Recommended Reading: Recent Scholarship with Implications for Pharmaceutical Pricing and Access

Bundles in the Pharmaceutical Industry: A Case Study of Pediatric Vaccines, by Kevin W. Caves and Hal J. Singer of Navigant Economics, provides a technical but still accessible analysis of the anticompetitive effects of vaccine manufacturers’ practice of conditioning price discounts on physician buying groups agreeing to purchase the manufacturers’ vaccines in a bundle and agreeing not to purchase other manufacturers’ products.  The article begins with an interesting overview of the characteristics of the vaccine market, an introduction to the physician buying groups that purchase vaccines and to the anti-kickback concerns they raise, and a summary of the (somewhat up in the air) legal standard for when bundled discounting becomes an antitrust violation.

The authors then present their analysis of the uphill battle Novartis (a source of funding for the article) will have to fight to induce physicians to “break the bundle” and buy its new meningitis vaccine.  The authors conclude that even if Novartis were to give away its meningitis vaccine for free, “buyers defecting from [Sanofi Pasteur's bundle of vaccines, which includes Sanofi's meningitis vaccine,] would still lose $14.05 per patient in expected value.”  They present data indicating “that buyers unencumbered by … Sanofi’s loyalty contracts are over three times as likely to purchase [Novartis' vaccine], relative to encumbered buyers…” and conclude that enough of the market is foreclosed to Novartis to establish a presumption of anticompetitive effects and concomitant harm to consumers.  Per the authors, “[i]n an industry served almost exclusively by large, multi-product incumbents, with no prospects for generic competition and extremely limited entry by competitive rivals of any kind, these findings have significant implications for public policy and antitrust enforcement.”

Somewhat less accessible (due to a plethora of equations) but still well worth reading is Tort Liability and the Market for Prescription Drugs by Eric Helland, Darius Lakdawalla, Anup Malani, and Seth Seabury.  Helland and his co-authors present the results of an empirical study of the relationship between product liability rules and drug price and utilization.  While the effect of a liability rule can often be studied by comparing a state that makes a change to the rule with one that does not, the authors had to modify this approach because drugs are sold nationally.  They determined the exposure to punitive damages caps of each of nearly 16,000 drugs by first determining each drug’s geographic distribution of sales, a figure which varies from drug to drug due to geographic variation in the prevalence of disease.  The authors found that the degree of exposure to caps was correlated with an increase in drug prices but also with an increase in drug utilization.  Tighter liability standards also correlate with a reduction in adverse drug reactions.  The authors write that their numbers “imply that if every remaining state adopted some reform, there would be a 23% increase in all [adverse] events and a 25% increase in serious [adverse] events … among branded drugs.”  They conclude that “on balance, liability improves consumer and social welfare.”

Accountable Care Organizations and Antitrust: A New PSA Test

A New PSA Test

Tim Greaney

Saint Louis University School of Law

There’s a new PSA test in health care.  Hopefully it will prove more reliable than that other one.

In conjunction with the unveiling of the long-awaited ACO regulation by HHS, the FTC and Department of Justice issued a Joint Policy Statement setting forth their standards for conducting an expedited (90-day) antitrust review of applicants for ACO certification.  The agencies explained that they will evaluate applicants’ market power based on the ACO’s share of services in each participant’s Primary Service Area (PSA) defined as the “lowest number of contiguous postal zip codes” from which the hospital or physician draws at least 75 percent of its patients for its services.   The Statement summarized the antitrust implications of ACOs formed by hospitals or physician groups with large market shares in their markets:

ACOs with high PSA shares may pose a higher risk of being anticompetitive and also may reduce quality, innovation, and choice for both Medicare and commercial patients. High PSA shares may reduce the ability of competing ACOs to form, and could allow an ACO to raise prices charged to commercial health plans above competitive levels.

The antitrust enforcers were properly concerned with the risk that ACOs could become a vehicle for increasing or entrenching provider market power.  Studies by academics, health policy experts and state governments have documented the impact of provider concentration on insurance premiums. Moreover, a post-reform merger wave may have increased the number of hospital and specialty physician markets and many areas are already served by dominant local providers.  Inasmuch as the success of the ACO concept depends on its ability to spur delivery system change, the predictable intransigence of monopolistic providers presents an important issue. In this regard, it is heartening that the extended (and apparently controversial) regulation drafting process produced a result that promises to constrain the growth and exercise of market power.

Notably, the Policy Statement also removed some uncertainty that may have existed as to the application of prior antitrust enforcement actions and advisory opinions in the ACO context.  For example, the Statement should provide some comfort to those organizing physician networks: ACOs that clear the CMS review of their integration efforts will almost certainly be regarded by FTC and DOJ as “clinically integrated” and hence not subject to the strict “per se” legal standard (More in a subsequent post on the issues raised in evaluating the competitive problems of ACOs in given circumstances).

Market power, however, remains a major sticking point in evaluating ACOs. Antitrust aficionados may question whether the PSA approach employed in the Policy Statement accurately indentifies markets or measures the market power of providers.  As the FTC and DOJ themselves have found, zip code data gives a highly imperfect measure of health care markets. Moreover, there are significant problems in obtaining the necessary data regarding the total volume of services in the providers’ markets, particularly with regard to their services provided to commercial insurers and employers.  However, it appears that the agencies will use this measure as a rough and ready starting point to identify potentially problematic ACOs and those that most obviously raise no competitive problems.

An important and, again, heartening, aspect of the Policy Statement is the agencies’ insistence that applicants with large market shares come forward with justifications and produce data and documents that would assuage competitive concerns.  This should help expedite the process. (Though, if past practice with mergers is a guide, the 90-day clock will not start running until the ACO completes its production of all required information). The agencies make it clear that they will solicit the views of payers and employers before making their determination.  Finally the CMS ACO regulation makes it clear that high PSA ACOs will not be approved unless the FTC or DOJ provides a clearance letter.

Not unlike the inexact science of medical diagnosis, the antitrust agencies are making do with the tools they have.

Accountable Care Organizations, Competition Policy and Antitrust Concerns

The Center for American Progress (CAP) recently put together a stellar panel on Accountable Care Organizations and Competition Policy. The panelists are listed below the video, and include the well esteemed Professor Tim Greaney– who taught here at Seton Hall Law last year as a Visiting Professor and has contributed a number of posts to HRW over these last few years.

CAP introduced the crux of the matter on its web page about as well as it can be expressed:

One of the most challenging questions facing ACOs is how to provide integration without sacrificing competition and the decreased cost and increased quality it produces. The Center for Medicare & Medicaid Services, the Federal Trade Commission, and the Department of Justice have already been carefully scrutinizing these issues. Will some ACOs threaten competition and eventually raise costs for consumers? To what extent can ACOs overcome the barriers set up by current antitrust regulation? How should the lessons from health care reform educate the role of antitrust enforcement and regulation? How should we approach health care antitrust issues in an era of ACOs?

Introductory remarks:
Christine Varney, Assistant Attorney General, Department of Justice

Featured panelists:
Christi Braun, Shareholder, Ober/Kaler
Tim Greaney, Co-Director, Center for Health Law Studies, Saint Louis University Law School
Melinda Hatton, Senior Vice President and General Counsel, American Hospital Association
Joe Miller, General Counsel, America’s Health Insurance Plans
Sharis Pozen, Chief of Staff of the Antitrust Division, Department of Justice

Moderated by:
David Balto, Senior Fellow, Center for American Progress

Revised Horizontal Merger Guidelines issued by FTC and DOJ

This 2 by 4 is a piece of dimensional lumber used in construction in North America. The nominal size is 2 by 4 inches but the actual size is 1.5 by 3.5 in (38 by 89 mm) In American folklore it is often used as a club to get someone's attention. During the anti-trust case, United States versus Microsoft, Judge Penfield Jackson gave this analogy to reporters for the New York Times. He had a trained mule who could do all kinds of wonderful tricks. One day somebody asked him: "How do you do it? How do you train the mule to do all these amazing things?" "Well," he answered, "I'll show you."He took a 2-by-4 and whopped him upside the head.The mule was reeling and fell to his knees, and the trainer said: "You just have to get his attention." U.S. v Microsoft, United States Court of Appeals District of Columbia, June 28, 2001. Photo and caption by Michael Holley

On August 19, the Federal Trade Commission (”FTC”) and Department of Justice (”DOJ”) issued revised Horizontal Merger Guidelines (”guidelines”).  First adopted in 1968 and revised in 1992, the guidelines are an outline of the primary “analytical techniques, practices and enforcement policies” used to evaluate mergers and acquisitions of actual or potential competitors under federal antitrust laws, including Section 7 of the Clayton Act, 15 U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.

As the first major revision in 18 years, the FTC and DOJ assert that the guidelines are not a change in policy, but a clarification of the merger review process.  In 2006, both agencies issued “Commentary on the Horizontal Merger Guidelines,” the first step towards the refinement of the guidelines.  The agencies jointly announced the project in September 2009.  They posed a number of questions for public comment and conducted a series of workshops this past winter.  As a result, 51 parties provided comments for the revisions.  The agencies further considered 31 written comments to the proposed revisions issued on April 20.

According to the FTC Press Release, the guidelines are primarily aimed to “help the agencies identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or likely will have no competitive impact on the marketplace.” In addition, the guidelines are intended to assist private parties, courts and antitrust practitioners.  Representatives of both agencies had the following to say:

“Because of the hard work of all involved at both agencies, private parties and judges will be better equipped to understand how the agencies evaluate deals. That improvement in clarity and predictability will benefit everyone,” said FTC Chairman Jon Leibowitz…

“The revised guidelines better reflect the agencies’ actual practices,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The guidelines provide more clarity and transparency, and will provide businesses with an even greater understanding of how we review transactions.”

What Has Changed?

According to the FTC Press Release, the guidelines do the following:

• Clarify that merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use a variety of tools to analyze the evidence to determine whether a merger may substantially lessen competition.
• Introduce a new section on “Evidence of Adverse Competitive Effects.” This section discusses several categories and sources of evidence that the agencies, in their experience, have found informative in predicting the likely competitive effects of mergers.
• Explain that market definition is not an end itself or a necessary starting point of merger analysis, and market concentration is a tool that is useful to the extent it illuminates the merger’s likely competitive effects.
• Provide an updated explanation of the hypothetical monopolist test used to define relevant antitrust markets and how the agencies implement that test in practice.
• Update the concentration thresholds that determine whether a transaction warrants further scrutiny by the agencies.
• Provide an expanded discussion of how the agencies evaluate unilateral competitive effects, including effects on innovation.
• Provide an updated section on coordinated effects. The guidelines clarify that coordinated effects, like unilateral effects, include conduct not otherwise condemned by the antitrust laws.
• Provide a simplified discussion of how the agencies evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power.
• Add new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.

Analysis by private parties is mixed.  Constantine Cannon LLP writes that the guidelines “reflect a more tolerant approach to mergers, stressing the need to ‘avoid unnecessary interference with . . . competitively beneficial’ mergers.”   In support, Constantine Cannon cites the increased Herfindahl-Hirschman Index (”HHI”) thresholds and statements clarifying that coordination can be legal.

On the other hand, Weil Gotshal writes that the guidelines “appear to provide the agencies with more tools… [and] offer less predictability regarding which analytical methodology will be applied.”  Of primary concern is the decreased emphasis on market definition and increased emphasis on a fact-specific process with a variety of analytical tools.  Revised definitions may create narrower relevant markets which will negate any benefits of higher HHI thresholds.  The newly enumerated categories of evidence may lead to broader document requests and longer investigations.  In providing many alternative techniques and theories, the agency has provided “few true guidelines to assist parties considering a transaction.”

Criticism From Within the Commission

Commissioner J. Thomas Rosch issued a separate concurring statement, in which he “acknowledged” flaws in the guidelines.  According to Commissioner Rosch, the following substantial changes since the 1992 revisions are not reflected in the new guidelines:

First, the Commission is increasingly challenging mergers in preliminary injunction and administrative (Part 3) proceedings…   Second, economic theories embedded in the 1992 Guidelines emphasized price effects almost exclusively. Increasingly, the Agencies and courts have considered nonprice effects, like effects on quality, variety, and innovation, to be no less important. Third, for a variety of reasons, many, if not most, courts have relied on empirical evidence instead of economic evidence, and have considered economic evidence as corroborative of that empirical evidence, if they have considered it at all…  As previously discussed, that in turn has led the staff reviewing mergers ex ante to devote more attention to the empirical evidence that can be presented and defended at trial.

As a result, Commissioner Rosch believes the guidelines do not reflect the way staff at the FTC conduct ex ante merger reviews or the information courts should be told about merger analysis.

According to Commissioner Rosch, the guidelines possess the following additional flaws:

• Stakeholder perspectives were considered unequally. As a result, the guidelines overemphasize “economic formulae and models based on price theory.” Commissioner Rosch credits the large influence of the defense bar, academics, and other kindred souls and at least one private meeting held with the leadership of the ABA Antitrust Section.
• The economic theories of the revised guidelines are improperly based wholly or partially on margins (prices minus incremental costs). Although the draft guidelines acknowledge in two footnotes that “high margins are not in themselves of antitrust concern,” Section 4.1.3 discusses the role of margins in critical loss analysis and as an indication of the sensitivity of demand to price.
• The guidelines say little about non-price competitive effects (ie., how a transaction affects quality, service innovation, and product variety). See page 2 of the guidelines, “[f]or simplicity of exposition, these Guidelines generally discuss the analysis in terms of… price effects.”
• The guidelines fail to offer a clear framework for analyzing non-price considerations. Commissioner Rosch supports this claim with four non-exhaustive illustrations of guideline deficiencies.

Commissioner Rosch’s statement raises many questions about the future of the guidelines.  Are the revised guidelines an accurate statement of current practices?  Will the issuance of the guidelines lead to a greater number of enforcement actions?  How will courts square this administrative document with prior merger and acquisition case law?  Only time will tell.

Are GPO’s Suppressing Safer Devices?

Photo by Comrade S via Flickr

S. Prakash Sethi has called group purchasing organizations (GPO’s) an “undisclosed scandal in the U.S. health care industry.” Mariah Blake’s article in the Washington Monthly on GPO’s is a sobering “must-read” for those concerned about the future of health care in the US. She writes about the entrepreneur Thomas Shaw, who’s invented a syringe that drastically reduces the risk of bloodstream infections for patients and healthcare workers. (According to Barry Lynn, who’s also written on the issue, “each year about 6,000 medical workers come down with HIV or infectious hepatitis from such accidents, and dozens end up dead.”) Shaw’s brilliant innovation “added only a few pennies to the cost of production,” but it’s rarely used today. Blake traces the non-diffusion of this innovation to a complex set of deregulatory decisions relating to GPO’s.

GPO’s are supposed to use purchasing clout on behalf of buyers (like hospitals) to drive down prices from sellers. But it appears that these intermediaries, like large Wall Street firms, are often more interested in fees and payments from the sell-side than they are in helping the buy-side. As one analyst testified before the DOJ and FTC, “the compensation of most GPO management is almost always based on . . . fee income [from suppliers] rather than on the real savings to hospital members.”

Shaw’s bad luck was to enter the market shortly after a massive GPO, Premier, struck a multiyear deal with supplier Becton Dickinson. As Blake notes, “Premier signed a $1.8 billion, seven-and-a-half-year deal with Becton Dickinson [whereby its 1700 member hospitals] had to buy 90 percent of their syringes and blood collection tubes from” Becton Dickinson, which also “landed similar deals with all but one major GPO.” Lynn says that “many hospital buying agents won’t even dare to talk to Shaw for fear of upsetting their more powerful suppliers.”

How did the GPO-Supplier nexus grow so strong? Blake does a terrific job explaining developments that transmogrified many cost-cutting intermediaries into self-serving middlemen:

To keep costs in check, in the 1970s many medical facilities began banding together to form group purchasing organizations, or GPOs. The underlying idea was simple: because suppliers generally give price breaks to customers who buy large quantities, hospitals could get better deals on, say, gauze or gloves, if a group of them came together and bargained for ten cases, rather than each hospital buying a case on its own. . . . By decade’s end, virtually every hospital in America belonged to a GPO.

Then, in 1986 Congress passed a bill exempting GPOs from the anti-kickback provisions embedded in Medicare law. This meant that instead of collecting membership dues, GPOs could collect “fees”—in other industries they might be called kickbacks or bribes—from suppliers in the form of a share of sales revenue. (For example, in exchange for signing a contract with a given gauze maker, a GPO might get a percentage of whatever the company made selling gauze to members.) The idea was to help struggling hospitals by shifting the burden of funding GPOs’ operations to vendors. To prevent abuse, “fees” of more than 3 percent of sales were supposed to be reported to member hospitals and (upon request) the secretary of [HHS].

[This shift] turned the incentives for GPOs upside down. Instead of being tied to the dues paid by members, GPOs’ revenues were now tied to the profits of the suppliers they were supposed to be pressing for lower prices. This created an incentive to cater to the sellers rather than to the buyers. . . . Before long, large suppliers began using “fees”—sometimes very generous ones—along with tiered pricing to secure deals that locked GPO members into buying their products. . . .

This situation only grew thornier in 1996, when the Justice Department and the Federal Trade Commission overhauled antitrust rules and granted the organizations protection from antitrust actions, except under “extraordinary circumstances.” . . . Within a few years, five GPOs controlled purchasing for 90 percent of the nation’s hospitals, which only amplified the clout of big suppliers.

There are a few lessons here. Within the confines of competition law, the message should be clear: Einer Elhauge was right to state in 2003 that “Serious antitrust concerns remain about exclusionary agreements that charge higher prices to GPOs or hospitals that won’t commit to limiting purchases from rivals of dominant manufacturers to a small (often 5-10%) percentage of their purchases.” The broader lesson is that intermediaries in many fields are often tempted to put their own profits ahead of the entities they’re ostensibly serving. In the endless battle for compensation between providers, hospitals, and insurers, there are many profitable opportunities to shift alliances. Meanwhile, entrepreneurs like Thomas Shaw, patients, and thousands of medical workers are enduring unsafe conditions that could easily be remedied.