ANALYSIS OF PROPOSED CONSENT ORDER TO AID PUBLIC COMMENT

The Federal Trade Commission (Commission) has accepted, subject to final approval, an agreement to a proposed consent order from the Asociacion de Farmacias Region de Arecibo ("AFRA") and Ricardo Alvarez Class ("Alvarez"). AFRA is an organization of approximately 125 pharmacies operating in northern Puerto Rico and Alvarez, a pharmacy owner in Manati, Puerto Rico, is one of AFRA’s officers. The agreement settles charges that the proposed respondents violated Section 5 of the Federal Trade Commission Act by fixing the terms and conditions, including prices, under which AFRA’s members would contract with a third party payer to provide services to indigents under Puerto Rico’s Health Insurance Act of 1993 (the "Reform"), and by threatening to withhold services if AFRA’s terms were not met.

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 agreement. The analysis is not intended to constitute an official interpretation of either the proposed complaint or the proposed consent order, or to modify their terms in any way.

The proposed consent order has been entered into for settlement purposes only and does not constitute an admission by either of the proposed respondents that the law has been violated as alleged in the complaint.

Summary of The Complaint Allegations

The Administracion de Seguros de Salud ("ASES"), a public corporation, implements and administers the Reform, the Puerto Rico government program designed to provide health care to the indigent and certain other residents of Puerto Rico. ASES has divided Puerto Rico into regions, soliciting bids for each region from payers to organize and provide services for beneficiaries. ASES currently selects one payer with which to contract per region. That payer then contracts with providers, including hospitals, physicians, pharmacies, and dentists. After reviewing bids from several payers, ASES selected Triple-S to administer the North Region of the Reform beginning April 1, 1995. The North Region consists of the municipalities of: Arecibo, Barceloneta, Camuy, Ciales, Florida, Hatillo, Lares, Manati, Morovis, Quebradillas, Utuado, and Vega Baja. The combined population of these municipalities is 434,000, of whom 260,000 are beneficiaries of the Reform.

Respondent AFRA, whose members are located in the North Region of the Reform, was formed on November 22, 1994, as a vehicle for its members to jointly negotiate with health plans. Each AFRA member agreed that AFRA would serve as its bargaining agent. Respondent Alvarez served as AFRA’s president from its inception until March 1997, and is currently its treasurer. Alvarez provided the leadership necessary to unite otherwise competing pharmacies, and directed AFRA’s efforts to set prices and other terms for participation in the Reform by its members.

In January 1995, AFRA began negotiating on behalf of its members with Triple-S. Alvarez served as AFRA’s chief spokesman and negotiator. AFRA sought to increase compensation for its members, and to require Triple-S to contract with all AFRA members who were interested in providing services. Alvarez exhorted AFRA’s members to refuse to sign contracts with Triple-S until advised to do so by AFRA. The refusal by AFRA members to provide services caused Triple- S to raise the fees paid to AFRA members, so that they would have a viable network of pharmacies to provide services under the Reform.

In March 1996, Triple-S lowered the fees paid to AFRA member pharmacies. In response, AFRA, under Alvarez’s leadership and guidance, threatened to withhold its members’ services as of June 10, 1996, unless Triple-S rescinded its fee schedule and increased reimbursement to its members. Thereafter, Triple-S acceded to AFRA’s demands. The new fee schedule amounted to a 22% increase over the March 1996 fee schedule.

AFRA’s members have not integrated their practices in any economically significant way, nor have they created efficiencies sufficient to justify their acts or practices described above.

The complaint alleges that the proposed respondents, by fixing the compensation upon which pharmacies would participate in the Reform, raised the cost of pharmacy goods and services to be furnished to the beneficiaries of the Reform, and thereby deprived the Commonwealth of Puerto Rico, payers, and consumers of the benefits of competition among pharmacies.

The Proposed Consent Order

The proposed consent order would prohibit the proposed respondents from concertedly 1) negotiating on behalf of any pharmacies with any payer or provider; 2) refusing to deal, boycotting, or threatening to boycott any payer or provider; 3) determining any terms, conditions, or requirements upon which pharmacies will deal with any payer or provider, including, but not limited to, terms of reimbursement; or 4)restricting the ability of pharmacies to deal with payers individually or through any arrangement outside of AFRA.

The proposed consent order would, however, allow either of the proposed respondents 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."

For the purposes of the order, a "qualified risk-sharing joint arrangement" must satisfy two conditions. First, participating pharmacies must share substantial financial risk. The order lists ways in which pharmacies might share financial risk. Second, the arrangement must be non-exclusive, both in name and in fact. The order does not permit arrangements that either restrict the ability of participating pharmacies to contract outside the arrangement (individually or through other networks) with third-party payers, or facilitate refusals to deal outside the arrangement by participating pharmacies.

For the purposes of the order, 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 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 proposed order would permit respondent Alvarez to negotiate with any payer or provider on behalf of pharmacies that he owns. The proposed order would also permit Alvarez to negotiate on behalf of pharmacies that he operates pursuant to a contract, provided that he submits written notice and a copy of the contract to the Commission within ten (10) days of entering into such contract and refrains from negotiations with any payer or provider for at least thirty (30) days after providing such notice.

Part III of the proposed order would require that AFRA distribute copies of the order and accompanying complaint, as well as certified Spanish translations, to each person who, at any time since November 22, 1994, has been an officer, director, manager, employee, or participating pharmacy in AFRA, and to each payer or provider, who at any time since November 22, 1994, has communicated any desire, willingness, or interest in contracting for pharmacy goods and services with AFRA members.

Parts IV and V of the order impose certain reporting requirements in order to assist the Commission in monitoring compliance with the order.

The proposed consent order would terminate 20 years after the date it is issued.