FTC Staff Comment to the Hon. John C. Bartley Concerning MA S.B. 526 to Require Prepaid Health Benefits Programs to Allow All Pharmacies to Provide Services to Subscribers on the Same Terms

V890067
L'0ITED STATES OF A\lERICA 	COMMIS~:~r: AUTHORIZED
FEDERAL TRADE CO\1\11SSI0N
BUREAU OF COMPETITION
May 	30, 	1989
The 	Honorable 	John 	C. 	Bartley
Massachusetts 	House 	of 	Representatives
State House
Boston, 	Massachusetts 	02133
Dear 	Mr. 	Bartley:
The 	staff 	of 	the 	Bureau 	of 	Competition 	of 	the 	Federal 	Trade
Commission 	is 	pleased 	to 	present 	its 	views 	on Massachusetts
Senate 	Bill 	526, 	entitled 	"An Act 	Providing 	For Accessibility To
Pharmaceutical 	Services. "1 	S. 	526, 	if 	enacted, 	would 	require
prepaid 	health 	benefits 	programs 	that 	include 	coverage 	of
pharmaceutical 	services, 	and 	provide 	those 	services 	through
contracts 	with 	pharmacies, 	either 	to 	allow 	all 	pharmacies 	to
provide 	services 	to 	program 	subscribers 	on 	the 	same 	terms, 	or 	to
offer 	subscribers 	the 	alternative 	of 	obtaining 	covered
pharmaceutical 	services 	from 	any 	pharmacy 	they 	choose.
S. 	526 	appears 	intended 	to 	guarantee 	consumers 	greater
freedom 	to 	choose 	where 	they will 	obtain 	covered 	pharmacy
services. 	Thus, 	on 	quick 	inspection, 	it 	might 	be 	viewed 	as 	pro-
competitive. 	For 	the 	reasons 	we 	discuss 	below, 	however, 	S. 	526
actually may 	reduce 	competition 	in 	the 	markets 	for 	both 	pharma-
ceutical 	services 	and 	prepaid 	health care 	prcgrlli~s, raise 	costs
to 	consumers, 	and 	restrict 	consumers' 	freedom 	to 	choosq 	health
benefits 	programs 	that 	they 	believe 	best 	meet 	their 	needs. 	The
bill 	also 	appears 	to 	conflict 	with 	previously 	enacted 	statutes 	in
Massachusetts 	that 	authorize 	the 	formation 	and 	operation 	of
prepaid 	health 	care 	programs 	whose 	effiLLent 	operation 	is
predicated on 	limiting 	the 	number 	of 	health 	care 	providers
including 	providers 	of 	pharmaceutical 	services 	-- 	that 	may
participate 	in 	such 	programs.
We 	believe 	that 	competition 	in 	the 	market 	for 	prepaid
health 	care 	progrmns 	assures 	that 	subscribers 	to 	such programs
will 	have 	access 	to 	a 	sufficient 	number 	of 	providers 	of 	pharmacy
services. 	However, 	even 	if 	the 	legislature 	concludes 	that 	such
access 	needs 	to 	be 	assured 	through 	regulation 	rather 	than 	market
competition, 	there 	are 	means 	to 	achieve 	that 	aim 	that 	would 	be
substantially 	less 	restrictive 	of 	competition 	and 	consumer 	choice
than 	the 	provisions 	of 	S. 	526. 	For 	these 	reasons, 	S. 	526 	appears
likely 	to 	have 	as 	its 	primary 	effect 	the 	protection 	of 	some
pharmacies 	from 	an 	aspect 	of 	marketplace 	competition: 	at 	the
expense 	of 	consumers.
1 	These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the
Bureau 	of 	Competition 	of 	the 	Federal 	Trade 	Commission, 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	or 	any
individual 	Commissioner.

I. 	Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
The 	Federal 	Trade 	Commission 	is 	empowered 	under 	15 	U.S.C.
§ 	41 	et 	seq., 	to 	prevent 	unfair 	methods 	of 	competition 	and
unfair 	or 	deceptive 	acts 	or 	practices 	in 	or 	affecting 	commerce.
Pursuant 	to 	this 	statutory mandate, 	the 	Commission 	encourages
competition 	in 	the 	licensed 	professions, 	including 	the 	health
professions, 	to 	the 	maximum 	extent 	compatible 	with 	other 	state
and 	federal 	goals. 	For more 	than 	a 	decade, 	the 	Commission 	and
its 	staff 	have 	investigated 	the 	competitive 	effects 	of
restrictions 	on 	the 	business 	arrangements 	of 	hospitals 	and 	state-
licensed 	health 	professionals.
The 	Commission 	has 	observed 	that 	competition 	among 	health
care 	prepayment 	programs 	and 	among 	health 	care 	providers 	can
enhance 	consumer 	choice 	and 	the 	availability 	of 	services, 	and
lower 	the 	overall 	cost 	of 	health 	care. 	In 	particular, 	the
Commission 	has 	noted 	that 	the 	use 	by 	prepaid 	health 	care 	programs
of 	limited 	panels 	of 	health 	care 	providers 	is 	an 	effective 	means
of 	promoting 	competition 	among 	such 	providers. 2 	As 	part 	of 	its
efforts 	to 	foster 	the 	development 	of 	procompetitive 	health 	care
programs, 	such 	as 	HMOs, 	which 	involve 	selective 	contracting 	with
a 	limited 	panel 	of 	health 	care 	providers, 	the 	Commission 	has
brought 	several 	law 	enforcement 	actions 	against 	anticompetitive
efforts 	to 	prevent 	or 	eliminate 	such 	programs. 3 	The 	Commission
also 	has 	supported 	federal 	"override" 	legislation 	that 	would 	have
exempted 	PPOs 	from 	restrictive 	state 	laws 	and 	regulations 	that
2 	Feder?l 	Trade 	Commission, 	Statement 	of 	Enforcement 	Policy
With 	Respect 	to 	Physician Agreements 	to 	Control 	Medical
Prepayment 	Plans, 	46 	Fed. 	Reg. 	48982, 	48984 	(October 	5, 	1981);
Statement 	of 	George 	W. 	Douglas, 	Commissioner, 	On 	Behalf 	of 	the
Federal 	Trade 	Commission, 	Before 	the 	Subcommittee 	on 	Health 	and
the 	Environment 	of 	the 	Committee 	on 	Energy 	and 	Commerce, 	United
States 	House 	of 	Representatives, 	on 	H.R. 	2956: 	The 	Preferred
Provider 	Health 	Care 	Act 	of 	1983 	at 	2-3 	(October 	24, 	1983);
Health 	Care 	Management 	Associates, 	101 	F.T.C. 	1014, 	1016 	(1983)
(advisory 	opinion); 	See 	also 	Bureau 	of 	Economics, 	Federal 	Trade
Commission, 	Staff 	Report 	on 	the 	Health 	Maintenance 	Organization
and 	Its 	Effect 	on 	Competition vi 	(1977).
3 	See, 	e.a., 	American 	Medical 	Association, 	94 	F.T.C. 	701
(1979), 	aff'd 	as 	modified, 	638 	F.2d 	443 	(2d 	Cir. 	1980), 	aff'd 	by
an 	equally 	divided 	Court, 	455 	U.S. 	676 	(1982) 	(order 	modified 	99
F.T.C. 	440 	(1982) 	and 	100 	F.T.C. 	572 	(1982)); 	Medical 	Service
Corp. 	of 	Spokane 	County, 	88 	F.T.C. 	906 	(1976) 	(consent 	order);
Forbes 	Health 	System 	Medical 	Staff, 	94 	F.T.C. 	1042 	(1979)
(consent 	order); 	Medical 	Staff 	of 	Doctors' 	Hospital 	of 	Prince
George's 	County, 	No. 	C-3226 	(FTC 	consent 	order 	issued Apl. 	14,
1988; 	Eugene 	M. 	Addison, 	M.D., 	No. 	C-3243 	(FTC 	consent 	order
issued 	Nov. 	15, 	1988).
2

restrict 	or 	prevent 	the 	development 	of 	PPO 	programs, 	such 	as
"freedom of 	choice" 	or 	"any willing 	provider" 	provisions, 	which
prevent 	PPOs 	from 	selectively contracting with 	a 	limited 	panel 	of
providers. 4 	The 	Commission's 	staff, 	orr 	request, 	also 	has
submitted comments 	to 	federal 	and 	state 	government 	agencies
explaining 	that 	various 	regulatory 	schemes 	would 	interfere
unnecessarily 	with 	the 	operation 	of 	such 	procompetitive
arrangements. 5
II. 	The 	Proposed 	Legislation
S. 	526 	requires 	that 	"every 	carrier 	. 	providing 	or
offering 	any 	group 	medical 	or 	other 	group 	health 	benefits
contract 	or 	insurance 	which 	also 	provides 	or 	offers 	coverage 	for
pharmaceutical 	services"6 	must 	provide 	those 	pharmaceutical
4 	See 	Statement 	of 	George 	W. 	Douglas, 	supra 	note 	2; 	Letter
from 	James 	C. 	Miller 	III, 	Chairman, 	Federal 	Trade 	Commission 	to
Representative 	Ron Wyden 	(July 	29, 	1983) 	(commenting 	on 	H.R. 	2956).
5 	The 	Commission's 	staff 	has 	submitted 	comments 	with
respect 	to 	a 	state 	prohibition of 	exclusive 	provider 	contracts
between HMOs 	and 	physicians, 	noting 	that 	such 	a 	prohibition 	could
be 	expected 	to 	hamper 	procompetitive 	activities 	of 	ID10s, 	and deny
consumers 	the 	improved 	services 	that 	such 	competition would
stimulate. 	Letter 	from 	Jeffrey 	I. 	Zuckerman, 	Director, 	Bureau 	of
Competition, 	Federal 	Trade 	Commission, 	to 	David 	A. 	Gates,
Commissioner of 	Insurance, 	State 	of 	Nevada 	(November 	5, 	1986).
Similarly, 	the 	staff 	submitted comments 	to 	the 	Department 	of
Health 	and Human 	Services 	suggesting 	that, 	in view 	of 	the
procompetitive 	and 	cost-containment 	benefits 	of 	fu~Os and 	PPOs,
proposed Medicare 	and Medicaid 	anti-kickback 	regulations 	should
not 	be 	written 	or 	interpreted 	so 	as 	to 	prohibit 	various 	common
contractual 	relationships 	that 	HMOs 	and 	PPOs 	have 	with 	limited
provider 	panels. 	Comments 	of 	the 	Federal 	Trade 	Commission's
Bureaus 	of 	Competition, 	Consumer 	Protection, 	and 	Economics
Concerning 	the 	Development 	of 	Regulations 	Pursuant 	to 	the
Medicare 	and Medicaid Anti-Kickback 	Statute 	at 	6-13 	(December 	18,
1987).
6 	There 	is 	some 	question 	as 	to 	the 	applicability 	of 	S. 	526
to 	different 	types 	of 	third-party 	payors 	of 	health 	care 	benefits.
For 	example, 	it 	is 	not 	entirely 	clear whether 	S. 	526 	would 	apply
to 	programs 	offered 	by 	commercial 	insurance 	companies. 	On 	the
one 	hand, 	the 	bill 	does 	not 	specify 	insurance 	companies 	in 	its
enumeration 	of 	the 	types 	of 	firms 	that 	are 	included 	within 	the
meaning 	of 	"carrier." 	On 	the 	other 	hand, 	the 	bill 	amends 	chapter
175 	of 	the 	MassaCHusetts 	General 	Laws, 	which 	deals 	with 	accident
and 	health 	insurance, 	and 	refe:'::"s 	to 	"any 	group. 	. 	health
benefits 	contract 	or 	insurance 	which 	also 	provides 	or 	offers
3

services 	through 	one 	or more 	of 	four 	types 	of 	arrangements
specified 	in 	the 	bill: 	(1) 	direct 	provision 	of 	those 	services
"in-house" 	by 	employees 	of 	the 	carrier; 	(2) 	cOlltracts 	with 	groups
of 	pharmacy 	services 	providers, 	~ith the 	proviso 	that 	"all
eligible" 	providers 	be 	given 	an 	opportunity 	to 	participate 	on 	the
same 	basis; 	(3) 	contracts 	with 	"select 	provider [s ] ," 	but 	'/lith 	the
requirement 	that 	the 	carrier 	also 	must 	offer 	subscribers 	an
alternative 	whereby 	they 	may 	obtain 	phar~aceutical services 	from
"a 	participating 	provider 	organization 	or 	group, 	which 	gives 	all
tangible 	fharmacy 	providers 7 an 	opportunity 	to 	participate"; 	and
(4) 	use 	of 	an 	"affiliated 	non-profit 	clinic 	pharmacy."
Options 	(1) 	and 	(4) 	describe 	the 	ways 	that 	group 	or 	staff
model 	HMOs 	-- 	which 	provide 	services 	to 	subscribers 	only 	at 	a 	few
centralized 	locations 	-- 	typically 	operate. 	Thus, 	these 	types 	of
rIMa 	programs, 	which 	are 	in 	the 	minority 	in 	most 	states 	in 	both
number 	of 	plans 	and 	number 	of 	subscribers, 	probably 	would 	be
largely 	unaffected 	by 	S. 	526. 8 	Most 	prepaid 	health 	care
programs, 	however, 	do 	not 	provide 	covered 	services 	at 	only 	a 	fe'o'1
locations. 	Consequently, 	these 	programs 	would 	have 	to 	offer
their 	covered 	pharmaceutical 	benefits 	thro~gh one 	of 	the 	other
two 	options 	provided 	in 	S. 	526. 	Because 	of 	this, 	S. 	526, 	if
enacted, 	may 	affect 	a 	large 	number 	of 	prepaid 	health 	care
programs 	and 	their 	subscribers.
III. 	Analysis 	of 	S. 	526
S. 	526 	may make 	it 	more 	difficult, 	or 	even 	impossible, 	for
many 	third-party 	payors 	to 	offer, 	and 	consumers 	to 	select,
programs 	including 	pharmaceutical 	coverage 	that 	have 	the 	cost
savings 	and 	other 	advantages 	of 	prepaid 	health 	care 	programs 	that
limit 	the 	number 	of 	providers 	that 	may 	participate 	in 	the
coverage 	for 	pharmaceutical 	services." 	(emphasis 	added).
Similarly, 	although 	the 	bill 	states 	that 	covered 	"ce.rriers"
include 	health 	maintenance 	organizations, 	m2dical 	service
corporations, 	and 	nonprofit 	hospital 	service 	corporations, 	the
statutes 	that 	authorize 	and 	regulate 	these 	entities 	indicate 	that
they 	are 	not 	subject 	to 	the 	state 	insurance 	laws, 	of 	which
Chapter 	175, 	which 	S. 	526 	cQend5, 	is 	a 	part. 	See 	11a55. 	Gen.
Laws 	Ann. 	ch. 	176G f 	§ 	2 	(West 	1987); 	ch. 	176C, 	§ 	2 	(West 	1987);
ch. 	176A, 	§ 	1 	(Hest 	1987).
7 	The 	term 	"tangible 	pharmacy 	provider" 	is 	not 	defined 	in
the 	bill.
8 	Some 	of 	these 	H~Os could 	be 	affected 	lI, 	for 	example,
they 	provide 	phannaceutical 	services 	through 	an 	affiliated
clinic 	pharmacy 	that 	is 	not 	non-profit.
4

program. 9 	To 	understand why 	S. 	526 	could 	have 	such 	adverse
effec~s requ~res some 	explanation 	of 	how 	competition 	operates 	in
the 	markets 	for 	health 	care 	se=vices 	and 	prepaid 	health 	care
programs, 	and 	the 	interrelationship 	of 	these 	markets.
A. 	The 	Market 	fer 	Pharmaceutical 	Se~vices
~nd the 	Prenaid 	Health 	Care 	Markpt
Providers 	of 	pharmacy 	services 	compete 	for 	the 	business 	of
patients 	Vlho 	need 	to 	have 	their 	prescriptions 	filled. 	Sub-
scribers 	of 	prepaid 	health 	care 	programs 	that 	provide 	coverage
for 	prescription 	drugs 	represent 	an 	increasingly 	important 	source
of 	business 	for 	pharmacies. 10 	One 	way 	in 	which 	pharmacies
compete 	for 	this 	segmen~ of 	business 	is 	by 	seeking 	arrangements
with 	payors 	that 	give 	them 	preferential, 	or 	even 	exclusive,
access 	to 	a 	program's 	subscribers. 	Payors 	offer 	such 	prefer-
ential 	or 	exclusive 	arrangements 	to 	selected 	pharmacies 	(often
pharmacy 	chains 	or 	networks 	of 	independent 	pharmacies) 	th~t o:£e~
the 	payor 	the 	lowest 	prices 	and 	best 	service. 	The 	payors 	incl~d2
incentives 	in 	their 	subscriber 	contracts 	(e.o., 	lower
deductibles 	and 	copayments) 	for 	subscribers 	to 	use 	the 	selected
pharmacies 	or, 	in 	SOlne 	cases, 	pay 	for 	services 	only 	if 	they 	are
obtained 	at 	a 	contracting 	pharmacy. 	This 	assures 	the 	selected
pharmacies 	of 	more 	business 	volume 	than 	if 	those 	subscribe~s
spread 	their 	purchases 	among many 	providers.
This 	increased 	volume 	peLwits 	the 	phar~acies to 	take
advantage 	of 	economies 	of 	scale, 	such 	as 	quantity 	discounts 	for
large 	volume 	purchases, 	and 	to 	reduce 	their 	normal 	markup 	over
cost 	for 	each 	prescription 	filled 	under 	the 	program. 	Third-party
9 	SL-dlG 	payors 	r,,~y even 	cease 	offering 	co·,rerage 	for
prescription 	drugs 	at 	all, 	if 	the 	costs 	of 	ccmplying 	~ith any 	of
the 	options 	in 	S. 	526 	are 	Loo 	high 	for 	them 	to 	make 	such 	cove~agE
available 	to 	subscribers 	at 	a 	competitive 	premium 	level.
10 	In 	1987, 	payments 	by 	private 	insurance 	for 	"drugs 	and
medical 	sundries" 	were 	$4.7 	billion 	of 	the 	$34.0 	biLlion 	total
spent 	for 	those 	items 	that 	year. 	S.W. 	Letsch, 	et 	a~~, 	"National
Health 	Expenditures, 	1987," 	10 	Health 	Care 	Fincmcino 	Revie",' 	109,
115 	(Winter 	1988). 	Industry 	representatives 	estimate 	that,
currently, 	about 	one-third 	of 	the 	$23.6 	billion 	consumers 	spend
on 	prescription 	drugs 	are 	paid 	for 	by 	third-p~rty programs.
Statement 	of 	Boake 	A. 	Sells, 	Chairman 	and 	Chief 	Executive
Officer, 	Revco 	Drug 	Stores, 	Inc., 	quoted 	in 	11 	Dr~~so~e News
109 	(May 	I, 	1989). 	Total 	expenditurES 	for 	drugs 	and 	medical
sundries 	are 	projected 	to 	increase 	to 	$42.1 	b~llion by 	1990.
Division 	of 	National 	Cost 	Estimates, 	Office 	of 	the 	Actuary,
Health 	Care 	Financing 	Administration, 	Department 	of 	Health 	and
Human 	Services, 	"Nutional 	Health 	Expenditures, 	1986-2000," 	8
Heal th 	Co_re 	F inane ing 	f{,,\7 ie;{ 	1, 	25 	(SU!ll.Iner 	1937).
5

payors 	find 	slich 	arrangements 	attractive 	because 	pharmacies
compete 	to 	offer 	lower 	prices 	and 	additional 	services. 	These
benefits, 	in 	turn, 	help 	make 	the 	payor's 	programs 	more
competitive 	in 	the 	prepaid 	healt~ care 	market. 11 	In 	addition,
administrative 	costs 	to 	the 	payor 	may 	be 	less 	in 	this 	type 	of
arrangement 	than 	where 	the 	payor 	must 	deal 	with 	all 	or most 	of
the 	pharmacies 	doing 	business 	in 	a 	program's 	service 	area.
Simi.larly, 	it 	may 	be 	easier 	for 	a 	payor 	to 	implement 	cost-control
programs, 	such 	as 	claims 	audits 	and 	utilization 	review, 	where 	it
has 	a 	limited 	number 	of 	pharmacies 	whose 	records 	must 	be
reviewed.
Subscribers 	who 	choose 	these 	programs 	benefit 	to 	the 	extent
that 	the 	lower 	pharmaceutical 	costs 	offered by 	the 	contracting
pharmacies 	are 	reflected 	in 	lower 	premium 	costs. 	Subscribers
selecting 	such 	programs 	make 	a 	conscious 	choice 	that, 	for 	them,
the 	benefits 	of 	lower 	premiums, 	lower 	deductibles 	and 	copayments,
and 	perhaps 	broader 	coverage, 	outweigh whatever 	minor
inconvenience 	they may 	encounter 	from 	having 	a 	more 	limited
choice 	of 	pharmacies. 	Nor 	are 	subscribers 	likely 	to 	face
inadequate 	access 	to 	providers, 	including 	pharmacies, 	despite 	a
program's 	use 	of 	a 	limited 	provider 	panel. 	Subsc~ibers can
change 	payors 	or 	programs, 	and 	obtain 	their 	health 	care 	coverage
from 	another 	source 	that 	offers 	a 	better 	alternative, 	if 	the
service 	availability 	in 	a 	particular 	program 	is 	insufficient 	or
inconvenient. 	Subscribers' 	ability 	to 	"vote 	with 	their 	feet" 	if
they 	are 	dissatisfied 	provides 	the 	necessary 	incentive 	for 	payors
to 	assure 	that 	subscribers 	are 	satisfied with 	their 	access 	to
covered 	health 	care 	services.
B. 	Effects 	of 	S. 	526 	on 	the 	Market 	for 	Pharmaceutical
Services 	and 	on 	the 	Prepaid 	Health 	Care 	Market
S. 	526, 	if 	enacted, 	may make 	it 	difficult 	or 	impossible 	for
many 	payors 	to 	offer 	subscribers 	prepaid 	health 	care 	programs
that 	have 	the 	cost 	and 	coverage 	advantages 	described 	above. 	As
mentioned 	previously, 	the 	in-house 	and 	affiliated 	clinic
pharmacy 	approaches 	are 	feasible 	only 	for 	a 	few 	types 	of
programs. 	One 	of 	S. 	526's 	remaining 	options 	is 	to 	open 	the
program 	to 	all 	pharmacy 	firms 	or 	groups 	willing 	Lv 	contract 	on
the 	same 	terms. 	Without 	the 	expectation 	of 	obtaining 	a
substantial 	portion 	of 	subscribers' 	business, 	however,
contracting 	pharmacies 	may 	be 	unable 	to 	achieve 	the 	scale
economies 	that 	permit 	them 	to 	offer 	lower 	price 	terms 	or
11 	In 	the 	event 	that 	competition 	among 	prepaid 	health 	care
programs 	or 	among 	providers 	of 	pharmaceutical 	services 	is
reduced, 	for 	example 	by 	regulatory 	constr~ints, the 	benefits
associated with 	permitting 	prepaid 	health 	care 	programs 	to 	enter
into 	arrangements 	with 	a 	limited 	number 	of 	he&lth 	care 	providers
may 	be 	diminished.
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additional 	services 	to 	payors. 	Moreover, 	since 	any 	pharmacy
would 	be 	entitled 	to 	contract 	with 	a 	payor 	on 	the 	same 	terms 	as
other 	contracting pharmacies, 	there 	would 	be 	little 	incentive 	for
pharmacies 	to 	compete 	in 	developing 	attractive 	or 	innovative
proposals. 	Since 	all 	other 	pharmacies 	could 	"free 	ride" 	on 	the
first 	pharmacy's 	proposal, 	innovative 	providers 	of 	pharmacy
services 	probably would 	be 	unwilling 	to 	bear 	the 	costs 	of
developing 	a 	proposal. 	This 	provision 	of 	S. 	526 	therefore 	may
substantially 	reduce 	competition 	among 	pharmacies 	for 	this
segment 	of 	their 	business.
The 	higher 	prices 	that 	some 	programs 	would 	have 	to 	pay 	for
pharmacy 	services, 	as 	well 	as 	the 	increased 	administrative 	costs,
would 	be 	expected 	to 	raise 	the 	premiums 	that 	those 	payors 	must
charge 	for 	programs 	that 	include 	pharmacy 	benefits, 	or 	might
force 	them 	to 	reduce 	their 	benefits 	in 	order 	to 	avoid 	raising
premiums. 	Either 	of 	these 	effects 	could 	reduce 	some 	payors'
ability 	to 	compete, 	since 	their 	programs 	would 	be 	less 	attractive
than 	before 	relative 	to 	other 	programs 	whose 	operations, 	and
costs, 	would 	remain 	unaffected 	by 	S. 	526.
The 	disadvantages 	to 	subscribers 	of 	requiring 	payors 	to 	open
their 	programs 	to 	all 	pharmacies 	may 	include 	higher 	premium 	costs
or 	the 	loss 	of 	broader 	coverage 	provisions, 	including 	lower
deductibles 	and copayments 	for 	pharmacy 	services, 	that 	programs
otherwise 	could 	provide 	due 	to 	the 	cost 	savings 	obtained 	through
limiting 	provider 	participation. 12 	Thus, 	requiring 	payors 	to
allow 	all 	pharmacies 	to 	participate 	in 	their 	programs 	may 	either
raise 	prices 	to 	consumers 	or 	eliminate 	the 	choice 	they 	otherwise
would 	have 	to 	select 	a 	program 	that 	gives 	them 	certain 	coverage
and 	payment 	benefits 	in exchange 	for 	agreeing 	to 	limit 	their
choice 	of 	pharmacies. 	Subscribers 	already may 	select 	other 	types
of 	prepayment 	programs, 	such 	as 	indemnity 	insurance, 	that 	do 	not
limit 	the 	pharmacies 	from 	which 	Lhey may 	obtain 	covered 	services.
Thus, 	requiring open pharmacy 	participation may 	reduce 	the 	number
and variety 	of 	prepayment 	programs 	available 	to 	consumers 	without
providing 	any 	additional 	consumer 	benefit.
The 	final 	option 	for 	payors 	under 	S. 	526 	is 	to 	offer
subscribers, 	in 	addition 	to 	any 	program 	that 	limits 	pharmacy
participation, 	an 	alternative 	under 	which 	subscribers 	essentially
would 	be 	entitled 	to 	use 	any 	pharmacy. 	This 	option 	also 	gives
subscribers 	little 	additional 	choice, 	since 	they 	already 	may
choose 	a 	program 	that 	does 	not 	limit 	where 	they may 	obtain
covered 	pharmaceutical 	(and 	other) 	services 	when 	they 	select 	a
prepaid 	health 	care 	program. 	Moreover, 	complying with 	this
12 	Even 	if 	an 	employer 	pays 	the 	entire 	premium 	cost 	of 	its
employees' 	coverage, 	higher 	premiums 	could 	represent 	a 	loss 	to
consumers 	since 	those 	monies 	could be 	used 	to 	pay 	for 	additional
coverage 	or 	other 	employee 	benefits.
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14
option 	of 	S. 	526 	may 	entail 	substantial 	administrative 	burdens
and 	expenses 	for 	payors. 	As 	discussed 	previously, 	the 	pharmacy
costs 	and 	administrative 	expenses 	of 	an 	"open-panel,,13 	program
are 	likely 	to 	be 	higher 	than 	those 	where 	the 	provider 	panel 	is
limited. 	Consequently, 	either 	the 	premiums 	for 	the 	payor's 	open-
panel 	alternative 	would 	need 	to 	be 	higher, 	or 	the 	benefits
reduced. 	Since 	subscribers 	who 	enroll 	in 	prepaid 	health 	care
programs 	that 	limit 	provider 	participation 	do 	so 	in 	order 	to
obtain 	the 	cost 	and 	coverage 	advantages 	that 	such 	programs
provide, 	it 	is 	questionable 	whether 	many 	of 	those 	subscribers
would 	opt 	for 	an 	alternative 	that 	eliminated 	those 	advantages
with 	regard 	tc 	pharmacy 	benefits.
Massachusetts 	already 	has 	recognized 	the 	benefits 	of
programs 	that 	limit 	participation 	by 	providers, 	including
pharmacies, 	by 	enacting 	various 	statutes 	that 	authorize 	the
formation 	and 	operation 	of 	such 	programs. 	Just 	last 	year,
Massachusetts 	adopted 	legislation 	authorizing 	"preferred 	provider
arrangements, ,,14 	which 	permits 	payors 	offering 	such 	programs 	to
contract 	selectively with 	health 	care 	Qroviders, 	including
providers 	of 	pharma=eutical 	services,15 	so 	long 	as 	selection 	of
thos~ providers 	is 	based 	"primarily on cost, 	availability 	and
quality 	of 	covered 	services. ,,16 	In 	addition, 	the 	legislature
adopted 	statutory provisions 	authorizing 	nonprofit 	hospital
corporations, 	medical 	service 	corporations, 	HMOs, 	and 	commercial
insurance 	companies 	to 	"establish, 	maintain, 	operate, 	own, 	or
offer" 	preferred 	provider 	arrangements 	approved 	by 	the 	Insurance
Commissioner. 	Similarly, 	for 	more 	than 	a 	decade, 	Massachusetts
has, 	by 	statute, 	authorized 	the 	formation 	and 	operation 	of 	HMOs,
which 	provide 	services 	to 	subscribers 	through 	selected 	health
care 	providers 	with 	whom 	the 	HMO 	generally 	has 	a 	contractual
agreement. 	Adoption of 	S. 	526 	would 	appear 	to 	be 	anomalous 	in
13 	An 	"open-panel" 	program 	does 	not 	restrict 	the 	number 	of
providers 	that 	may 	participate 	in 	it, 	although 	all 	participating
providers 	must 	agree 	to 	the 	program's 	payment 	terms 	and 	other
requirements 	of 	participation. 	Other 	programs, 	such 	as 	indemnity
insurance, 	do 	not 	even 	have 	participation 	agreements 	with
provlders, 	so 	that 	sub3cribers 	may obtain 	covered 	services 	from
essentially 	any 	licensed 	provider 	of 	those 	services.
Mass. 	Gen. 	Laws 	Ann. 	ch. 	1761 	(West 	1989 	Supp.)
15 	The 	statute 	defines 	"health 	care 	providers" 	as 	including,
among 	others, 	registered 	pharmacists, 	persons 	licensed 	to 	engage
in 	the 	sale, 	distribution, 	or 	delivery, 	at 	wholesale, 	of 	drugs 	or
medicines, 	and 	stores 	registered 	and 	licensed 	for 	transacting
retail 	drug 	business. 	Ch. 	1761, 	§ 	1, 	referencing Mass. 	Gen 	Laws
Ann. 	ch. 	112 	(West 	1983 	and 	1989 	Supp.).
16 	Ch. 	1761, 	§ 	4.
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light 	of 	these 	statutes, 	since 	it 	might 	prevent 	many 	such
programs 	from 	operating, 	at 	least 	with 	regard 	to 	covered
pharmacy 	services, 	in 	the 	ways 	envisioned 	and 	authorized 	by
existing 	statutes.
Finally, 	if 	the 	legislature 	concludes 	that 	subscribers 	who
voluntarily 	select 	health 	care 	prepayment 	programs 	that 	limit
their 	choice 	of 	pharmacies 	nevertheless 	require 	additional
regulatory 	protection 	to 	assure 	that 	they 	have 	adequate 	sources
for 	pharmacy 	services, 	alternatives 	exist 	that 	are 	less
restrictive 	of 	competition 	and 	less 	harmful 	to 	consumers 	than 	S.
526's 	approach. 	For 	example, 	the 	state 	could 	require 	payors 	to
demonstrate, 	as 	part 	of 	their 	current 	regulation 	under 	the
insurance 	laws, 	that 	their programs 	provide 	adequate 	access 	to
services 	for 	their 	subscribers, 	leaving 	the 	payors 	free 	to
decide 	precisely 	how 	to 	meet 	the 	requirement. 	This 	approach
would 	meet 	the 	concern 	that 	subscribers 	have 	adequate 	access 	to
services, 	while 	leaving 	the 	payors 	free 	to 	compete 	for
subscribers 	on 	the 	basis 	of 	how 	successfully 	they 	please
subscribers 	in 	providing 	such 	access. 	In 	fact, 	this 	type 	of
approach 	is 	simil3r 	to 	what 	Massachusetts 	appears 	to 	have 	adopted
in 	authorizing 	the 	establishment 	and 	operation 	of 	preferred
provider 	arrangements 	and 	HMOs.17
In 	summary, 	we 	believe 	that 	S. 	526 	may 	reduce 	competition 	in
the 	markets 	for 	both 	prepaid 	health 	care 	programs 	and 	pharmaceu-
tical 	services 	provided 	to 	such programs. 	As 	a 	consequence, 	it
may 	raise 	prices 	to 	conSUIT,ers 	and 	unnecessarily 	restrict 	their
freedom 	to 	choose 	health 	benefits 	programs 	that 	they 	believe 	best
meet 	their 	needs.
17 	Mass. 	Gen. 	Laws 	Ann. 	ch. 	1761, 	§ 	2(c) 	(West 	1989 	Supp.)
provides 	that 	preferred 	provider 	arrangements 	must 	meet
"standards 	[apparently 	to 	be 	promulgated by 	the 	Commissioner 	of
Insurance] 	for 	assuring 	reasonable 	levels 	of 	access 	of 	[sic]
health 	care 	services 	and 	geographical 	distribution 	of 	preferred
providers 	to 	render 	those 	services." 	Massachusetts 	law 	requires
HMOs 	to 	include 	in 	their 	subscriber 	contracts 	information 	on
"the 	locations 	where, 	and 	the 	manner 	in which 	health 	services 	and
any 	other 	benefits 	may 	be 	obtained." 	Mass. 	Gen. 	Laws 	Ann. 	ch.
176G, 	§ 	7(4) 	(West 	1987). 	These 	HMO 	subscriber 	contracts 	are
subject 	to 	disapproval 	by 	the 	Insurance 	Commissioner 	if 	"the
benefits 	provided 	therein 	are 	unreasonable 	in 	relation 	to 	the
rate 	charged," 	(Ch. 	I76G, 	§ 	16) 	and 	the 	Commissioner 	is
authorized 	to 	promulgate 	rules 	and 	regulations 	as 	necessary 	to
carry 	out 	the 	provisions 	of 	the 	act. 	(Ch. 	176G, 	§ 	17).
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We 	hope 	these 	comments 	are 	of 	assistance.
Sincerely yours,
q//~gz~J~~~
! /// 	I 	r"!Jp frey 	I. 'Zuckerman
Director 	../
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