THIRD PARTY PREPAID PRESCRIPTION PROGRAMS FRIDAY, JULY 9, 1971 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENVIRONMENTAL PROBLEMS, AFFECTING SMALL BUSINESS OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 2359, Rayburn House Office Building, Hon. William L. Hungate (chairman of the subcommittee) presiding. Present: Representatives Hungate, Bergland, and Lujan. Also present: Donald B. Roe, subcommittee counsel; Myrtle Ruth Foutch, clerk; and John M. Finn, minority counsel. Mr. HUNGATE. The Committee will be in order. We will resume hearings on prepaid prescription programs. In the interest of time we want to move along as we understand many of you have busy schedules. We particularly appreciate having with us the Deputy Assistant Attorney General for Consumer and Interagency Affairs, and we will call on you as our first witness. You may proceed, sir. TESTIMONY OF HON. BRUCE B. WILSON, DEPUTY ASSISTANT ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE, ANTITRUST DIVISION; ACCOMPANIED BY B. BARRY GROSSMAN, CHIEF, EVALUATION SECTION, ANTITRUST DIVISION Mr. WILSON. Thank you. With me is Barry Grossman, Chief of the Evaluation Section of the Antitrust Division. We are happy to respond to this committee's request for our views on the development of prepaid prescription drug plans. Getting reasonably priced prescription drugs to consumers who need them is clearly a substantial problem in economic terms, but even more importantly, in human terms. In 1969, $4 billion was spent for outof-hospital prescription drugs alone. As life expectancy has increased, and as modern research has developed new and better drugs, the role which prescription drugs play in this Nation's health program has grown significantly. Unfortunately, advances in medical science are often not without substantial cost. Many persons, particularly those of advanced age or modest financial means, have found that the cost of purchasing prescription drugs on a need basis imposes a severe strain on their budgets. As a result, new plans, including the so-called prepaid prescription drug plans, have been developed in an attempt to meet the needs of these persons. Prepaid prescription drug plans may be administered either by Federal or State agency, or a private insurance carrier. The agency or insurance company contracts with the individual subscriber desiring coverage or arranges group coverage with a union or other association representing a number of such individuals. The agency or company administering the plan also arranges with drug stores to participate in the plan, to provide drugs to subscribers, and to obtain reimbursement from the Government agency or private carrier. As I have indicated, these plans can be purely private arrangements, initiated by a carrier, or they can involve public agencies, such as a State welfare agency. In the latter case, the agency usually retains the carrier to provide various administrative and dispersing services. There are a number of private plans which differ in detail, but basically they work as follows. The subscriber agrees to pay a premium to the carrier. In order to meet its obligations to its subscribers, the carrier generally offers to pay participating druggists a set fee for any prescription drugs supplied to its subscribers. This fee may be determined in a number of ways: actual cost (or a cost figure accepted as standard) plus a fixed dispensing fee, or the druggist's usual and customary charge, or some combination of these factors. The public plans are similar, except that the governmental agency determines the amount to be paid to the druggist. If the Chairman consents, I will omit certain parts of my prepared testimony. Mr. HUNGATE. Mr. Wilson, the Chair thanks you. Perhaps we should announce as we did yesterday in the interest of hearing as many witnesses as we can we allot everybody 5 minutes oral plus another 5 minutes, assuming there is no objection from the committee, which would be 10 minutes. Then any lengthy statement which they have prepared will be received, so your opportunity to be heard in writing is not fettered. At this point if there is no objection we will admit your entire written statement into the record. (The prepared statement of Mr. Wilson follows:) STATEMENT OF BRUCE B. WILSON, DEPUTY ASSISTANT ATTORNEY GENERAL FOR CONSUMER AND INTERAGENCY AFFAIRS, DEPARTMENT OF JUSTICE Mr. Chairman and Members of the subcommittee: The Department of Justice is happy to respond to this committee's request for our views on the development of prepaid prescription drug plans. Getting reasonably priced prescription drugs to consumers who need them is clearly a substantial problem in economic terms but even more importantly, in human terms. In 1969, $4 billion was spent for out-of-hospital prescription drugs alone. As life expectancy has increased, and as modern research has developed new and better drugs, the role which prescription drugs play in this nation's health program has grown significantly. Unfortunately, advances in medical science are often not without substantial cost. Many persons, particularly those of advanced age or modest financial means, have found that the cost of purchasing prescription drugs on a need basis imposes a severe strain on their budgets. As a result, new plans, including the so-called prepaid prescription drug plans, have been developed in an attempt to meet the needs of these persons. Prepaid prescription drug plans may be administered either by a federal or State agency, or a private insurance carrier. The Government agency or insurance company contracts with the individual subscriber desiring coverage or arranges group coverage with a union or other association representing a number of such individuals. The agency or company administering the plan also arranges with drug stores to participate in the plan, provide drugs to subscribers, and obtain reimbursement from the Government agency or private carrier. As I have indicated, these plans can be purely private arrangements, initiated by a carrier, or they can involve public agencies, such as a State welfare agency. In the latter case, the public agency usually retains the carrier to provide various administrative and dispersing services. There are a number of private plans which differ in detail, but basically they work as follows. The subscriber agrees to pay a premium to the carrier. In order to meet its obligations to its subscribers, the carrier generally offers to pay participating druggists a set fee for any prescription drugs supplied to its subscribers. This fee may be determined in a number of ways: actual cost (or a cost figure accepted as standard) plus a fixed dispensing fee, or the druggist's usual and customary charge, or some combination of these factors. The public plans are similar, except that the governmental agency determines the amount to be paid to the druggist. The early plans generally provided for reimbursement to be on the basis of the druggist's usual and customary charge. This arrangement proved to be impractical, however, because it presented opportunities for abuses but, more importantly, it provided no incentive to keep operational costs down. Nor could the buying agency or the carrier have any realistic method of predicting the amount of its prospective disbursements. As a result, most of the later plans have turned to an acquisition or scheduled cost plus a fixed dispensing fee basis for reimbursement to the participating druggist. As I have already indicated, these plans are part of an attempt to make available workable mass systems designed to benefit consumers of health care services. Optimally, such plans should provide the consumer with the benefits both of competitive prices and of ready prescription drug availability. The plans should also provide prompt payment to dispensing pharmacists, with a minimum of administrative burden. Naturally, we believe that such plans should operate in a manner consistent with the antitrust laws. I will focus my discussion first on those questions. Prepaid prescription drug plans obviously alter the traditional relationship between the druggist and the consumer. The consumer has traditionally purchased his out-of-hospital drugs directly from the druggist. Competition in this area, however, has not always been ideal. For example, most States, either through statute or through rules adopted by State regulatory boards, have prohibited druggists from advertising prescription drugs or their prices. These prohibitions tend to deprive consumers of information as to comparative prices which is a prerequisite of a competitive market. Thus, the fact that new plans for providing drugs to the consumer may alter traditional relationships does not necessarily mean that the consumer will suffer. The new methods of supplying prescription drugs do, however, raise economic, social and legal problems which must be considered. One question which has been raised about those plans which incorporate a fixed dispensing fee as part of the druggist's reimbursement is whether they will have the effect of fixing prices for prescription drugs. As I am sure this committee is aware, the antitrust laws are very clear on this point: agreements between competitors, and some agreements between non-competitors, which in purpose or effect cause prices to be, in the jargon of the law, "fixed," are illegal. The basic philosophy underlying the antitrust laws is that unrestricted competition will yield the most efficient allocation of economic and other resources, the highest quality of goods produced, and the lowest prices. Obviously, an agreement which prevents free-market forces from determining the price of goods is in direct conflict with that philosophy. When two or more persons agree not to compete on price, or agree to take some action which will have the likely effect of reducing price competition, they are removing one of the cornerstones of a free market. This is true regardless of the motive of the parties and the "reasonableness" of the prices which are fixed. How does this analysis apply to prepaid prescription drug plans? If an insurance carrier entered into an agreement with a single druggest that the druggist would supply drugs to the carrier at an agreed upon price, there would clearly be no violation of the antitrust laws, The result would merely be a contract between seller and purchaser. Does this conclusion change because the carrier enters into several agreements with competing druggists that they will supply drugs to the carrier's subscribers and look to the carrier for reimbursement on the basis of a set formula? The answer depends on a number of factors. First, it is clear that if the price to be paid is determined by negotiation between the carrier and competing druggists operating as a group, that conduct by the druggists would violate the antitrust laws. Any concerted action by competing druggists which materially affects or seeks to determine the price to be paid the druggist by the carrier would constitute horizontal price fixing which is a per se violation of section 1 of the Sherman Act. Similarly, any joint agreement to accept or reject a carrier's offer would constitute a violation. Two cases in recent years have involved joint action by pharmaceutical associations. In Northern California Pharmaceutical Ass'n. v. United States, 306 F.2d 379 (9th Cir. 1962), a pharmaceutical association had devised a professional pricing schedule and distributed it to its members, encouraging its use. The association and individual members were indicted and convicted in Federal district court. On appeal, the Association contended that the concerted action in devising the schedule and adopting it was not a restraint on interstate commerce and involved only local trade. They also contended that they were exempt from the Sherman Act by reason of their status as professionals. These arguments were rejected by the court of appeals, which held that there is no defense to price fixing on the ground that it is reasonable or that it is being done by professionals. The second case was filed a few months after the Northern California case. In that case, United States v. Utah Pharmaceutical Association, 201 F. Supp. 29 (D. Utah 1962), the membership of the association was limited to registered pharmacists. The case alleged concerted action among the association and its members to fix and control the prices of prescription drugs for retail sale through the distribution and promotion of a pricing schedule. Again the court rejected the argument that pharmacists are immune from the antitrust laws because they are engaged in the practice of a learned profession. The law is, I believe, clear that druggists may not band together in an attempt to control the prices of the products they sell. I believe that these decisions represent sound public policy in as much as they preserve competitive options for the consuming public. Assuming no such concerted action by the pharmacists, is a violation nevertheless presented because an individual druggist may accept a carrier's offer with the knowledge that the offer is being made to all other druggists and will likely be accepted by at least some of them? Is this common knowledge held by all the druggists sufficient to allow a court to imply the existence of an illegal agreement? A similar problem was presented to the Supreme Court in Interstate Circuit v. United States, 306 U.S. 208 (1939). There, Interstate Circuit, a first-run movie exhibitor, made separate contracts with distributors of motion pictures whereby each distributor agreed that it would require second-run exhibitors to charge a specified minimum admission price. Pointing out that each distributor knew other distributors were asked to make the same agreement and that each distributor knew that the success of the plan depended upon cooperation by other distributors, the court held that such evidence was sufficient to support the district court's finding of an illegal agreement. There are those who feel that the type of prepaid prescription drug plans which we are discussing similarly result in tacit agreements between accepting druggists due to their knowledge that all druggists have received a similar offer from the the carrier. A recent decision of the Virginia Supreme Court has held invalid a Blue Cross plan on this ground. It seems to us, however, that the analogy is not quite perfect, for it ignores the special facts of the Interstate Circuit case, as well as a later Supreme Court decision which has a distinct bearing on this question. In Interstate Circuit, the offer involved a very complex arrangement which would have significantly altered the prior business practices of the offerees. While the offerees know that their competitors had received an identical offer, the more important fact was that each offeree knew that it would suffer significant competitive disadvantage if it accepted that offer and its competitors did not. Thus, the economic rationality of each offeree's decision was dependent upon the decisions of its competitors. With this in mind, the Supreme Court viewed the fact that each offeree had reacted to the very complicated offer in precisely the same manner accepting part and rejecting part-as evidence that could support a finding of an agreement between the offerees. However, the Supreme Court did not hold that the fact that offerees know that their competitors are receiving identical offers automatically turns their acceptance into an illegal agreement. In a subsequent case, Theatre Enterprises, Înc. v. Paramount Film Distributing Corporation, 346 U.S. 537 (1954), the Supreme Court ruled against a claim that an identical response by offerees to an offer in itself establishes an illegal agreement. In that case, there was considerable evidence which indicated that each offeree's response would have been economically rational even if its competitors had reacted in a contrary manner-i.e., the responses were independent rather than interdependent. Prepaid prescription drug plans of the type we are discussing appear at least as close to the Theatre Enterprises example as to that of Interstate Circuit. If the carrier's offer is attractive to any individual pharmacist, he can accept it without regard to whether other pharmacists accept; in fact, the smaller the number of acceptances, the better off are those pharmacists who have accepted. Of course, there may be those pharmacists who will feel compelled to accept for fear of losing business to those of their competitors who do accept. This, however, merely reflects the buying power of the offeror; it does not compel an inference of agreement among the offerees. Thus, it is our view that the fact that druggists know that they are receiving offers identical to those made by the carrier to competing druggists does not, in and of itself, result in an agreement in violation of the antitrust laws. Does the result of this analysis change if we consider the carrier not as the purchaser of the drugs but as the agent for a combination of consumers? The answer to this question is, at best, not clear. The antitrust laws traditionally have been directed at business entities and to this day have not been applied to combinations of consumers. Even, however, if it were assumed that consumer combinations came under the proscriptions of the antitrust laws, significant questions would remain. The legality of the use of a common purchasing agent by some commercial purchasers, as distinguished from consumers, should be determined, we believe, on a rule of reason basis. Potential efficiencies such as cost savings must be weighed against potential anticompetitive effects. The same type of careful balancing would be required where the members of the combination are not business entities but rather consuming members of the public, even if such consumer combinations were to be held subject to the antitrust laws. In any event, the plans which we are discussing may well lead to the conclusion that the carrier is in fact the_real purchaser. The carrier has agreed with its subscribers to provide drugs. In return, the subscribers have agreed to pay a premium. There would be no price fixing question presented if the carrier simply purchased the drugs and then distributed them when necessary to its subscribers. And, in essence, that is what the carrier is doing. The carrier has accepted the risk that the premiums which it receives will be sufficient to cover the cost of the drugs which it must buy for its subscribers and additionally return a profit. When its subscribers present their identification to the pharmacist, they are not purchasing the drugs; they have already paid for the drugs through their premium to the carrier. The card they present simply authorizes the pharmacist to supply the drugs and to look for payment to the carrier. Thus, the real purchaser is the carrier which, instead of purchasing and stockpiling the drugs, is purchasing only when the need actually arises. Up to this point, I have discussed only the antitrust problems which these plans may present. There are, however, more general economic considerations which are relevant to any inquiry into prepaid prescription drug plans. The development of such plans evidences consumer desires to obtain insurance against the heavy prescription drug costs that may result from serious illness. A basic principle of a free market system is that it provides for the satisfaction of consumer desires at prices dictated not solely by the fiat of producers but by the discipline of efficiency and innovation required in a competitive market. In a dynamic economic system, changes may have the effect of forcing inefficient producers to the sidelines. While such results may seem harsh, they are an integral part of a system of competition that has provided this nation with an unequalled standard of living. History indicates that unwise governmental attempts to protect various interests from the forces of change often have the unhappy effect of increasing consumer costs without achieving commensurate public benefits. And, while superficial analysis might lead one to expect that increases in consumer costs resulting from authorizing price fixing would automatically promote the long-term profits of of the affected industry, such has not always been the case. Relieved of the need |