Mr. CONTE. Any further questions?

If not, Mr. Shaffer, for the subcommittee, and I am sure for Mr. Dingell, the chairman of this subcommittee, we are very appreciative for your testimony this morning. It was clear and concise, and it is very helpful.

Mr. SHAFFER. Thank you. I hope that we helped pharmacy out a little. I would like to leave this with you.

Mr. DINGELL. Mr. Shaffer, I also want to express my gratitude for your help this morning.

Our next witness is Mr. Charles Frank Fort, president, Food Town Ethical Pharmacies, Inc., Baton Rouge, La.

It is a pleasure to welcome you to this committee. I have had the pleasure of hearing you on previous occasions and found your remarks to be most helpful to the committee.

Mr. FORT. Thank you.

Mr. DINGELL. We are pleased to have Congressman Rarick from Louisiana here to introduce Mr. Fort.

TESTIMONY OF HON. JOHN R. RARICK, A MEMBER OF CONGRESS FROM THE STATE OF LOUISIANA

Mr. RARICK. Mr. Chairman and members of the subcommittee, I am very happy to introduce Mr. Charles Frank Fort who is president of the Food Town Ethical Pharmacies, Inc., in our capital city, Baton Rouge, La.

Food Town Ethical Pharmacies, Inc., is a large operation to our people but a small business nationwide. We are proud of the Food Town people and I am very happy to introduce to you and members of the subcommittee Mr. Fort who will be a witness on his own behalf. Mr. DINGELL. Thank you.

TESTIMONY OF CHARLES FRANK FORT, PRESIDENT, FOOD TOWN ETHICAL PHARMACIES, INC., BATON ROUGE, LA.

Mr. FORT. I won't read the statement since it will be in the record. But I would like to summarize it for you and invite your questions. Mr. DINGELL. This would be most helpful.

(The complete statement of Charles Frank Fort follows:)

STATEMENT OF CHARLES FRANK FORT, PRESIDENT OF FOOD TOWN ETHICAL PHARMACIES, INC., BATON ROUGE, LA.

Mr. Chairman and Members of The Regulatory and Enforcement Agencies Subcommittee:

Thank you for the opportunity to submit information concerning Distribution Practices In The Drug Industry And Their Effect On Small Business.

My name is Charles Frank Fort. As President and General Manager of Food Town Ethical Pharmacies, Incorporated, I am responsible now for the operation of a small business in relation to our giant competitors. Beginning in 1955 our one drug store operation experienced the handicaps of small business and today our one-pharmacist drug stores provide information concerning current problems. When we opened our first drug store, the cost of operating inventory and the first month's advertising exceeded capitalization. Now there are thirteen stores with annual sales from $70,000.00 to $1,500,000.00, generating a total sales volume of over $7,000,000.00.

The compelling policy of Food Town Ethical Pharmacies, Incorporated demands highest professional standards in the low-price mass distribution of drugs

and other merchandise, which bear trusted brands and trademarks. Our professional and other employees are compensated above the averages in our trade areas. Our policy also requires strict compliance with federal and state regulations. We do not merchandise private labels and have refused to dispense generic name drugs except on specific instructions of a physician.

My purpose here is to attempt to aid this Committee to solve a very serious dilemma involving the laudable ambition to assist small business without increasing drug and prescription costs to the consumer. Consumer prices must not be increased by legislation or regulation.

I. DAMAGING DISTRIBUTION PRACTICES, INCLUDING SOME ESTABLISHED BY
LEGISLATION AND GOVERNMENTAL REGULATION

A. Federal and State agencies in drug distribution

Distribution of drugs by Federal and State Agencies, now a growing tendency, is damaging to both small wholesalers and retailers.

It has been estimated by drug industry spokesman that 45% of all prescriptions dispensed in the U.S. within the next five years will be dispensed in government programs, which now affect 19 million older people.

Retail pharmacies face a growing and damaging competitive situation in retail distribution caused by drug dispensaries operated by the Federal and State agencies, including hospitals, nursing homes, other extended care facilities, neighborhood health centers and the Veterans Administration.

The VA has been requested to drop its policy of encouraging mail order prescriptions to VA pharmacies, a method which deprives beneficiaries of a free choice of pharmacy.

Congress is urged to demand drug distribution through the nation wide network of community pharmacies by all federal agencies. Of the 54,000 drug stores in the U.S. a large percentage is in the small business category. Average sales volume is less than $300.00 a day. With only 100,000 licensed pharmacists in retail drug stores in the U.S., there obviously are less than 2 pharmacists per drug store. 50,000 of these pharmacists own their own drug store or are in a partnership. These men cannot compete with the government in retail distribution.

Drug distribution under Medicare penalizes community drug stores.

The 100,000 licensed hard working pharmacists who dispensed one billion prescriptions in the nation's 54,000 drug stores last year provided the very best national network of community pharmacies, through which drugs should be distributed to Medicare beneficiaries. At present this predominately small business community has been left out of this program, except in cases in which one drug store per Medicare nursing home can serve as pharmacist consultant. One-pharmacist drug stores cannot participate in the consultant program as he cannot practice as an out-pharmacist.

Patients choice of drug store was not provided for and Medicare hospital outpatients (including those in nursing homes) do not receive drugs under the free enterprise competitive system, which has proved its worth in reducing drug prices in retail distribution.

The record refutes the Vice President's quoted contention that it would cost too much to include the nation's drug stores in Medicare drug distribution. U.S. Department of Commerce statistics on Medical Care Expenditures for 1946-1965 reflect that only 144 of the consumer's medical care dollar is being spent for drugs compared to 17.5¢ twenty years ago.

The retail pharmacists of America played an important role in this record and deserve Congressional action to include them in Medicare's drug distribution pro

gram.

In my opinion this recommendation would not only serve the interest of small businessmen but could reduce the cost.

Of even greater value is the fact that the nation's drug stores could provide better service and protection for Medicare beneficiaries by preventing the dangerous practice of dispensing by non-pharmacists in Medicare nursing homes.

In a recent investigation of nursing homes the General Accounting Office found that during a 3-month period in nine nursing homes 54 medications were administered to patients without a doctor's written prescription. Many instances of inadequate controls were found. One case showed that Compazine, a tranquilizing drug was administered 3 times a day to a welfare patient from October, 1965 to January, 1966 without a doctors prescription.

The record indicates that drug and prescription distribution is safer and more economical through the professional pharmacists of our community drug stores. B. Drug manufacturers' prices lower to dispensary clinic and hospital pharmacies, including tax-supportd, tax-free, non-profit and profit-making

Discriminatory drug prices offered by drug manufacturers to those institutional competitors poses one of the greatest threats to small businessman in drug distribution, especially when out-patients receive prescription service from the dispensary, clinic, dispensing physician or hospital.

An example of the price differential is disclosed by a Federal District Court suit filed recently in California alleging that a major drug manufacturer granted illegal price advantage to hospitals, clinics and dispensing physicians on its diuretics. The discounts which were not allowed to competitive drug store distribution involved 1000 tablets free with the purchose of 2000 tablets or 5000 free with the purchase of 5000.

For several years associations in retail and wholesale drug distribution have urged manufacturers to discontinue the unfair practice of offering lower drug prices to hospitals and clinic pharmacies than those offered to wholesale druggists and retail pharmacies.

Even though the Robinson-Patman Act may prohibit this practice, which is so harmful to the small drug retailers and wholesalers, possible enforcement is so costly and time consuming. Help is beyond the practical reach of the nation's thousands of one-pharmacist drug stores.

Specific legislation is needed to spell out the circumstances under which hospital and clinics can receive price advantages in drug distribution.

Remedial action also is required to protect wholesale drug distribution which is absolutely necessary for survival of the small businessman in retail drug distribution.

The wholesale drug industry operated last year at approximately 1%% net profit. It cannot compete with drugs diverted by some clinic and hospital employees to retailers when these institutions buy at prices as much as 50% lower. Even at the relative position of my company in the small business community, we could not survive without the availability of full-service wholesale drug companies.

In my opinion many drug manufacturers would welcome specific legislation to relieve them of the pressure by hospitals and clinics to provide discriminatory prices.

C. Distribution of generic name drugs (established name)

Present practice in the distribution of generic name drugs places the small drug store operator at a great disadvantage, especially if the physician chooses to prescribe by generic name only.

Generally, there are three types of prescriptions: (1) generic name only (2) generic name with manufacturer specified and (3) trademarked pharmaceutical. Since #2 and #3 are specific the pharmacist is not faced with the grave responsibility of selecting the manufacturer, as he must do when dispensing a genericname-only prescription.

As the final link in the distribution of a generic name drug which is not guaranteed by government inspection, the community pharmacist must assume the legal and professional responsibility of choosing a manufacturer whose integrity may be suspect. Usually he will not have the time or means of a thorough analysis and certainly he will not have the laboratory facilities for chemical analysis. Not only does the procedure rob the physician of his right to specify exact medication, but it is a hazard no small professional businessman should be forced to assume. This practice now exists and indications indicate it will expand. That a gamble exists is indicated by a statement of Dr. James L. Goddard, published in March, 1967: "I think it's going to require very careful study before anyone could assume that there is such a thing as generic equivalency on a broad scale in our drug field today. There will have to be better methods of determination of equivalency than we now have, and more attention paid to the entire problem. It's not a simple issue. We well appreciate this."

Dr. Goddard's description of the steps taken by the U.S. Department of Defense on the question of generic equivalency reflects the inadequacy of any onepharmacist drug store to meet the generic name responsibility in drug distribution: “... their methods of assuring quality of drugs purchased by the Department of Defense are most impressive. They carry out factory inspections. They sample the products that are involved, and in general I think they have a system

that has a lot of merit in terms of making certain that the DOD, the members of the Armed Forces, and the dependents who are served by this system do get drug quality regardless of the source of the drug. It is a very impressive program."

Until the U.S. Government by continuous or batch by batch inspection can guarantee the quality of non-trademarked drugs, physicians and small drug store pharmacists must be protected against compulsory generic name prescribing and dispensing.

D. Price-fixing fair trade (resale price maintenance, otc.)

A distribution practice, compelled by approximately one-half the States, empowers manufacturers to fix prices, usually at every step in the distributive system.

These laws deprive the small businessman of one of his very best weapons: the right to lower the price on presold merchandise, especially to compete with powerful private brands.

For the purpose of reducing consumer prices nationwide and to aid small businessmen in drug distribution, Congress should consider legislation under the interstate commerce clause to make price-fixing by manufacturers illegal.

E. Distribution of private brands—the Borden case

In 1965 the U.S. Court of Appeals at New Orleans held that it was not a violation of the price discrimination provision (section 2-a) of the RobinsonPatman Act for the Borden Company to sell private brand evaporated milk to wholesalers or retailers at prices lower than it charged for the Borden Brand, even though they were chemically identical.

When applied to drug distribution which is made up of so many small wholesalers and retailers, the decision establishing the "commercially different" theory to justify price discrimination benefits the big business competitor.

Only large volume distributors can buy in large enough quantity and absorb the cost of packaging, labeling and advertising while the small distributor can obtain only the brand name at a higher price.

In many instances the public appeal at retail of the brand name will tend to compensate for the price differential, if the price difference is not too great. However, in the hands of a large national retailer with a heavy advertising budget to create "intense public demand" a private brand may be converted into a brand name at a lower price for comparable quality and grade.

In drug distribution good examples of this process of converting private brands into brand names are Walgreen and Rexall.

In about one half of the States, Brand Name price-fixing by manufacturers aggravates this problem. The small retailer cannot convert a private brand into a "brand name" and he cannot reduce the price of the manufacturers' brand. Whether in a free trade State or a price-fixing fair trade State, the small drug store cannot compete on price with "like grade and quality."

The Robinson-Patman Act should be amended specifically to prohibit price differentials on products of "like grade and quality" or on those which are "chemically identical" irregardless of the product's commercial or consumer demand value.

The "like grade and quality" should be spelled out so that minor deviations in design or features will not allow for price discrimination.

F. Distribution limited by franchise and the "right to refuse to sell"

In the General Motors decision of 1966, the U.S. Supreme Court reaffirmed that a manufacturer has a right to select the customers to whom he sells his merchandise. But the Court clearly held that the manufacturer did not have the right to do so by arrangement or conspiracy with someone else.

In wholesale and retail drug distribution many small businessmen hailed this decision as a break in eliminating franchise abuses by some manufacturers, especially in the cosmetic field.

Whether employing a direct, wholesale or dual distribution system, many of these manufacturers issue franchises to sell their merchandise only to retailers and/or wholesalers approved by the retail or wholesale competition. So in practice some of these manufacturers abuse their right to refuse to sell to a new customer by "agreement, arrangement or conspiracy with someone else."

This practice is used also by manufacturers and their customers to prevent distribution to wholesalers and retailers who refuse to maintain a price fixed by the manufacturer.

Even though the General Motors decision was expected to ease the flow of merchandise price-fixed by franchise and distribution-controlled by franchise, the discriminating system still exists.

At this time Food Town Ethical Pharmacies, Incorporated is one of many drug retailers who cannot buy Coty, Max Factor and other lines. In the beginning refusal was based on the fact that we refused to agree to maintain a fixed price in a fair trade State and later, after our State Courts outlawed price-fixing, in a free-trade State.

While our big competitors are buying these lines, they continue to refuse to sell to us, advising that "their distribution is sufficient at present." This continuous refusal exists even after we agree to maintain their retail price and not sell to any other retailer. The real reason is hard to prove in court, even though we know it involves "agreement, arrangement or conspiracy" between the manufacturer and our competitors—many larger than we are.

To indicate the need of small business for remedial legislation to provide instant relief the U.S. Department of Justice has been working on the Revlon case for many years with respect to restrictive and restraining use of the francise system to control prices and retail competition.

Trial of this Revlon case in U.S. District Court in New York began on April 3, 1967. Consent judgments exist with Coty, Max Factor and possibly others.

Scheduled to testify as a witness in this case, I first complained to the U.S. Department of Justice in 1956, when we were a very small business threatened with failure because Revlon and others refused to sell to us or had cut us off because of price. With an unpleasant agreement to maintain prices, we have been buying Revlon direct.

Many small drug stores need legislation to assure that they can buy needed merchandise. These businesses should be protected from the damaging affects of manufacturers who abuse the right to refuse to sell and who set up schemes to close all other sources of supply.

Mr. William Hood, professor of small business at the University of Michigan stated recently, "Nearly all states refrain from doing what spokesmen for small business urge that the federal government do, namely, enforce vigorously the statutes prohibiting restraints of competition."

In my opinion specific Federal legislation is needed to expedite assistance to small business.

II. THE PROBLEM OF PRICE DIFFERENTIALS RELATED TO VOLUME

American abundance is based to a great degree on mass production and volume sales. "Cheaper by the dozen, gross or carload" describes the system which has been so successful in providing the consumer with the greatest quality and quantity at the lowest price.

In the field of drug distribution, as in others, it creates a problem for the small businessman that seems to defy a solution. If he can't buy in the largest quantity, he can't buy at the lowest price.

The solution must not force consumer prices upward and should not adversely affect the American technique which has provided the highest standard of living in the world: Quantity purchase creating mass production to lower the cost which then increases sales, use and consumption to the benefit of the most people.

An analysis of quantity price differentials in retail drug distribution discloses that there is generally a cost differential of from 15% to an extreme 47% (for 10,000) between the very lowest price in the greatest quantity. The average would be about 15% to 20%.

Our experience indicates that most small drug stores can buy a large percent of their merchandise at the lowest price. However, after eleven years, our company cannot buy everything at the lowest quantity price. When the quantity lowest price is based on 100,000 tablets and it takes 6 to 8 months to sell that quantity, we look for other retailers to share the purchase.

In this way we are reaping the type of benefit offered small businesses in voluntary chains.

A survey conducted by Drug Topics Magazine (1-9-67) revealed some interesting facts on the question of voluntary chains: "The grocery business, through voluntary chains, has been returned to independent groceries to the extent that a majority volume of business is now done in such voluntary associations, "Asked if they have had an opportunity to review voluntary chains or associa tions, 56% of the retail pharmacists polled by Drug Topics' latest nationwide spotcheck replied in the negative. On the other hand, 44% have noted such