Advisory Opinion to Nichol (08-12-97)

August 12, 1997

Allen Nichol, Pharm. D.
147 Hankins Road
Hightstown, N.J. 08520

Dear Dr. Nichol:

This letter responds to your request for a staff advisory opinion on behalf of the New Jersey Pharmacists Association ("NJPA"). NJPA proposes to set up two "pharmacist service networks" to offer health education and monitoring services to diabetes and asthma patients. It plans to negotiate the fees for such services with third party payers. Based on our understanding of the facts as explained in your correspondence and subsequent telephone conversations, Commission staff would not recommend a challenge to the proposed networks.

NJPA's Proposed Action

The New Jersey Pharmacists Association is a professional association of pharmacists in the state of New Jersey. It proposes to enroll two networks of pharmacists, one to provide disease self-management education to asthma patients, and the other to do the same for diabetes patients. NJPA will bill insurance companies and other third party payers for such services based on rates negotiated by NJPA. In providing these educational services, participating pharmacists would, among other things, meet with patients and assess their condition, review their medications history, and set objectives for disease management, including modification of patient habits. These services are not connected to the dispensing of prescription drugs and may be provided in the patient's home or the home or office of the pharmacist. NJPA anticipates that the program will result in at least three visits for each patient, arranged primarily by appointment. Before using these services, patients would have to receive a "Statement of Medical Need" from their physicians. NJPA reports that controlled clinical studies show that such programs can reduce costs to payers and improve the health of asthma and diabetes patients.(1)

NJPA plans to market these services to insurance companies, health maintenance organizations, managed care organizations, pharmacy benefit managers and other third party payers. The provision of compensable diabetes self-management education in New Jersey is governed in part by Public Law 1996, ch. 331.(2) This legislation requires that insurance companies and other third party payers pay for diabetes self-management education that a physician, nurse practitioner, or clinical nurse specialist has determined to be medically necessary.(3) 1996 N.J. Laws, ch. 331, §§ 1.b, 2.b, 3.b, 4.b, 5.b, 6.b. Under the law, doctors, registered dieticians, and nurses, physicians assistants and other health care professionals who receive certification can provide such diabetes education services in competition with pharmacists.  1996 N.J. Laws, ch. 331, §§ 1.b, 2.b, 3.b, 4.b, 5.b, 6.b. No comparable state legislation governs compensation for asthma education services. However, NJPA reports that the U.S. Health Care Finance Administration has billing codes for such asthma-related services if there is a physician's order of medical necessity. Private third party payers have recognized, and compensated practitioners for providing, asthma education. Besides specially trained pharmacists, physicians, respiratory therapists and registered clinical nurses with backgrounds in pulmonary disorders can also provide compensable asthma education services.

Because the training and qualifications to participate in the education programs are distinct, NJPA will impanel the asthma and diabetes self-management education networks separately. Some pharmacists will enroll to provide diabetes education, some asthma education, and some both. Any New Jersey pharmacist who satisfactorily completes certain educational requirements will be eligible for NJPA network membership and participation. The New Jersey Board of Pharmacy sets the educational requirements for pharmacists to become eligible to provide diabetes education services. The state currently requires 32 live hours of classroom work and eight hours of home study. Similarly, one prominent course for training pharmacists in patient self-management for asthma involves 16-20 hours of classroom work, although there is no state standard. NJPA has no plans to limit either the number or percentage within New Jersey of pharmacies participating in its networks for patient education. However, based on pharmacist interest in the training thus far, NJPA estimates that no more than 20% of the licensed pharmacists in the state will ever take the necessary courses.

Supplemental information provided by NJPA indicates that insurance companies and other payers will be setting up their own panels of providers to supply similar services in competition with the NJPA networks. In addition, NJPA reports that at least three other entities are currently setting up networks of pharmacists for diabetes services within the state of New Jersey. NJPA's proposed networks are nonexclusive, in that a pharmacist participating in one of them will be free to participate and provide health education services via other networks. However, pharmacists receiving patients by referral from NJPA must treat and bill for those patients through NJPA.

NJPA does not plan to create practice protocols for pharmacists participating in its networks. It presumes that any pharmacist who has been through the specialized training can design his or her own patient education program. However, if an individual payer requests a specific education program design, NJPA will include that as part of its negotiation with the payer and so inform pharmacies.

NJPA plans to contract on behalf of participating network pharmacists in two ways, depending upon the agreement negotiated with a particular third party payer. First, NJPA states that some third party payers may agree to capitated fees, giving the network a flat payment per month for each beneficiary the payer covers. Second, NJPA proposes that it might alternatively negotiate what it refers to as a "shared risk reward" compensation approach, in which the pharmacies share in cost savings achieved in treating high risk patients. In other words, if costs are lower for an identified group of patients than they were during a defined baseline period, the pharmacies will receive a part of the money saved as compensation.

Analysis

Many of the analytical principles set forth in Statement 9 of the Department of Justice/Federal Trade Commission 1996 Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust ("Health Care Statements") apply to networks of pharmacists like the ones proposed by NJPA. As discussed in the Statements, "naked agreements" among competitors that fix prices are per se illegal under the antitrust laws. However, when a joint venture involves significant integration among competitors, the rule of reason may apply to price-related agreements that are reasonably necessary to achieve procompetitive benefits. Economic integration justifying such rule of reason treatment can arise from agreements by providers to share substantial financial risk for services they provide through the network. Other types of integration that provide efficiency benefits, including clinical integration among providers, may also warrant application of the rule of reason. Under a rule of reason analysis, any potential anticompetitive effects of the proposed venture are weighed against the procompetitive efficiencies likely to be produced by the venture. Such an analysis takes into account characteristics of the particular multiprovider network and the competitive environment in which it operates to determine the network's likely effect on competition.

The Health Care Statements recognize that the existence of substantial financial risk sharing by providers may justify rule of reason treatment. NJPA has posited two alternative means of compensation for participating pharmacists. Both of these alternatives appear to qualify as the types of financial risk-sharing contemplated by the Health Care Statements.

As noted above, NJPA proposes to offer third party payers the option of making capitated payments to the network, such as $1.00 per month for every person (not just asthma and diabetes patients) covered by the plan. Under this proposed arrangement, the NJPA networks would be exposed to the risk of higher than expected incidence of diabetes or of unusual conditions triggering asthma, thereby increasing the demand for their services. Such capitation allows the third party payer to shift some risk of the cost of higher utilization to providers. In addition, network members can affect utilization because as a particular pharmacist is more effective in providing self-management education, his or her patients will require fewer return visits. To implement the capitation, NJPA plans to have a quality assurance panel and a peer review officer. A member pharmacist who has patients that persistently fall outside of the group norm, in terms of health improvement and costs to NJPA, could prevent NJPA from achieving the goals of the capitation contract. If, despite peer advice from NJPA, this member's problems persist, he or she will be expelled from the network. This form of risk sharing among network members, based upon capitation, is sufficient to bring the joint fee setting arrangement outside of per se treatment and into the rule of reason, particularly because the risk sharing mechanism is accompanied by a program that will monitor and seek to improve the performance and efficiency of network members. See Health Care Statements at 109.

NJPA refers to its second system of provider payment as its "shared risk reward" approach. Under this system, NJPA and the payer would identify a population of patients, such as all the people covered by the health plan who were diagnosed with diabetes as of January 1 of the previous year. Then, if overall costs for the identified group are reduced compared with a baseline period, such as six months during the previous year, the network pharmacists will receive part of the savings as compensation. NJPA's quality assurance panel and peer review officer will assist NJPA in controlling costs under this payment plan. The Health Care Statements describe as substantial financial risk sharing a venture "establishing overall cost or utilization targets for the network as a whole, with the provider participants subject to subsequent substantial financial rewards or penalties based on group performance in meeting the targets." Health Care Statements at 109. NJPA's second reimbursement system is analogous, except that NJPA proposes no predetermined targets, and the rewards are based on cost savings, not costs. In this instance, the risk shared among NJPA member pharmacies is indeed substantial because if there is no reduction in health care expenditures the member pharmacists receive nothing. This "shared risk reward" arrangement would be analyzed under the rule of reason.

Under a rule of reason analysis, the competitive effects of a multiprovider network are evaluated in each of the relevant markets in which it may have a substantial impact. Health Care Statements at 114. If a multiprovider network has a substantial share of any of the relevant markets, it could, depending on other factors, increase the price of such services above competitive levels. Health Care Statements at 116. Of primary concern, of course, is the effect of the network's activities on price and output in the market that includes patient education services of the type provided by the network and its members. An important collateral concern is the danger that participants could exchange competitively sensitive information that would allow them to coordinate activities outside of the joint venture. Health Care Statements at 79. Here such collateral concerns might arise with respect to the market for prescription drugs.

In this case, even with a large share of pharmacy participation, there is little risk that the contemplated networks could have a collateral effecton the prices of prescription drugs. Because any licensed pharmacist who has taken the special training courses is free to join, there is at least a theoretical possibility that NJPA could have 100% pharmacy participation in its plan. However, the venture proposed by NJPA involves no agreement on drug prices, just the price of patient education services. It would seem to create no greater opportunity for collusion on the sale of prescription drugs than does the perfectly lawful existence of NJPA itself.

As to the markets for diabetes or asthma patient self-management education services, the proposed networks do entail agreement among pharmacists on the prices charged to third party payers. This could raise serious concerns if the venture had such a large proportion of the providers of the service at issue that it could exercise market power over buyers, but that does not appear to be a significant danger here. Although NJPA could potentially enroll a large percentage of pharmacists in its networks, pharmacists are not the only providers eligible to supply the services in question. In fact, in the case of asthma patient self-management education services, any market definition would have to include physicians, respiratory therapists and registered clinical nurses with backgrounds in pulmonary disorders as sellers. Likewise, doctors, registered dieticians, and nurses and physicians assistants certified as diabetes educators can provide the diabetes education services that NJPA proposes. Even under the most optimistic projections of NJPA's success in attaining pharmacy enrollment, the existence of these competing professionals make it unlikely that NJPA will attain a substantial share of the providers of asthma or diabetes patient self-management education services.(4) Also significant is the fact that NJPA's program will be non-exclusive, in that members will be allowed to participate in other networks offering similar patient education services.(5)  There are no apparent barriers to the creation of competing pharmacy networks. Third party payers can use their existing networks or create new ones, and NJPA reports that it knows of at least three others that are being formed by pharmacists. The presence of these pharmacy and non-pharmacy alternatives would appear to negate the possibility that high rates of participation in NJPA could give its pharmacists the power to raise prices for patient self-management education to anticompetitive levels. On balance, the benefits to competition offered by the creation of the NJPA networks outweigh the minimal risks to competition, if any, posed by the joint price negotiation that is a necessary part of the venture.

Conclusion

For the reasons discussed above, Commission staff has no present intention to recommend a challenge to NJPA's establishment and operation of the pharmacist service networks as described above. This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules of Practice. Under Commission Rule 1.3(c), 16 C.F.R. §  1.3(c), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, if facts change significantly, or if it would be in the public interest to do so.

Sincerely yours,

Michael D. McNeely 
Assistant Director

1. See, e.g.,T. Pauley, M. Magee & J. Cury, "Pharmacist-Managed, Physician-Directed Asthma Management Program Reduces Emergency Room Visits," 29 Annals of Pharmacotherapy, 5-9 (Jan. 1995); S. Clement, "Diabetes self-management education (Technical Review)," 18 Diabetes Care 1204-14 (1995).

2. This legislation is codified in the New Jersey Statutes Annotated at Chapter 17, §§ 48--6n, 48A--7l, 48E--35.11; Chapter 17B, §§ 26--2.1l & 27--46.1m; and Chapter 26, § 2J--4.11.

3. The law provides: "Diabetes self-management education shall be provided by a dietician registered by a nationally recognized professional association of dieticians or a health care professional recognized as a Certified Diabetes Educator by the American Association of Diabetes Educators or a registered pharmacist in the State qualified with regard to management education for diabetes by any institution recognized by the board of pharmacy of the State of New Jersey." 1996 N.J. Laws, ch. 331, §§ 1.b, 2.b, 3.b, 4.b, 5.b, 6.b.

4. NJPA reports that around 400 New Jersey pharmacists have taken the special training to provide diabetes education thus far, while the National Certification Board for Diabetes Educators has provided data indicating that New Jersey currently has around 350 certified diabetes educators who are not pharmacists. Overall, there are approximately 12,000 pharmacists in New Jersey, and 1,800 community pharmacies, about half of which are chain and superstore outlets. (It is unclear which figure is the most relevant. Some employers may allow their employee pharmacists to moonlight and keep the entirety of their fees for themselves, making the total number of pharmacists more significant. In other cases, pharmacies may insist on keeping all or a portion of the fees that their employees generate for these patient education services.) In comparison, New Jersey has over 160,000 registered nurses, 3,500 respiratory therapists and 260 physicians assistants. This statistical information was supplied by the New Jersey state boards licensing each profession and IMS America. In addition, the America Dietetic Association reports that there are more than 1,900 registered dieticians in the state.

5. Our conclusions might be different should it turn out that NJPA is "non-exclusive" in name only and members (or even non-member pharmacists) refuse to provide patient self-management education services except on terms identical to those negotiated by NJPA. See Health Care Statements at 66-67.