Institutional Pharmacy Network, 961 0005
Analysis of Proposed Consent Order to Aid Public Comment

The Federal Trade Commission has accepted, subject to final approval, an agreement to a proposed consent order from Institutional Pharmacy Network (IPN) and its five members: Evergreen Pharmaceutical, Inc.; NCS Healthcare of Oregon, Inc.; NCS Healthcare of Washington, Inc.; United Professional Companies, Inc.; and White, Mack and Wart, Inc.

The proposed consent order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreement and the comments received and will decide whether it should withdraw from the agreement or make final the agreement's proposed order.

The purpose of this analysis is to facilitate public comment on the proposed order, and it is not intended to constitute an official interpretation of the agreement and proposed order or to modify in any way their terms. The proposed consent order has been entered into for settlement purposes only and does not constitute an admission by any proposed respondent that the law has been violated as alleged in the complaint.

Description of the Draft Complaint

A complaint that the Commission prepared for issuance along with the proposed order alleges the following:

Evergreen Pharmaceutical, Inc.; NCS Healthcare of Oregon, Inc.; NCS Healthcare of Washington, Inc.; United Professional Companies, Inc.; and White, Mack and Wart, Inc., are institutional pharmacies that compete to serve institutional care facilities, such as nursing homes. Institutional pharmacies provide specialized services, including providing medications in single dose packages, maintaining an "emergency box" at the client facility with drugs for use in emergency situations, and providing consulting and quality assurance services to institutional care facilities. The institutional pharmacy respondents together provide pharmacy services for approximately 80 percent of the patients that receive institutional pharmacy services in Oregon.

The State of Oregon created the Oregon Health Plan ("OHP") in 1994 to provide health care to Medicaid recipients and other needy Oregonians. Under OHP, the state contracts with Fully Capitated Health Plans ("Plans"), which are managed care organizations that receive a fixed payment to care for OHP patients. The Plans in turn contract with providers, including nursing homes, hospitals, physicians, retail pharmacies, and institutional pharmacies. OHP covers about half of all institutional care patients in Oregon.

The institutional pharmacy respondents formed IPN to offer their services jointly. Their purpose to negotiate collectively has been to maximize their resulting leverage in bargaining over reimbursement rates with the Plans. Indeed, even before forming IPN, they saw "an advantage to negotiate from strength for reimbursement" because they recognized that competition among themselves would drive down reimbursement rates. IPN neither provides new or efficient services, nor enables its members to provide new or efficient services. Moreover, IPN members do not share risk.

IPN has contracted with three Plans. Pursuant to each of those contracts, each Plan pays IPN members a higher rate than it pays institutional pharmacies that are not IPN members and that did not negotiate collectively with that Plan. IPN also attempted to contract with at least four other Plans. Clinical, Evergreen, IPAC, ProPac, and UPC agreed that, before conducting individual negotiations, each member would give IPN time to attempt to negotiate a contract. Pursuant to this agreement, the pharmacies negotiated separately with three of the Plans only after IPN failed to reach an agreement on behalf of the group. IPN also negotiated with a fourth Plan that is by far the largest purchaser of institutional pharmacy services for OHP patients. Although this Plan sought to deal with the pharmacies individually, they largely refused to respond and instead approached the Plan as a group. After months of attempting to negotiate individually with the institutional pharmacy members of IPN, and under pressure to implement pharmacy arrangements for institutional care patients under OHP, the Plan began negotiating with IPN. As a result of these negotiations, the Plan agreed to pay higher rates to IPN members than it had agreed to pay other institutional pharmacies.

The institutional pharmacy members of IPN have agreed among themselves, and used IPN, to engage in collective negotiations over price and other terms with the Plans and thereby to fix the fees they charge the Plans. In so doing, IPN and its institutional pharmacy members have fixed, stabilized, or increased the price of institutional pharmacy services and otherwise restrained competition among institutional pharmacies in Oregon and thereby deprived the State of Oregon, the Plans, nursing homes and other long-term care facilities, and OHP beneficiaries of the benefits of competition among providers of institutional pharmacy services in Oregon.

Description of the Proposed Consent Order

The proposed order would prohibit IPN and the institutional pharmacy respondents from entering into, maintaining, or enforcing any agreement with any pharmacy concerning fees or fixing, raising, stabilizing, maintaining, or tampering with any fees. The proposed order contains a number of provisos.

Proviso (1) allows each respondent to engage in conduct (including collectively determining reimbursement and other terms of contracts with payers) that is reasonably necessary to operate (a) any "qualified risk-sharing joint arrangement," or (b) upon prior notice to the Commission, any "qualified clinically integrated joint arrangement." The proviso addresses the arrangements that the respondents may enter into, rather than the overall nature of the group, because a pharmacy network may enter into legitimate arrangements with some third-party payers but engage in illegal conduct with respect to others. For the purposes of the order, a "qualified risk-sharing joint arrangement" must satisfy two conditions: (a) participating pharmacies must share substantial financial risk and (b) the arrangement must be non-exclusive. The order lists ways in which pharmacies might share financial risk. These track the four types of financial risk sharing set forth in the Joint FTC-Department of Justice Statements of Antitrust Enforcement Policy in Health Care. 4 Trade Reg. Rep. (CCH)  13,153 (August 28, 1996). To be a "qualified" risk sharing arrangement, the arrangement must also be non-exclusive, both in name and in fact. An arrangement that either restricts the ability of participating pharmacies to contract outside the arrangement (individually or through other networks) with third-party payers, or facilitates refusals to deal outside the arrangement by participating pharmacies, does not fall within the proviso. Although exclusive joint arrangements are not necessarily anticompetitive, they can impair competition, particularly when they include a large portion of the pharmacies in a market. In light of the IPN members' large share of the Oregon institutional pharmacy market, this definition does not permit the respondents to form or participate in exclusive arrangements.

A "qualified clinically integrated joint arrangement" includes arrangements in which the pharmacies undertake cooperative activities to achieve efficiencies in the delivery of clinical services, without necessarily sharing substantial financial risk. For purposes of the order, such arrangements are ones in which the participating pharmacies have a high degree of interdependence and cooperation through their use of programs to evaluate and modify their clinical practice patterns, in order to control costs and assure the quality of pharmacy services provided through the arrangement. As with risk-sharing arrangements, the definition of clinically integrated arrangements reflects the analysis in the 1996 FTC/DOJ Statements of Antitrust Enforcement Policy in Health Care and the arrangement must be non-exclusive. Because the definition of a clinically integrated arrangement is by necessity less precise than that of a risk sharing arrangement, the order imposes prior notification requirements. Such prior notification will allow the Commission to evaluate the likely competitive impact of a specific proposed arrangement and thereby help guard against the recurrence of acts and practices that have restrained competition and consumer choice.

The remaining provisos allow business arrangements typical to pharmacy markets. Proviso (2)(a) allows the proposed respondents to contract with pharmacy benefit managers that own or are affiliated with retail pharmacies. Provisos (2)(b) and (3) together permit price agreements between a pharmacy and a nursing home even if the nursing home is affiliated with a pharmacy. Proviso (2)(c) permits a pharmacy to enter into subcontracting agreements where it is not reasonable for a pharmacy with an agreement with a nursing home or third-party payer to provide services by itself. Such agreements are common among both retail and institutional pharmacies. Proviso (2)(c) also allows for such subcontracts where the respondent that operates a long-term care network (as UPC does) enters into an agreement with the incumbent pharmacy provider for an institutional facility within that network. Finally, Proviso (4) permits pharmacy agreements to operate or manage a pharmacy.

Parts III.A and III.B of the proposed order require the respondents to distribute the order to the Fully Capitated Health Plans and to certain officers, directors, and managers. Parts III.C, III.D, and III.E require each respondent to file compliance reports, retain certain documents, and notify the Commission of certain changes in its corporate structure.