Announcement of Public Workshop, "Examining Health Care Competition" ("Health Care Workshop") Project No. P13-1207 #00004

Submission Number:
Joanna Shepherd
Initiative Name:
Announcement of Public Workshop, "Examining Health Care Competition" ("Health Care Workshop") Project No. P13-1207
Dear FTC Health Care Workshop Organizers: A critical question in health care delivery is the effect of selective contracting on consumers. In the pharmaceutical market, selective contracting takes the form of preferred and narrow pharmacy networks. Understanding the advantages and disadvantages of pharmacy networks is especially important given recently proposed CMS regulations. Until now, CMS has consistently permitted use of preferred pharmacy networks, noting that cost-sharing discounts at preferred pharmacies are among the "appropriate contracting tools" that plan sponsors can use "to lower costs." Yet the rule proposed in January 2014 would abruptly reverse course and make it difficult, if not impossible, for Part D plan sponsors to continue to operate these networks effectively. The proposed rule would force plan sponsors to admit "any willing pharmacy" into a preferred network. The rule would therefore eliminate the single biggest bargaining chip that plans have when attempting to negotiate lower prescription drug prices for their beneficiaries-the ability to offer exclusivity in exchange for price concessions. The rule would also force plan sponsors to disclose and offer two sets of price levels and cost-sharing rates-"preferred" and "non-preferred" -to all pharmacies. These restrictions would prevent parties from contracting privately and deter pharmacies from undercutting the now public market by offering more aggressive discounts. As the FTC has explained, under such regulatory schemes, "[b]ecause any pharmacy may 'free-ride' on a competitor's successful network proposal, pharmacies may be less willing to invest in the development of innovative, competitive proposals to begin with." In other words, if a plan has to admit any willing provider, no provider would be willing to offer a better discount than the others. To make things worse, forcing plans to disclose negotiated drug price levels to all pharmacies can "foster tacit collusion" among rival pharmacies, as the FTC has pointed out. A discussion of the costs and benefits of preferred pharmacy networks is critical to understanding the most effective methods of health care delivery. I attach my recent study, forthcoming in the MINNESOTA JOURNAL OF LAW, SCIENCE & TECHNOLOGY that fully explains and quantifies the benefits of preferred pharmacy networks. In this Article, I use the principles of economic theory, the conclusions of previous empirical studies, the determinations of the FTC, and proprietary data I obtained from the largest pharmacy benefit manager in the United States to analyze both the claims in support of pharmacy networks and the arguments against them. I find that pharmacy networks significantly lower the cost of prescription drugs for drug plans and consumers. Moreover, data show that pharmacy networks have almost no effect on most consumers' access to pharmacies; the overwhelming majority of consumers live near retail pharmacies that are included in exclusive pharmacy networks. Please consider including pharmacy networks among the topics you discuss at the Health Care Workshop. Sincerely, Joanna Shepherd