Friday, March 14, 2014

Straight From the FTC: Why Any Willing Provider Laws Hike Costs

As I describe in Run Away: CMS Abandons Part D Preferred Pharmacy Network Changes, the Centers for Medicare & Medicaid Services (CMS) plan for wrecking Medicare Part D has been temporarily thwarted.

CMS had proposed changes to the Any Willing Provider (AWP) provisions that would have effectively ended preferred pharmacy networks. Judging by the online comments and emails I’ve received since Tuesday’s article, some readers still don’t grasp how such AWP laws raise healthcare costs.

Not to worry. The Federal Trade Commission (FTC) helpfully explains the economic logic in this succinct letter to CMS. It’s a must-read for anyone who wants to understand how competition affects healthcare costs.

If you’re too busy to read this 10-page letter (or my summary below), the key economic issue appears in The Incredibles, one of our family’s favorite movies:
HELEN: Everyone's special, Dash.
DASH: Which is another way of saying no one is.
Read on for the incredible story.


More than 30 states have passed Any Willing Provider (AWP) or Freedom of Choice (FOC) laws. They require payers to open their networks to any provider willing to accept the terms of a given plan. Many of these laws are specifically directed at pharmacy services.

In January, CMS proposed similar changes to its interpretation of Part D’s AWP language. As CMS sees it, any pharmacy that meets a plan's lowest (“preferred cost-sharing”) prices should be able to join the network.

The National Community Pharmacists Association (NCPA) has been hammering away at AWP under the guise of “choice” and “convenience.” In a February letter supporting the Part D changes, NCPA and other small pharmacy groups wrote:
“We support CMS' proposal to require Part D plan sponsors to offer terms & conditions for every level of cost sharing, including preferred cost sharing, to any willing pharmacy that will accept the terms.”
After CMS abandoned the proposed Part D changes, NCPA reiterated its support for AWP in this letter to the U.S. House.


Narrow networks work for a very simple reason: they force providers to compete. As the FTC explains in its new letter to CMS:
“If plans cannot give providers any assurance of favorable treatment or greater volume in exchange for lower prices, then the incentive for providers to bid aggressively for the plan’s business – by offering better rates – is undermined.” (page 3)
Translation: If everyone is special, then no one is special. Narrow networks work because pharmacies are willing to accept lower prescription reimbursements to boost store traffic as a “preferred” provider. If there is no business advantage to discounting, then pharmacies won’t compete for a plan’s business.

The FTC describes how the absence of narrow networks would change the market:
“[A]ny willing provider and FOC provisions may also reduce incentives for plans to invest in plan designs and complex negotiations with pharmacies and manufacturers.” (page 3)
Translation: Creating and managing differential networks is more complex than paying every provider in the same way. PDPs would not be motivated to undertake this cost and complexity.

The FTC also notes that some patients would lose if preferred networks were eliminated:
“Specifically, beneficiaries who are willing to accept coverage under a plan with a narrow network of preferred pharmacies in exchange for lower costs may be deprived of that option.” (page 2)
Still not convinced? Then see pages 5-6 of the FTC's letter. The FTC cites multiple studies showing that selective contracting goes along with deeper discounts. I cited one of these papers—The Effect of Any Willing Provider and Freedom of Choice Laws on Health Care Expenditures—in a comment on Tuesday’s post.

What’s truly surprising is that CMS apparently solicited the FTC’s comments. I guess CMS never took Economics 101.

BTW, this same economic logic applies to payers’ formulary development. If a PBM could not credibly threaten to exclude a drug, then manufacturers would not be willing to cut deals. Hence, the formulary exclusions by Express Scripts and CVS Caremark demonstrate a seriousness of purpose that should worry pharmaceutical manufacturers. See Express Scripts and the Inevitability of Formulary Exclusion and Benchmarking Manufacturers' PBM Rebates.


The narrow network rationale will not seem super for companies that don’t want to reduce prices. Hence, providers generally oppose these laws.

Narrow networks also force consumers to trade choice for cost savings. If you are spending your own money, then by all means choose your own pharmacy. But if you ask someone else—the American taxpayer, your employer, a health plan—to pay for your drugs, don’t be surprised if they want you to save them money.

And of course: no capes!


  1. Good morning, I work for a 21-store independent pharmacy chain that does not get access to any preferred Medicare Part-D network. We would trade the lower reimbursement for the increased foot traffic but do not get access to the contract. I would assume based on what have read is that large chain pharmacies would not offer discounted pricing because they would see less foot traffic because they can't get competitors excluded. Independent pharmacies are better at providing service and actual adherence to medications. Despite the continued this blog's continued support for mail order, it does not save a plan sponsor money.

  2. Nice, Adam. I also think it works in reverse. A number of years ago one of the professional sports leagues had a personnel policy that if a competitor team B made an offer to a player on team A, as long as team A matched team B’s offer, the player would stay with team A. This of course meant that there wasn’t much incentive for team B to make an effort to construct an offer, there weren’t many offers made, and so the players’ union managed to get the policy rescinded. There’s an article in today’s Wall Street Journal that a different rule change has resulted in a bonanza for today’s NFL players on the free agency market.


    PS I seem to recall a book on any willing provider legislation by a Mike Morissey (or something like that), published perhaps by the American Enterprise Institute.

  3. Howdy again, Adam.

    Don't mean to beat a dead horse...or kicking in this conversation, but wow--check out the quote below.

    "If you are spending your own money, then by all means choose your own pharmacy. But if you ask someone else—the American taxpayer, your employer, a health plan—to pay for your drugs, don’t be surprised if they want you to save them money".

    Yeah. We want to save the taxpayer some money. So where's the logic in exlcuding providers from having the opportunity to bid. Shouldn't it be a formal bidding process with all providers being asked to bid?

    Closed door bidding is reminiscent of thugs...and liquor...and guns.

    And apparently drugs and PBM's too.

  4. Jarrod, my name is Dan App, I work for McKesson Pharma. We own and opertate Access Health, the largest PSAO in the country. 3800 + memebers and the most Preffered Networks in the industry at 52. We can provide you these lower memeber costs. Please email me for more information.

  5. Jarrod, my name is Dan App, I work for McKesson Pharma. We own and opertate Access Health, the largest PSAO in the country. 3800 + memebers and the most Preffered Networks in the industry at 52. We can provide you these lower memeber costs. Please email me for more information.

  6. Adam- Let's look more at the idea "if everyone is special, then no one is special". If everyone was allowed to be a "preferred" pharmacy and every pharmacy decided to participate (not all would obviously), how would that raise costs? It wouldn't. There is a major assumption that if these networks were open, national chains such as WalMart would not have the incentive to participate. They would then walk away from the "preferred" network. No way! They would really have to continue participating, or they would lose the market share to some other competitor who would sign the contract. On the other hand, every pharmacy who is not allowed to participate is highly motivated to participate, as this business has been effectively funneled across the street. I can speak from experience as we evaluated a preferred network a couple of years back. We were originally not going to sign the contract, but received so much pressure from patients, we had to. You face the reality of it's either lower reimbursement for the business or no business.
    I strongly contend that competition lowers prices, instead of raising them. As more and more competitors are squeezed out of the market and only a handful remain, the desire to discount prices to attract business is no longer there (see single source generic products). Why would I sell widgets at a low price if there is no other place to get widgets? Why would I continue to be a "preferred" pharmacy if I were the only choice remaining?

  7. Adam,

    I hope you're being intentionally disingenuous just to be provocative. The issue of Any Willing Provider (AWP) provisions is clearly more nuanced than simply cost and who incurs that cost.

    Yes, most health care is subsidized by public and/or private third parties. But that doesn't mean all of us who benefit from such programs must check our freedom of choice at the provider's door. Citizens of the US benefit from a legion of taxpayer funded programs. But that doesn't mean we must sacrifice our freedom to choose on the altar of cost containment. That's just un-American.

    The real question regarding the elimination of AWP provisions in prescription benefit plans is whether the resulting cost savings are worth the effect it would have on access and quality. Show me that eliminating AWP provisions (a) significantly reduces cost (and doesn't just shift it to someone else), and (b) does not significantly reduce access and quality, especially to underserved and at-risk populations. Then you've got an argument I can get behind.

  8. " I can speak from experience as we evaluated a preferred network a couple of years back. We were originally not going to sign the contract, but received so much pressure from patients, we had to."

    This is precisely the FTC's point.

  9. Super. I want "freedom of choice" about which car I will drive. Please tell me when I can take delivery of my new Bentley. Also, let me know where I should I send the bill, because I can only afford a Toyota.

  10. Dan - Thank you for proving my point about PSAOs. For those who don't know, Access Health members are independent pharmacies. Adam

  11. I'll answer that specious analogy with one that is more to the point: What if you lived in a country where access to a basic level of reliable personal transportation was recognized as a constitutionally implied right and the only choice you were given was a 1985 Yugo with 100,000 miles on it?

  12. dan,
    what you fail to mention is thats through out the united states. You are probably in only two preferred networks per region. FYI smart d which is now express scripts lets awp and so does the silverscript plan. So take those two out your equation. also..lets say for ny..other than the two i just mentioned.. which ones other ones are you preffered with?? humana?? aarp?? aetna??? envision??? etc etc etc...

  13. Sorry, I don't understand your Yugo analogy. But if you don't like my snarky answer, let me be more direct.

    Like it or not, narrow (tiered) networks have been a feature of the U.S. healthcare system for many, many years. See The Narrow Network Revolution or just google "narrow networks."

    Now that these networks have arrived in retail pharmacy, pharmacy owners start demanding "freedom of choice." But this freedom costs someone money, as I explained way back in 2008's Wal-Mart's PBM Game Plan.

    I understand your point about underserved and rural populations, but you are describing a very small slice of the market. I have not seen compelling, unbiased evidence that there is a legitimate access problem. But if there is, then let's have some targeted intervention, rather than dumping a proven cost-control concept.

  14. So my question would be.....did that suggested targeted solution occur and has the problem been fixed? My guess is the answer is "no" to both. Not enough bodies (voters) involved and zero industry interest (which equals zero lobbying dollars to offset the first missing variable).

  15. No one has proposed a targeted solution for preferred networks. The NCPA and others are lobbying hard for an all-or-nothing solution to a laundry list of "wants." Just my $0.02, but perhaps they should focus on a few achievable fixes rather than trying to get everything (and end up with nothing).

  16. Adam,

    You probably know more about the pharmacy business than most people alive. It therefore surprises me that you think the AWP laws follow "normal" economic principals. Is it not obvious to you that there is a severe conflict of interest at play here? What percentage of these part d preferred network pharmacies are owned by the PBM's? What normal market conditions are picking the preferred networks, the last time I checked I was not offered a chance to bid on any of these networks!

    You know full well that the pharmacies purchase their drugs from a wholesaler, either owned or not owned by the dispensing pharmacy. You also know that pharmacies are paid by PBM's (again either owned or not owned) and not manufactures.

    If the part-d sponsors are paying pharmacies based on the same payment grid awp-14% or MAC ETC..., where is this cost saving coming from? If all providers are paid the same, all part d sponsors are getting the same formulary concessions from manufactures, and the co-pays are the same to the patient were is the savings?

    Its obvious to me that the PBM's are busy lining their pockets steering a GOVERMENT SPONSORED plan to a few PRIVATE companies. It makes me sick.

    Lets not even mention patient access and their overwhelming preference to shop local if the government was not steering them away from supporting their community pharmacies.

    Please tell me what I am missing?

    Jesse Swing
    Galesville Pharmacy
    Galesville LTC Pharmacy

  17. Adam-As an owner of two small independent pharmacies in rural Indiana my patients have to travel about 40 miles to visit the preferred pharmacy. What about their cost of time and travel? Also since the contract between the PBM and the Pharmacy is not public knowledge how are we sure that our "tax dollars" are truly being saved? Since the PBMs are required to complete a network(or else cms would say that it was not providing adequate access) they must have an acceptable contract with the big box stores or their networks could not be completed. I'm sure that on the non med-d scripts the chains are getting substantially higher reimbursements than independent stores since I lived in that world for a long time, why would one assume any different in the med-d world of reimbursements? Also after reviewing this blog I wonder if you would disclose any fiduciary relationships you have with PBMs ,insurance providers, or big box stores. I am the first to admit I have a vested financial interest in being able to participate in the med-d program. I suspect you won't be so open about your interest.



  18. Mr. Fein,

    In reading the current issue of Drug Channels, you referenced the FTC letter to CMS regarding the increase in health care costs if the AWP rule went into effect. That may or may not be true, but the PBM's must loosen their grip on independent pharmacy. The restrictive "preferred" networks that are currently in place provide no benefit to seniors, particularly those who live in rural areas and have no ability to drive the 30 miles to the closest pharmacy that is in their network.

    Let's also keep in mind that this is the same FTC that OK'd the merger of CVS/Caremark and Express Scripts/Medco. Does the FTC really believe that a retail and mail-order pharmacy buying a PBM and 2 of the largest PBM's joining forces will not result in a virtual monopoly and a majority of the insured lives. Then they further are willing to state that if there is competition in the AWP rule that prices will increase? I am willing to bet that the FTC knows nothing about the lack of transparency that is common practice in the PBM industry and they are probably not willing to investigate any wrongdoing. This lack of transparency does more to drive up health care costs that any AWP rule change will.

    Thank you for your time.

  19. Wake Up Pharmacy.
    The basic reality being employed today by government (restricted networks) toward pharmacy products is that drugs are a commodity
    and that there is little differentiation between a commodity coming from one producer or an another producer and price should be the determining factor.
    Just as gas and hardware have separated the commodity from
    the service of their products, it seems that government wants to do the same “big box model” with health care.

    This “FACT” makes the current framework for the compensation
    of pharmacy services as unsustainable, unreliable and in need of change in light of current legislation put forth by massive government.

    Yes, Independent Pharmacy can continue to innovate, find new
    ways to offer patients convenient, value-added health care services that
    solidify retail pharmacy's role as patients' preferred local health care
    destination, but we must have willing non-government partners to maintain
    market share against restricted and preferred networks that the large government is now advocating, a government that appears to be moving the entire senior market away from the independent pharmacist.

    What to do:

    1) Grass root pharmacy leaders need to get behind a new pharmacy business model that embraces “business” partners that will represent
    Independent pharmacy to and at the millions of business board meeting, meetings that to our ignorance we have ignored, while wasting millions of dollars and years of time on politicians.

    2) To accomplish step one above the most effective things that the pharmacy profession could do in today’s market (PBM preferred networks) is to create a national association that addresses this problem as a sole priority.
    Creating a national association quickly positions the pharmacist as the expert in our niche. Moreover, it positions the entity as an authority to both the general public and the media…..a position that NCPA has not been able to do because of perceived bias.

    This new national organization should be a national PSAO that teams
    with new and old state PSAOs, a PSAO designed to get concerned vendors on our team. Again though this is a national organization in name it must be formed from local grass root causes and groups. KIPA in Kentucky is a good example of a grass root org that could be replicated throughout the country.

    Create a board of directors that is very diverse in nature, many vendor styles included, that can supply both antidotal as well as fact based stories on the PBM problem. To have credibility you put together an appropriate board of directors as viewed from the media’s eyes.

    “Convince the business payers and government will follow, governments will always follow the dollar. We cannot outspend the PBMs politically, but the payers can. If we give business leaders what they want, they will give pharmacy providers what we want. “

  20. No need to blow up the whole Part D Program?!!! When Part D started there were ZERO preferred network pharmacies. It went numerous years without any preferred pharmacy plans. Patients had access everywhere. Even in small towns where little stores without PSAOs contracted individually. If anything, these new preferred pharmacies have blown up reasonable access to small town pharmacies. If you add in the additional costs to the consumer in terms of the required purchase of gas to get to and from the "preferred" pharmacy the "savings" that preferred pharmacies provide is negligible. So if all we have done is reduced access for negligible savings, what harm can there be in simply going back to the way it started, which was a far more fair and equitable Part D system anyway?