Advisory Opinion to Levenson (07-27-00)

July 27, 2000

Paul E. Levenson
The Rufus Choate House
14 Lynde Street
Salem, MA 01970-3404

Dear Mr. Levenson:

This letter responds to your March 27, 2000 request for an advisory opinion concerning Northeast Pharmacy Service Corporation's proposal to establish a network of independent pharmacies in Massachusetts and Connecticut that will contract to provide certain pharmaceutical-related services to health plans and other third-party payers. Northeast believes that the participating pharmacists, by working with certain classes of patients to help them understand and comply more fully with their medication treatment plans, can improve the quality of care that those patients receive while at the same time reducing the overall costs of medical services provided to them. Based on our understanding of the facts you have presented, as described below, Commission staff have no present intention to recommend that the Commission bring an enforcement action challenging implementation of Northeast's proposal.

The Proposed Network

Northeast currently acts as a pharmacy services administrator on behalf of 368 independent pharmacies(1) in Massachusetts and Connecticut.(2) The network that is the subject of this opinion will be distinct from the larger network: it will be composed of only a subset of Northeast member pharmacies, and will provide only the patient care and other services described below. The new network will not contract with payers for pharmaceutical dispensing services, even with respect to payers with whom it enters into contracts for patient care services. Contracting for dispensing services will continue to be done as it is at present, outside the framework of the new network.

Northeast believes that independent pharmacists can play a more integral role in the medical management of patients with chronic or long-term illnesses such as asthma, diabetes, emotional disorders, or congestive heart failure. It believes that pharmacists' individualized monitoring of these patients' medication programs, in consultation with their physicians, can reduce prescription error and increase patients' compliance with their prescribed treatment programs, thus improving the patients' health status. In addition, Northeast believes that implementation of the program it has proposed will decrease the overall cost of treating these patients by assuring use of the lowest-priced effective medication and by reducing patients' use of physician office visits, emergency room treatments, and hospital inpatient stays.

In furtherance of these goals, Northeast intends to market a package of medication-related patient care services provided by participating pharmacies to physician groups, self-insured employers, and managed care organizations. These patient care services will include coordinating patients' use of medications with patient monitoring and education in disease state management, avoiding adverse drug interactions and other adverse events, assessing individual patients' conditions on an ongoing basis, measuring patients' compliance with their prescribed drug regimens, making recommendations to prescribing physicians about appropriate adjustments to those drug regimens, and suggesting generic substitutes for prescribed drugs when medically appropriate.(3) In order to provide this package of services, Northeast intends to develop standardized disease management programs, establish protocols for monitoring individual patients' adherence to their medication plans, implement methods to improve access to counseling and medication supplies by patients confined to their homes or to residential facilities, design in-store patient education and counseling programs, implement screening programs, and develop drug therapy management programs specifically aimed at seniors.

Northeast anticipates that the network initially will include about thirty independent pharmacies throughout Massachusetts and Connecticut; the number is expected to grow to no more than 100 in three years. Pharmacies participating in the network must maintain an approved claims processing system, that you estimate will cost at least $10,000. This system will be used to standardize patient care policies and procedures throughout the network, and to gather operations data necessary for Northeast to manage the performance of the network pharmacies. In addition, each participating pharmacy will establish a dedicated fax line, provide a semi-private in-store counseling area, and maintain a library of patient education video tapes approved by Northeast. Each pharmacist will develop in-depth knowledge of one or more disease states with respect to which the network will provide services, and will maintain the ability to conduct patient health screenings for conditions such as high blood pressure, high cholesterol levels, diabetes, and depression. An initial $5000 capital investment in the network also will be required.

Northeast will establish a Management Committee that will formulate and oversee procedures, standards, and operating principles for the network. The committee will be composed of network pharmacies and other health care professional and management consultants as needed.

According to your submission, the network needs to be able to deliver standardized services and to adhere to common principles relating to shared financial risk and to patient care protocols in order to accomplish its objectives. In particular, you note that uniform standards of patient care are necessary for accurate measurement of the impact of the network's activities on patient outcomes and on overall health care costs incurred by the patients. Accordingly, network pharmacies would contract jointly through Northeast to provide services, and would submit bills through the network for services rendered pursuant to those contracts.

Northeast proposes a two-pronged system of payment for these patient care services that combines fee-for-service and risk-based payments. Northeast anticipates that performance goals will be adopted for each payer's benefit plan. These goals could include, for example, rates of use of generic drugs; reductions in office visits, emergency room visits, and hospital admissions; the overall level of pharmacy costs; patients' health status; and the amount of patient monitoring and education performed over a particular time period. Each time a service is rendered, the patient's insurer would be billed, and it would pay to Northeast a contracted hourly rate for each service. Northeast would distribute 50% of each payment to the individual pharmacist who performed the service. The other 50% would be retained by Northeast, to be distributed to network pharmacies if the network as a whole (or that subset of network pharmacies serving the enrollees of a particular health benefit plan) attained its preestablished performance objectives for that health plan. Distributions to the individual network pharmacies would be made in accordance with each pharmacy's performance relating to pharmacy performance criteria including, for example, the number of patients seen, medication errors prevented, numbers of calls made to remind patients to obtain refills, and generic and therapeutic substitution of prescription drugs. If the overall performance goals were not met, the withheld funds would either be kept in the risk pool for future distribution or used to defray operating expenses of the network.

In addition to distributions from the withhold discussed above, network participants would be eligible to receive distribution of a portion of overall cost savings that resulted from the patient care management services. Northeast proposes that these savings be divided equally between the payer and the network. Savings for the patient group in question would be measured against some standard of past expenses for the same or a comparable group.

Northeast expects that payer contracts will run for at least two years. It anticipates that that period of time will be required for payers to evaluate the patient care improvements that result, and the impact of the network's activities on overall costs. Northeast expects that at the end of that period, some payers may prefer to continue their contacts with the network solely on a fee for service basis, so that they can determine more exactly the cost of the service in advance. However, Northeast expects that the vast majority of the network's services will continue to be provided on a risk basis.

Northeast will be the exclusive contacting agent for participating pharmacies for the patient care services described in this letter. Participating pharmacies will not be permitted to offer those services through another network. The network will not contract on behalf of its member pharmacies with respect to dispensing of pharmaceuticals, and the members will remain free to contract individually with prescription benefit plans.


The general antitrust analysis applicable to pharmacy network joint ventures is described in Statement 9 of the Department of Justice/Federal Trade Commission 1996 Statements of Antitrust Enforcement Policy in Health Care ("Health Care Statements").(4) As discussed in the Statements, "naked" agreements among competitors that fix prices are per se illegal under the antitrust laws. However, the rule of reason applies to price-related agreements that are reasonably necessary to achieve the procompetitive benefits of a joint venture involving significant economic integration among competitors.

Economic integration warranting rule of reason analysis of necessary price-related agreements can be evidenced by an agreement among network participants to share substantial financial risk for services provided through the network, as well as by other types of integration that are likely to produce efficiencies. Under a rule of reason analysis, any potential anticompetitive effects of the proposed venture are weighed against the procompetitive efficiencies that are likely to be produced by the venture. The rule of reason analysis takes into account characteristics of the particular network and the competitive environment in which it operates, to determine the network's likely effect on competition.

Operation of the new network envisioned by Northeast involves direct agreement among the participating pharmacies, some of which compete with one another, concerning the prices to be charged for disease management services.(5) Accordingly, the threshold question is whether that agreement is reasonably necessary to achieve significant efficiencies that are likely to flow from integration among the network participants.

The Health Care Statements discuss a number of examples of arrangements that can involve sharing of substantial financial risk, including use of "significant financial incentives for its provider participants, as a group, to achieve specified cost-containment goals." Such incentives might take the form of "withholding from all provider participants a substantial amount of the compensation due to them, with distribution of that amount based on group performance in meeting the cost-containment goals of the network as a whole," or "establishing overall cost or utilization targets for the network as a whole, with the provider participants subject to subsequent substantial rewards or penalties based on group performance in meeting the targets."(6)

As the Health Care Statements make clear, the types of arrangements specifically described in the Statements are not the only possible types of arrangements that could involve the sharing of substantial financial risk or other substantial integration. Indeed, one of the purposes of the 1996 revision of the Statements was to encourage development of innovative risk-sharing and other arrangements that have the potential to improve quality and cost effectiveness of services or otherwise provide significant benefits to consumers.

The network that Northeast has proposed involves joint provision, and joint negotiation of contracts for, only for the types of patient care services discussed above. No collective negotiation of contracts for dispensing of pharmaceuticals is contemplated. Members of the network will be combining their resources in order to develop the standards, procedures, and protocols necessary to provide a set of patient care services that, for the most part, the individual pharmacies are not now in a position to offer. The network will use a combination of financial incentives to promote efforts by each individual participating pharmacy to meet the goals established by the network as a whole: an internally managed withhold on payments for services rendered, and significant potential rewards in the form of sharing in the savings in overall health care costs flowing from operation of the network.(7)

The proposed network appears, therefore, to involve financial and service integration among network participants to provide a package of services that has the potential to provide significant benefits to consumers, and the price agreement among network members appears to be reasonably related to the network's achievement of those benefits. Consequently, we have analyzed the formation and operation of the network under the rule of reason.(8)

It appears unlikely that Northeast's operation of the proposed network would significantly restrain competition among pharmacies in any market.(9) The initial members of the proposed network are dispersed throughout Massachusetts and Connecticut, and in most instances do not appear to be significant competitors of one another. The group collectively constitutes fewer than 10% of independent pharmacies, and fewer than 2% of all pharmacies, in Massachusetts and Connecticut. Even if the network expands to as many as 100 pharmacies, it likely will include no more than about 5% of all pharmacies in each of the two states. Northeast notes that many other types of businesses could provide patient care services similar to those that its network proposes to provide, including pharmacy chains, supermarket pharmacy departments, and other independent pharmacy organizations. Based on the information you have provided, along with other information available to us, it appears that sufficient competitive alternatives exist to defeat any effort by Northeast and its members to raise prices or otherwise impair market competition.(10)

In sum, based on the forgoing, we would not recommend a challenge to Northeast's operation of a network of independent pharmacies having the features 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,

Richard A. Feinstein
Assistant Director


1. Northeast understands an independent pharmacy to be one that is privately owned and has no more than 9 stores under common ownership.

2. Northeast currently administers 30 prescription benefit plans on behalf of its members' pharmacies, who comprise about 17% of the pharmacies in Massachusetts and 30% of those in Connecticut. These pharmacies together fill about 11% of all prescription in Massachusetts and 19% of those in Connecticut.

3. In addition to engaging in generic substitution of chemically identical products, network pharmacies will seek physician authorization to substitute a generic version of a branded drug for another branded drug in the same therapeutic class where doing so is medically appropriate.

4. Reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,153.

5. It is not clear to what extent the network pharmacies, many of which are fairly thinly distributed across Massachusetts and Connecticut, are actual competitors of one another. At least some, however, do appear to be in competition with one another, and for purposes of this opinion we treat the agreements relating to operation of the network as horizontal.

6. Health Care Statements at 109.

7. We have not determined that the withhold system that Northeast has proposed would, by itself, be considered an arrangement under which participating pharmacies share substantial financial risk. Indeed, it appears unlikely, without more, that a withhold that is retained by the network, and thus is used to benefit the participants either directly, through ultimate distribution to them, or indirectly, by supporting operations of the network that otherwise would have to be paid for by the participants, creates a significant financial incentive for the participants, as a group, to achieve the specified goals of the network. In such cases, the strength of the financial incentive embodied in the withhold is significantly reduced, because network members ultimately recover the full amount of the withhold even if the performance goals are not met. In this instance, however, the withhold is coupled with, and supports, a risk-sharing arrangement in the form of sharing between the payer and the network of cost savings attributable to the efforts of the network participants to maximize the effectiveness of treatment programs prescribed for the patients they serve. The arrangement as a whole, therefore, appears to establish the sharing of substantial financial risk among the network participants.

8. Northeast has stated that some payers, after an initial trial of the concept, may prefer to contract with the network purely on a fee-for-service basis, retaining for themselves all the savings, above those payments, that are generated by the network's activities. In the event that the network enters into some purely fee-for-service contracts with such payers in the future, we would analyze the activities of the network as a whole to determine whether the pricing aspects of those contracts would be appropriately analyzed under the rule of reason. See Policy Statements at 67 n.27 (discussing physician networks). While, as the Policy Statements caution, "the mere presence of some risk-sharing arrangements . . . will not necessarily result in rule of reason analysis of the non-risk sharing aspects of the venture," the presence of some non-risk-sharing activities by a network that otherwise in engaged in integrated provision of services will not necessarily subject those activities to per se analysis.

9. Northeast has not provided information that would permit us to define local geographic markets for the patient care services that the network proposes to offer. There is no need in this instance to define those markets, for there appears to be no area in which the participating pharmacies are likely to have to power to raise prices or otherwise limit competition significantly.

10. Of course, significant antitrust issues would be raised if Northeast members used the network as a vehicle for coordinating their pricing for services delivered outside the network, or otherwise limiting competition in ways that did not contribute significantly to the legitimate purposes of the network.