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By Meg McEvoy
Health-care entities are going “vertical,” acquiring other health-care companies in the continuum of care, and one large pharmacy chain may be engaging in anticompetitive conduct that is enabled by the deals, attorneys say.
CVS Health is facing a pair of related lawsuits in federal district courts in Florida alleging that the pharmacy chain violated antitrust laws after it got into the business of administering the 340B program—340B administrators contract with hospitals to provide software and compliance tools to administer the covered entities’ drug discount programs. The suits allege that since CVS acquired 340B administrator Wellpartner, the company has engaged in unlawful tying, using its status as a “must have” 340B contract pharmacy to require that covered hospitals also use Wellpartner as their program administrator.
The tying allegations are exactly the type of anticompetitive conduct that concerns antitrust enforcers following a vertical merger. And CVS’s alleged anticompetitive conduct comes at a time when the company is facing review by the Justice Department’s antitrust enforcers over its proposed acquisition of insurance company Aetna, another “vertical” merger. Attorneys disagree about whether CVS’s purportedly “bad behavior” in one market could impact the Aetna deal.
Plaintiffs RxStrategies and Sentry Data Systems are both 340B program administrators: The companies contract with 340B covered entities to provide a software platform that tracks and monitors prescription dispensations and facilitates compliance.
RxStrategies claims that CVS first made overtures to it in 2016—the companies entered into a mutual nondisclosure agreement, and RxStrategies says it designed and built software and shared trade secrets and client information with CVS. Sentry, too, alleges it had shared proprietary information with CVS. Sentry claims that CVS had contracted with it to be an exclusive provider of CVS’s platform software services for administration of the 340B program.
In December 2017, CVS announced it had acquired Wellpartner, a competitor of both RxStrategies and Sentry. CVS informed covered entities, including RxStrategies’ and Sentry’s customers, that Wellpartner would be the exclusive 340B program administrator for all CVS retail and specialty pharmacies, the complaints allege.
RxStrategies and Sentry are alleging CVS is engaging in illegal tying, in violation of Section 1 of the Sherman Act. CVS is using its status as a “must-have” 340B contract pharmacy to force covered entities to also use its subsidiary, Wellpartner’s, 340B administration services, according to the complaints.
CVS can do this because of its market power, the complaints allege. CVS is the second-largest 340B contract pharmacy, according to the RxStrategies complaint.
CVS held 23.6 percent of the U.S.'s retail pharmacy market, as of December 2017, according to form 10-Ks filed with the Securities and Exchange Commission. CVS has 9,800 pharmacy locations and $96.5 billion in revenue. According to the Sentry complaint, 76 percent of Americans live within five miles of a CVS pharmacy.
“Covered entities are incentivized to contract with pharmacies that provide the most convenient (and often the most) locations for their patients with the broadest access to 340B program drugs,” according to the RxStrategies complaint.
Since the CVS-Wellpartner acquisition, Sentry says, at least 56 of its customers have been contacted by CVS and Wellpartner and told they had to switch to Wellpartner. Both plaintiffs allege they have lost significant business due to CVS’s announcement.
The complaints note that CVS’s requirements are an anomaly in this market.
“Walgreens, arguably CVS’s single biggest competitor, does not force covered entities to abandon their 340B administrators to gain access to its pharmacies. Nor does Walmart,” the RxStrategies complaint says.
Both RxStrategies and Sentry claim that Wellpartner charges above-market rates, and that CVS’s conduct will raise prices in the 340B administrator market.
“CVS Health is committed to the highest standards of ethics and business practices and we believe these complaints have no merit. Despite Sentry and RxStrategies being leading administrators of 340B plans, they appear threatened by new competition and are trying to use unfounded antitrust allegations to stall the growth of a competitor, Wellpartner,” a spokesperson for CVS told Bloomberg Law May 29.
CVS and Wellpartner’s motion to dismiss Sentry’s claims is scheduled for a hearing June 18.
CVS is facing antitrust scrutiny by the Department of Justice’s Antitrust Division for its proposed acquisition of insurer Aetna. The $69 billion deal would bring together CVS’s pharmacy market heft with one of the nation’s largest insurance companies.
The DOJ is also reviewing Cigna’s $67 billion acquisition of pharmacy benefit manager ExpressScripts.
“The DOJ investigation of the pending CVS-Aetna deal is unlikely to be affected by these complaints or similar assertions of ‘bad conduct,’” Jack Rovner, co-founder of the Chicago-based Health Law Consultancy who counsels on antitrust matters, told Bloomberg Law. There may be horizontal elements to the CVS-Aetna deal that the DOJ will scrutinize, Rovner said. CVS is a Medicare Part D drug plan sponsor, and Aetna is also a Medicare Advantage (managed care) and Part D plan sponsor, so the DOJ will examine “whether the overlap is sufficient in relevant geographic markets to likely substantially lessen competition.”
The DOJ will also examine “how [CVS-Aetna’s] vertical integration may affect competition at the various levels of their vertical relationship,” Rovner said, acknowledging that this is “a more challenging antitrust analysis.”
“What the DOJ is interested in is what the incentives are going to be after the transaction, not whether you are a noble company or a dastardly company,” Douglas Ross, a partner with Davis Wright Tremaine in Seattle whose practice focuses on antitrust and litigation, told Bloomberg Law. Analysis of a vertical merger “is much more complicated,” Ross said.
“In the horizontal area, we have more empirical knowledge,” Ross said. “We know that more concentration in a market is going to lead to higher prices. We haven’t got the same kind of empirical research out there for vertical mergers. We just don’t.”
But the ability to engage in tying could be a concern for regulators analyzing vertical mergers, Ross said. “In a vertical merger, by definition, you’d make it easier to tie.”
The imminent outcome of the government’s challenge to AT&T’s proposed acquisition of Time Warner, another huge vertical merger, may provide some clarity on vertical merger analysis.
One former regulator thought CVS’s alleged behavior in the 340B administration markets was, at least, inauspicious timing.
“It is an interesting time for CVS to be engaged in this conduct,” Christopher G. Renner, a partner with Boies Schiller Flexner LLP in Washington who represents Sentry, told Bloomberg Law. Renner is a former acting deputy assistant director of the Federal Trade Commission’s Bureau of Competition.
“What the DOJ is doing in reviewing CVS-Aetna is trying to understand the ability and incentive of CVS to engage in exclusionary conduct after the merger. But in 340B, today, CVS is engaging in conduct that raises antitrust issues.”
The CVS-Aetna deal may exacerbate the competition problem in the 340B administrator market as well, Renner said.
“CVS’s efficiency arguments for that merger depend in part on its ability to steer Aetna patients to CVS pharmacies and clinics. But that same strategy will also enhance CVS’s bargaining leverage with respect to hospitals participating in the 340B program, thereby enhancing CVS’s ability to force hospitals to deal with Wellpartner to the exclusion of competing 340B vendors like Sentry.”
RxStrategies’ complaint alleges the CVS-Aetna merger will make things worse in the 340B administration market: “The proposed CVS-Aetna merger, if approved, would further exacerbate these anticompetitive practices to the detriment of the 340B program’s intended beneficiaries: covered entities and their patients.”
The CVS-Aetna merger consummation deadline is extendable to June 3, 2019.
CVS has agreed to pay Aetna a $2.1 billion termination fee if the deal isn’t approved by antitrust regulators.
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