Creation of Community Pharmacy Network as Proposed Not Likely to Restrain Competition, FTC Staff Advises

A plan to establish a network of independent community pharmacies and pharmacists, that would contract with managed care organizations and physician groups to provide both drug distribution and disease management services, appears to present an innovative approach with the potential for significant procompetitive benefits, according to staff of the Federal Trade Commission. Responding to a request for an advisory opinion from counsel for Orange Pharmacy Equitable Network ("OPEN"), FTC staff advised that it has no present intention to recommend a challenge to OPEN's undertaking negotiations to implement the model it proposed.

OPEN's members are independent community pharmacies located in Orange County, California. The proposed network is intended to link drug prescribing, dispensing, and patient education/disease management services in a structure in which the prescribing doctors, the dispensing pharmacies, and the disease management pharmacists share common economic incentives to work together to manage drug therapy in the interest of reducing overall medical care costs. OPEN will seek to negotiate with managed care organizations or groups of physicians that are at financial risk for provision of medical services and prescription drugs. The proposed network will integrate management of medical and pharmacy benefits, with OPEN sharing in overall health care cost savings that result from improved drug prescription, dispensing, and utilization.

As far as can be determined, the type of arrangement proposed by OPEN has not been implemented anywhere in the country. OPEN believes that the details of network operation and compensation can be worked out only in future negotiations with individual payers or physician groups, and that each contract is likely to be different. In general, it anticipates that network members would be compensated based on a combination of fee-for-service payments and distributions from a risk pool containing withholds from fees for drug product dispensing and savings from expected drug and other medical costs.

While the staff advisory, signed by Richard A. Feinstein, Assistant Director for Health Care Services and Products at the FTC, cautioned that the absence of certain information makes it difficult to reach a firm conclusion about any particular agreement that OPEN might negotiate, the letter stated that the proposed network "appears, in principle, to involve potentially beneficial financial and service integration" among participants of the type that would bring operation of the network within the rule of reason. As is described in 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"), the staff letter noted, "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." One of the purposes of the 1996 revision of the Statements, according to the staff letter, 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 staff concluded that the proposed arrangement appears designed to foster integration among pharmacies, pharmacists, and prescribing physicians in ways that have the potential to lead to improved quality of pharmaceutical care and more cost-effective management of pharmacy and medical benefits, and that it contemplated use of a combination of types of financial incentives to facilitate achievement of those goals.

The staff letter also concluded that OPEN's operation under the type of structure described in its proposal is not likely to significantly restrain competition for pharmaceutical services in Orange County. "This conclusion would not necessary apply, however, if OPEN were to include other pharmacies, such as chain drug stores or supermarket chain pharmacies, in the network."

NOTE: This letter sets out the views of the staff of the FTC's Bureau of Competition, as authorized by the Commission's Rules of Practice. It has not been reviewed or approved by the Commission. As the Commission's rules explain, the staff's advice is rendered "without prejudice to the right of the Commission later to rescind the advice and, where appropriate, to commence an enforcement proceeding."

Copies of the staff's advisory opinion letter are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.