HEALTH CARE FINANCING REVIEW L 25
(Summer 1987).

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The Honorable H. Craig Lewis
Senate of Pennsylvania 	Page 5.
Third-party payors find such arrangements attractive because, in order to win
the contracts, pharmacies compete to offer lower prices and additional services which
they can offer because of the advantages noted above. 	These benefits, in turn, help
make the payor's programs more attractive in the prepaid health care market. 	In
addition, administrative costs to the payor may be less in this type of arrangement
than those in which the payor must deal with, and make payments to, all or most of
the pharmacies doing business in a program's service area. Likewise, it may be easier
for a payor to implement cost-control strategies, such as claims audits and utilization
review, 	where 	it 	has 	a 	limited 	number 	of 	pharmacies 	whose 	records 	must 	be
reviewed.
Subscribers may prefer to choose these limited-provider prograins if the lower
pharmaceutical costs offered by the contracting pharmacies are reflected in lower
premium costs, lower deductibles or broader coverage. 	Subscribers who make such
a choice presumably decide that the~e benefits outweigh whatever inconvenience they
may 	encounter 	from 	having 	a 	more 	limited 	choice 	of 	pharmacies. . Nor 	are
subscribers likely to face inadequate access to providers, incluc1ing pharmacies, despite
a 	program's use of a 	limited provider paneL 	The same competitive forces that
encourage pharmacies to make their best price and service offer to a payor, in order
to gain access to subscribers to its programs, also induce payors to offer the level of
pharmacy accessibility 	that subscribers want. 	Subscribers can change payors or
programs 	if 	the 	service 	availability 	in 	a 	particular 	program 	is 	insufficient 	or
inconvenient. 	Subscribers' ability to "vote with their feet" if they are dissatisfied
provides an incentive for payors to assure that subscribers are satisfied with their
access to covered health care services.
The Commonwealth of Pennsylvania has recognized the beneficial nature of
prepaid health care programs that limit provider participation. 	For example, for
more than a decade Pennsylvania has, by statute, authorized the formation 	and
operation of HMOs, which provide services to subscribers through selected health
care 	providers 	with 	whom 	the 	HMO 	generally 	has 	a 	contractual 	agreement. 7
Adoption of S.B.675 would appear to be anomalous in light of these statutes. since
it 	might 	prevent 	many 	such 	programs 	from 	operating, 	at 	least 	with 	regard 	to
covered pharmacy services. in precisely the ways envisioned and authorized by the
statutes.8
7 	See, e.g., 	the 	Health 	Maintenance 	Organization 	Act, 	40 	PS. 	§ 1551 	et seq.
(1989 Supp.); the Health Care Cost Containment Act, 35 P.$. § 4491 et seq. (1989 Supp.),
infra note 10.
S 	See 	the 	Health 	Maintenance Organization 	Act 	at 	§ 1554. authorizing 	the
Secretary to require renegotiation of contracts by the HMO with providers whenever.
e.g., "he determines that 	they provide for excessive payments, or that they fail 	to

The .Honorable H. Craig Lewis
Senate of Pennsylvania
m 	CONCLUSION
Page 6.
Senate Sill 675, if enacte~ may reduce the choices available to consumers and
raise their costs without providing any substantial public benefit The bill may make
it more difficult, or even 	impossible, for many third-party 	payors to offer, and
consumers to select, programs including pharmaceutical coverage that have the cost
savings and other advantages discussed above. 	The bill would require all employee
benefit plans to open their programs to all pharmacists that wish to contract on the
same terms. Correspondingly, subscribers could not be limited as to the participating
pharmacies 	at 	which 	they 	could 	fill 	prescriptions 	or 	be 	charged 	a 	different
co-payment fee, receive different coverage, or incur different conditions, depending
'on which providers they use. 	Opening the programs to all pharmacies wishing to
participate on the same terms may affect both cost and coverage in prepaid health
care plans. Without the expectation of obtaining a substantial portion of subscribers'
business, contracting 	pharmacies 	may 	be unable 	to 	offer 	lower 	price 	terms 	or
additional services to payors. 	Moreover, since any pharmacy would be entitled to
contract with 'a payor on the same term,sas other contracting pharmacies, there
would be Hhle incentive for 	pharmacies to compete in developing attractive or
innovative proposals in the first place. Because all other pharmacies could "free ride"
on the first pharmacy's proposal. innovative providers of pharmacy services may be
unwilling to bear the costs of developing a proposal
The higher prices that payors may have to reimburse pharmacies for their
subscribers' covered pharmacy services, as well as the increased administrative costs
associated with having to deal with many more pharmacies, in turn, may raise the
prices that those payors must charge (i.e.,their premiums) for their prepaid health
care programs that include pharmacy benefits, or may force them to reduce their
benefits in order to avoid raising the premiums.9 Given the choices that subscribers
already 	have 	to select other 	types of 	prepayment 	programs, such 	as indemnity
insurance, that do not limit the pharmacies from which they may obtain covered
services, requiring open pharmacy participation may reduce the number and variety
include reasonable incentives for cost control, or that they otherwise substantially and
unreasonably 	contribute 	to 	the escalation of 	the 	costs 	of 	providing health care
services to subscribers ... :'
9 	The General Assembly has recognized that the continuing rise in the cost for
health care services has produced a "major crisis" in the Commonwealth and has
passed the Health Care Cost Containment Act. 35 P.S. § 449.1 et seq. (1989 Supp.), to
address the causes of the escalation of health care costs. 	Insofar as the proposed
legislation would raise costs to consumers, it would appear to be in conflict with a
prior legislative finding and declaration.

\
;.
The Honorable H. Craig Lewis
Senate of Pennsylvania 	Page 7.
of prepayment programs available to consumers without providing any additional
consumer benefit.
In 	summary, we 	believe 	that 	S.B.675 may 	raise 	prices 	to consumers 	and
unnecessarily restrict consumer choice in prepaid 	health care programs:. 	We hope
these comments are of assistance.
Sincerely yours, 	... ,.#
~(~tfr
Mark D. Kindt
Regional Director
Cleveland Regional Office