National Community Pharmacists Association Issues Public Comment to FTC, Justice Department Antitrust Division

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com

WASHINGTON, April 30 -- The National Community Pharmacists Association, New Alexandria, Virginia, has issued a public comment to the Federal Trade Commission and the U.S. Department of Justice Antitrust Division. The comment was written on April 21, 2022, and posted on April 28, 2022.

Here are excerpts:

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To: The Honorable Lina Khan, Chair, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580

The Honorable Jonathan Kanter, Assistant Attorney General, U.S. Department of Justice, 950 Pennsylvania Avenue, NW, Washington, DC 20530-0001

RE: Solicitation for Public Comments on the Business Practices of Pharmacy Benefit Managers and Their Impact on Independent Pharmacies and Consumers

Dear Chair Khan and Assistant Attorney General Kanter:

The National Community Pharmacists Association (NCPA) welcomes the opportunity to provide comments to the Federal Trade Commission and the Antitrust Division of the Department of Justice on the "merger guidelines" -- the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. NCPA is well-positioned to comment on the necessity of Guidelines, as NCPA can provide insights that both reflect modern market realities and that will guide the Agencies in identifying and proscribing unlawful, anticompetitive practices.

NCPA represents America's community pharmacists, including 19,400 independent community pharmacies. Almost half of all community pharmacies provide long-term care services and play a critical role in ensuring patients have immediate access to medications in both community and long-term care settings. Our members represent a $67 billion health care marketplace, employ 215,000 Americans, and provide an expanding range of health care services to millions of patients every day. Our members are small business owners who are among America's most accessible health care providers.

NCPA's members continue to suffer from the anticompetitive effects of multiple horizontal and vertical mergers in the health care industry over the past 20 years. These mergers have resulted in a highly concentrated market structure that allows pharmacy benefit managers to "exercise undue market power."/1

Three vertically integrated companies/2 now control access to more than 80%3 of all prescriptions filled in the United States. They also have access to competitively sensitive information about their competitors. Each of these three companies possess market power in one or more product markets and in several relevant geographic markets./4

The harm caused by the consolidation is not only to competitors who are squeezed out through exclusionary practices made possible by vertical integration, but also to competition and consumers. The White House Council of Economic Advisors reports that "[p]ricing in the pharmaceutical drug market suffers from high market concentration in the pharmaceutical distribution system and a lack of transparency."/5

The Agencies did not challenge a single transaction in this market with anything more substantial than targeted divestitures. Many did not even receive a Second Request. Something is broken with merger review.

Broaden the Scope of the Guidelines

The Guidelines need a broad sample of real-world mergers that serve as evidence of harm to competition that rely on structural presumptions and historical comparisons. As

1 Council of Economic Advisors, Reforming Bio Pharmaceutical Pricing at Home and Abroad (February 2018) at 10.

2 Aetna-CVS-Caremark; UHG-Optum; Cigna-ESI; Humana-Primark.

3 Fein, Adam. "The Top Pharmacy Benefit Managers of 2021: The Big Get Even Bigger." Drug Channels. April 5, 2022. https://www.drugchannels.net/2022/04/the-top-pharmacy-benefit-managers-of.html?m=1.

4 Competition in Health Insurance: A Comprehensive Study of US Markets (2017 Update).

5 Supra fn. 1.

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currently constructed and implemented, the Guidelines identify a very narrow type of mergers for which there is overwhelming and compelling evidence of harm to competition - e.g., merger to monopoly, or that are susceptible to econometric analysis. Transactions that do not fit within the obvious category or the narrow template are cleared despite appearing to the general public to be a substantial lessening of competition, higher prices for consumers, and diminished access and innovation. In short, the Guidelines as currently constructed and applied subvert the intention of the statute as enacted by Congress.

Application of the Guidelines relies too heavily on complex economic modeling rather than real-world behaviors and structural presumptions. This over-reliance on economic analysis has created a "CSI" effect in courtrooms with judges mistakenly believing, and thus requiring, that judges can and must predict merger effects with precision in each case. In turn, the econometric analysis takes over, with each side spending millions to develop complicated modeling that is often proven wrong within just a few years of the deal closing. This "CSI" effect could be ameliorated by the reintroduction of structural presumptions that are based on what actually has happened in the market.

The FTC's Bureau of Economics and the DOJ's Economic Analysis Group have access to data and information that they can use to compare the actual outcome against the predicted outcome painted by the parties. For instance, an entity with 35% market share acquires a downstream entity with a significantly lower market share. The parties claim - consistent with the 1987 and 2020 Vertical Guidelines - that because the transaction will eliminate double-marginalization (contracting friction), the combined entity will be more efficient and end prices to consumers will decrease. After several years, the market share of the downstream entity increases and matches the market share of the upstream entity. Meanwhile, competitors of the downstream entity are exiting the market, and the price of the output paid by consumers increases. Studying the actual effects of consummated transactions/6 would be instructive for assessing the competitive effects of the next transaction in the industry that involves an upstream and downstream entity in that market or a similarly structured one.

Apply the Guidelines as Written

Challenge vertical mergers that create or enhance barriers to entry and stop focusing on price as the sole indicator of when to act. Short of rewriting the Guidelines, the Agencies application of the Guidelines as written would result in significantly more robust enforcement. For example, the 2020 Vertical Guidelines identify the conditions which potentially raise significant competitive concerns. Yet, challenges to vertical transactions are rare - once every 40 years - despite the increasing number of vertically integrated entities, particularly in healthcare and technology.

In the technology space, the creation of these closed loop barriers to entry is referred to as "walled gardens." The concept is the same in healthcare: establish a market, control access to customers, and construct rules to disadvantage competitors. Vertical transactions that create or enhance barriers to entry and allow for exclusion of rivals essentially are ignored as a result of the Guidelines' focus on price./7

These exclusionary behaviors do directly affect price and they harm the competitive process which ultimately results in additional harm to consumers./8

The recent

6 E.g., the retrospective undertaken by the FTC in the early 2000's that examined its hospital merger enforcement; or HOW ACQUISITIONS AFFECT FIRM BEHAVIOR AND PERFORMANCE: EVIDENCE FROM THE DIALYSIS INDUSTRY, Paul J. Eliason, Benjamin Heebsh, Ryan C. McDevitt and James W. Roberts (June 18, 2018) https://faculty.fuqua.duke.edu/~rcm26/ESRD_mergers.pdf

[seven footnote is omitted]

8 In our market, we have seen how a walled garden directly leads to increased prices for consumers. For example, the three largest PBMs which account for 80% of all prescriptions filled in the U.S., are each vertically integrated with a health insurer (Cigna, Aetna, and UnitedHealth) upstream and a pharmacy downstream. Each of the upstream insurer has market power in multiple geographic areas in the U.S. The affiliated PBM leverages that market power

Complaint filed by the DOJ challenging UnitedHealth Group's acquisition of Change Healthcare is the rare example of an enforcement action that meets the foreclosure concerns identified in the Guidelines and brings into focus the data implications of the merger.

[Text omitted]

Conclusion

Over the last 40 years, the accommodating policy toward mergers found in the current structure and application of the Guidelines has resulted in a substantial lessening of competition throughout the economy. Even the simple step of more faithfully applying the Guidelines as currently written would have a positive impact. Greater attention to exclusionary effects, non-price effects, and vertical foreclosure do not require much more. As things stand, the dynamism of the marketplace that enabled and spurred innovation has been replaced by many of the same market characteristics that spawned the Sherman Act and the Clayton Act. Law professors teach students that the antitrust laws level the playing field, fostering a competitive marketplace that produces higher quality goods, consumer choice, and lower prices. The Agencies should work to ensure that the Merger Guidelines consider all of those benefits of competition - quality, choice, lower costs - in evaluating the competitive effects of a transaction.

Sincerely,

B. Douglas Hoey RPh, MBA

CEO, National Community Pharmacists Association

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com