FTC Staff Comment to the Honorable James L. Seward, Concerning New York Assembly Bill 5502-B to Regulate the Use of Mail Order Pharmacies by Health Plans Offering Prescription Drug Coverage

Office of Policy Planning
Bureau of Economics
Bureau of Competition
August 8, 2011
Hon. James L. Seward
Senator, 51st District
Legislative Office Building
Albany, NY 12247
Dear Senator Seward:
The staffs of the Federal Trade Commission=s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics1 are pleased to respond to your request for comments
on the likely competitive effects of New York Assembly Bill 5502-B (“A-5502-B” or “the
Bill”), which regulates the use of mail order pharmacies by health plans offering prescription
drug coverage.2
FTC staff recognize that the Bill seeks to enhance New York consumers’ ability to
choose how and where their prescriptions are filled. We are concerned, however, that the
Bill will have the unintended consequence of harming consumers. By reducing competition
between pharmacies, this legislation likely will raise prices for, and reduce access to,
prescription drugs, which are an increasingly important component of medical care.
The Bill will limit a health plan’s ability to steer beneficiaries to a lower cost mail
order vendor of maintenance drugs,3 via financial incentives or other terms of coverage,
whenever a competing retail pharmacy is willing to fill prescriptions at “comparable” prices.
By restricting a health plan’s ability to offer favorable treatment to a low cost mail order
pharmacy, the Bill undercuts pharmacies’ incentives to bid aggressively for a share of that
health plan’s business. Reducing those incentives is likely to raise the prices that consumers
pay for the prescription drugs that their health plans cover. Some cost increases may be
passed on to plan beneficiaries in the form of higher out-of-pocket prices. In some cases,
plans may respond to higher costs by reducing the scope of prescription drug coverage, or by
eliminating prescription drug coverage entirely. For those reasons, FTC staff recommend
that the Bill not be enacted.
I. Interest and Experience of the Federal Trade Commission
Congress has charged the Federal Trade Commission (“FTC” or “Commission”) with
enforcing the FTC Act, which prohibits unfair methods of competition and unfair or
deceptive acts or practices in or affecting commerce.4 Pursuant to its statutory mandate, the
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580

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FTC seeks to identify business practices and government regulations that may impede
competition without offering countervailing benefits to consumers.
Competition is at the core of America's economy,5 and vigorous competition among
sellers in an open marketplace gives consumers the benefits of lower prices, higher quality
products and services, more choices, and greater innovation. Because of the importance of
health care competition to the economy and consumer welfare, anticompetitive conduct in
health care markets has long been a key target of FTC law enforcement,6 research,7 and
advocacy.8 Of particular relevance to our analysis of A-5502-B is the Commission’s 2005
“Conflict of Interest Study” regarding pharmacy benefit managers (“PBMs”). In response to
a 2003 Congressional request, the FTC analyzed data on PBMs and, in particular, on price
competition and other issues regarding the use of mail order pharmacies by PBMs and others.
In its 2005 report based on the study, the FTC found, among other things, that mail order
pharmacies typically are less expensive than retail pharmacies for both health plans and their
members9
II. The Bill and “Any Willing Provider” or “Freedom of Choice” Laws
A. A-5502-B’s Restrictions on Mail Order Pharmacies.
The Bill imposes parallel restrictions on any policy or insurer that provides coverage
for prescription drugs.10 Such policies and insurers are subject to two basic limitations,
which apply whenever a competing pharmacy is willing to accept prices that are
“comparable” to those charged by a health plan’s preferred mail order pharmacy. First, the
plan must permit each covered person to fill any mail order prescription at the pharmacy of
his or her choice – at any retail (non-mail) pharmacy in the plan’s network, or at any mail
order pharmacy at all, independent of network participation.11 Competing pharmacies need
only offer to accept prices that are “comparable” to those charged by a health plan’s
preferred mail order pharmacy. Second, plans cannot impose higher copayments or
deductibles when a covered individual chooses to fill a prescription at a non-preferred
pharmacy.12
B. “Any Willing Provider” and “Freedom of Choice” Regulations.
A-5502-B limits a health plan’s ability to require or encourage the use of any
particular mail order pharmacy. These limits are akin to those found generally in “any
willing provider” (“AWP”) and “freedom of choice” (“FOC”) laws. AWP laws require
health plans to include in their networks any provider that is willing to participate in
accordance with the plan’s terms.13 FOC laws are similar, but are directed at health plans
instead of providers. FOC laws require plans to reimburse for health care goods or services
obtained from any qualified provider, even if the provider is not one of the plan’s preferred
providers, or is not a member of the plan’s network.14 More than thirty states have adopted
AWP or FOC laws in some form, and more than a dozen have adopted such laws for
pharmacy services in particular.15

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FTC staff have expressed concerns about potential anticompetitive effects and
consumer harms associated with AWP and FOC laws before.16 These laws can make it more
difficult for health insurers or PBMs to negotiate discounts from providers; if plans cannot
give providers any assurance of favorable treatment or greater volume in exchange for lower
prices, then the incentive for providers to bid aggressively for the plan’s business – to offer
better rates – is undercut.17 AWP and FOC laws also can limit competition by restricting the
ability of insurance companies to offer consumers different plans, with varying levels of
choice. These restrictions on competition may result in insurance companies paying higher
fees to providers, which, in turn, generally results in higher premiums, and may increase the
number of people without coverage. Both economic theory and the available empirical
evidence suggest that AWP/FOC provisions are likely to have these negative effects.18
III. Likely Effects of A-5502-B
Mail order pharmacies can offer substantial cost savings, especially with respect to
prescriptions for “maintenance” drugs, which are taken for long periods of time, on a regular
basis.19 Limits on the use of mail order may, therefore, raise the cost of providing
prescription drug benefits to New York health care consumers. Although the Bill attempts to
provide consumers with a choice among available pharmacy providers, it may have the
unintended consequences of curtailing prescription drug coverage and increasing out-of-
pocket payments.
FTC research has found that mail order pharmacies typically are less expensive than
retail pharmacies, 20 for both health plans and consumers.21 For this reason, health plans,
insurers, and PBMs use a variety of incentives to encourage the use of mail order
pharmacies, especially for beneficiaries taking maintenance medications.22 For example,
plans may offer lower co-payments for mail order drugs, or charge deductibles for retail
purchases, or impose limitations on the number of times a prescription may be refilled at a
retail pharmacy.23 Some health plans even have “mandatory mail order” programs that
reimburse beneficiaries for maintenance medications only if the beneficiaries fill those
prescriptions by mail.24
These restrictions sometimes limit choices, but they help keep costs down for
consumers because they help the health plans get better prices from the pharmacies.
Pharmacies often offer lower prices for higher customer volume – in other words, they offer
bigger discounts to health plans or PBMs that give their members an incentive to use those
pharmacies.25 Also, if health plans are able to exclude a pharmacy from their network or
channel customers elsewhere, that creates a strong incentive for pharmacies to bid
aggressively and offer better deals.26 All of these factors help consumers get lower prices.
A-5502-B limits the abilities of health plans and PBMs to employ both of these
strategies for reducing costs. First, to the extent that the Bill restricts a health plan’s ability
to create incentives for customers to choose one pharmacy rather than another,27 it undercuts
the ability of the plan to negotiate favorable terms with any particular mail order pharmacy:
there is no incentive for a mail order pharmacy to bid aggressively for a share of a health
plan’s business if the pharmacy has no reason to expect that a lower bid will result in a higher

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share. Second, costs will increase further – once those negotiations are concluded – if a
health plan cannot create incentives for its beneficiaries to use a relatively low-cost mail
order pharmacy. When costs increase there are negative effects for all those who pay for
health care – individuals, companies, and all levels of government. As a Maryland study has
shown, statutory impediments to mail-order provision of, for example, maintenance drugs,
can be very costly for a state and its citizens.28
We are also concerned about the use of the term “comparable” in the Bill’s FOC
provision. The term is ambiguous, which will make it difficult for health plans to assess
when an offer is close enough to trigger the requirements of the bill. This ambiguity will
likely increase the time and cost of negotiating and also may lead to litigation. Second, the
use of “comparable” has the potential to add costs beyond those normally associated with
FOC laws: a plan’s ability to negotiate a favorable contract with a mail order pharmacy is
undercut to begin with; and then, competing mail order pharmacies – and competing
participating non-mail order pharmacies – need not even match the negotiated prices. They
need only accept prices that are “comparable.”29
IV. Conclusion
FTC staff appreciate that A-5502-B seeks to enhance consumers’ ability to fill their
prescriptions at the pharmacies of their choice. We are concerned, however, that the Bill
impedes a fundamental prerequisite to consumer choice: healthy competition between retail
and mail order pharmacies, which constrains costs and maximizes access to prescription
drugs. We are concerned that, in the end, higher costs will lead to higher prices and fewer
choices for New York health care consumers. For some consumers, increased costs may
mean higher out-of-pocket prices for prescription drugs. For other consumers, it may mean
that prescription drug benefits are curtailed or eliminated. Scaled-back drug benefits are
likely to create pressing financial concerns for many consumers, and may even lead to
additional health problems. As an 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.”30
For these reasons, we urge the legislature and the Governor to seek alternative means
to preserve consumer choice in the purchase of prescription drugs. We appreciate this
opportunity to share our views and welcome any further discussions regarding competition
policy.

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Respectfully submitted,
Susan S. DeSanti, Director
Office of Policy Planning
Joseph Farrell, Director
Bureau of Economics
Richard A. Feinstein, Director
Bureau of Competition
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics. The letter does not necessarily represent the views of the Federal
Trade Commission (Commission) or of any individual Commissioner. The Commission has, however, voted to
authorize us to submit these comments.
2 Letter from Hon. James L. Seward to Susan S. DeSanti, Director, Office of Policy Planning, Federal Trade
Commission (June 24, 2011).
3 Maintenance drugs are prescription drugs that are used to treat chronic illnesses or conditions and
prescriptions for maintenance drugs often are written for long terms and/or repeat fills. Mail order pharmacies
chiefly fill maintenance drug prescriptions, and incentives to use mail order tend to focus on such prescriptions.
See, e.g., FEDERAL TRADE COMMISSION, PHARMACY BENEFIT MANAGERS: OWNERSHIP OF MAIL-ORDER
PHARMACIES 16-19 (Aug. 2005) [hereinafter FTC PBM STUDY], available at
http://www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf.
4 Federal Trade Commission Act, 15 U.S.C. § 45.
5 See Standard Oil Co. v. FTC, 340 U.S. 231, 248 (1951) (“The heart of our national economic policy long has
been faith in the value of competition.”).
6 See generally, e.g., FTC, An Overview of FTC Antitrust Actions In Health Care Services and Products (Sept.
2010), available at http://www.ftc.gov/bc/110120hcupdate.pdf; see also FTC, Competition in the Health Care
Marketplace: Formal Commission Actions, available at
http://www.ftc.gov/bc/healthcare/antitrust/commissionactions.htm.
7 See, e.g., FTC & U.S. DEP’T OF JUSTICE (“DOJ”), IMPROVING HEALTH CARE: A DOSE OF COMPETITION, Ch. 7
(2004), available at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf. The 2004 Report was
informed by extensive hearings on health care markets – including pharmaceutical and insurance markets – that
were jointly conducted by the FTC and DOJ in 2003, as well as an FTC-sponsored workshop and independent

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research. Information on the 2003 Hearings on Health Care and Competition Law and Policy is available at
http://www.ftc.gov/bc/healthcare/research/healthcarehearing.htm.
8 FTC and staff advocacy may comprise letters or comments addressing specific policy issues, Commission or
staff testimony before legislative or regulatory bodies, amicus briefs, or reports. See, e.g., FTC Staff Letter to
Hon. Mark Formby, Mississippi House of Representatives, Concerning Mississippi Senate Bill 2445 and the
Regulation of Pharmacy Benefit Managers (Mar. 2011), available at
http://www.ftc.gov/os/2011/03/110322mississippipbm.pdf; FTC and DOJ Written Testimony before the Illinois
Task Force on Health Planning Reform Concerning Illinois Certificate of Need Laws (Sept. 2008), available at
http://www.ftc.gov/os/2008/09/V080018illconlaws.pdf; FTC Amicus Curiae Brief in In re Ciprofloxacin
Hydrochloride Antitrust Litigation Concerning Drug Patent Settlements Before the Court of Appeals for the
Federal Circuit (Case No. 2008-1097) (Jan. 2008), available at http://www.ftc.gov/os/2008/01/080129cipro.pdf;
FTC & DOJ, A DOSE OF COMPETITION, supra note 7.
9 See FTC PBM STUDY, supra note 3, at 25, 31-36; see also GENERAL ACCOUNTING OFFICE, EFFECTS OF USING
PHARMACY BENEFIT MANAGERS ON HEALTH PLANS, ENROLLEES, AND PHARMACIES 9 (Jan. 2003) [hereinafter
GAO REPORT], available at http://www.gao.gov/cgi-bin/getrpt?GAO-03-196 (reporting average mail-order
prices “about 27 percent and 53 percent below the average cash price customers would pay at a retail pharmacy
for the selected brand name and generic drugs, respectively.”).
10 A-5502-B (amending § 3216 of the insurance law with regard to any “policy,” § 3221 with regard to any
“insurer,” and § 4303 with regard to “any policy issued by a medical expense indemnity corporation, a hospital
service corporation or a health services corporation which provides coverage for prescription drugs” – with
exceptions, in each case, for policies that result from collective bargaining agreements between employers and
recognized or certified employee bargaining organizations).
11 Id.
12 Id.
13 Michael Vita, Regulatory Restrictions on Selective Contracting: An Empirical Analysis of ‘Any Willing
Provider’ Regulations, 20 J. HEALTH ECON. 955, 956 (2001).
14 See, e.g., id.
15 See, e.g., Anne Carroll and Jan M. Ambrose, Any-Willing-Provider Laws: Their Finanical Effect on HMOs,
27 J. Health Pol., Pol’y & L. 928, 931 (2002) (noting thirteen states with pharmacy AWP laws). As Carroll and
Ambrose note, AWP laws vary widely in their particulars , id. at 929, and FTC staff have not undertaken a
current survey of AWP/FOC laws under any particular characterization.
16 See, e.g., FTC Staff Comment to the Hon. Nelie Pou Concerning New Jersey A.B. A-310 to Regulate
Contractual Relationships Between Pharmacy Benefit Managers and Health Benefit Plans (Apr. 2007)
[hereinafter New Jersey Comment], available at http://www.ftc.gov/be/V060019.pdf; FTC Staff Comment to
the Hon. Terry G. Kilgore Concerning Virginia House Bill No. 945 to Regulate the Contractual Relationship
Between Pharmacy Benefit Managers and Both Health Benefit Plans and Pharmacies (Oct. 2006), available at
http://www.ftc.gov/be/V060018.pdf; Letter from FTC Staff to Patrick C. Lynch, Rhode Island Attorney
General, and the Hon. Juan M. Pichardo, Rhode Island State Senate (Apr. 8, 2004) [hereinafter Rhode Island
Comment], available at http://www.ftc.gov/os/2004/04/ribills.pdf.
17 See New Jersey Comment, supra note 16, at n. 36 and accompanying text; Rhode Island Comment, supra
note 16, at 6; see also Aaron S. Edlin & Eric R. Emch, The Welfare Losses from Price-Matching Policies, 47
J. IND. ECON. 145 (1999). Such negotiations on behalf of health plans often are handled by PBM companies or
by insurer-owned, or retailer-owned, providers of PBM services. See generally FTC PBM STUDY, supra note 3,
at Ch. 1.
18 For example, one study found that expenditures rise when AWP or FOC laws are enacted, and tend to rise
more with stronger laws. Vita, supra note 13, at 966 (panel data showing, e.g., that states with highly restrictive
AWP/FOC laws spent approximately 2% more on healthcare than did states without such policies). As Vita
notes, empirical studies of the effects of such laws are few. Id. at 956. A 2005 Maryland study, however,
examined in particular the effects of these types of statutory impediments to mail order provision of, e.g.,

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maintenance drugs. According to the Maryland report, greater use of mail order maintenance drugs – enabled
by liberalizing Maryland insurance law – would save Maryland consumers 2-6% on retail drug purchases
overall, and third-party carriers 5-10%. See MD. HEALTH CARE COMM. AND MD. INS. ADMIN., MAIL-ORDER
PURCHASE OF MAINTENANCE DRUGS: IMPACT ON CONSUMERS, PAYERS, AND RETAIL PHARMACIES 2-3 (Dec. 23,
2005) [hereinafter MARYLAND REPORT]; cf. Carroll and Ambrose, supra note 15, at 939-40 (examining data
from the early 1990s and finding pharmacy AWP laws associated with higher costs).
19 See supra note 3.
20 See FTC PBM STUDY, supra note 3, at 25 (mail order prices lower, even after controlling for prescription size
and drug selection) ; see also GAO REPORT, supra note 9, at 8-11 (reporting that PBMs negotiate substantial
discounts with retail pharmacies, but achieve much greater savings using mail order pharmacies).
21 FTC PBM STUDY, supra note 3, at 35-36 (comparing prices for both 30- and 90-unit prescriptions, for each of
three drug types filled by retailer-owned PBM mail order pharmacies, with those filled by retail non-mail
pharmacies, and finding, e.g., that “[f]or 30-unit prescriptions dispensed by retailer-owned PBMs, both
members and plans paid lower average prices at mail than at retail for each of the three drug types. For G
[generic], MSB [multi-source brand], and SSB [single-source brand] drugs, the total average not-owned retail
price was higher than the owned mail price by 27.6%, 14.4%, and 10.6%, respectively.”).
22 See FTC PBM STUDY, supra note 3, at 17-19. It should also be noted that prices vary across mail order
pharmacies. See, e.g., id. at 29-30 (prescription prices typically lower at PBM-owned mail order pharmacies
than at non-PBM-owned mail order pharmacies). Hence, incentives to patronize a particular mail order
pharmacy may be important to cost saving strategies.
23 See id. at 18-19.
24 See id. at 19.
25 See id. at 36-37.
26 Rhode Island Comment, supra note 16, at 4 n.11; see also Vita, supra note 13 (finding that AWP laws lead
to higher drug prices).
27 The Bill prohibits, in particular, an insurer or plan from requiring that “any mail order covered prescription”
be filled by a mail order pharmacy, much less any particular mail order pharmacy, and it prohibits any different
“copayment fee or other condition” imposed on purchases that are made from an alternative provider. See text
accompanying notes 10-12, supra.
28 According to the Maryland Report, greater use of mail order maintenance drugs, as would be enabled by
liberalizing Maryland insurance law, would save Maryland consumers 2-6% on retail drug purchases overall,
and third-party carriers 5-10%. See MARYLAND REPORT, supra note 18, at 2-3.
29 The use of “comparable” in the Bill directly addresses those pharmacies at which a beneficiary may fill a
prescription – that is, at any mail order or any network retail pharmacy willing to accept comparable prices.
According to the Bill, copays cannot differentiate among any such pharmacies, whether they are willing to
accept comparable prices or not.
30 William Sage, David A. Hyman & Warren Greenburg, Why Competition Law Matters to Health Care
Quality, 22 HEALTH AFFAIRS 31, 35 (Mar./Apr. 2003). Although estimates of the elasticity of demand for
health insurance coverage vary, the empirical evidence is clear that higher costs result in less coverage. See
DAVID M. CUTLER, HEALTH CARE AND THE PUBLIC SECTOR, National Bureau of Economic Research Working
Paper W8802, Table 5 (Feb. 2002), available at http://papers.nber.org/papers/W8802.