This is a new one: CVS is now using predatory, anti-competitive tactics to bully rivals out of the scandalously fraudulent Medicare 340B market, aspiring to become the Standard Oil of corporate cronyism.
The pharmacy giant recently acquired Wellpartner, a so-called 340B administrator, and suddenly its competitors’ customers have been flooded with threatening phone calls from CVS instructing them to use Wellpartner or their customers will be cut off from CVS pharmacies.
It’s the corporate equivalent of the vaguely menacing mafioso quip: “It’d be a shame if something happened to this nice little doctor’s office you have here.” It’s also illegal under the 1890 Sherman Antitrust Act; the term of art for this type of conduct is “tying.”
And now the pharmacy giant is facing twin federal lawsuits on the issue just as the Department of Justice is reviewing whether another CVS merger — a $69 billion deal with insurance company Aetna — is anti-competitive.
“It is an interesting time for CVS to be engaged in this conduct,” deadpanned Christopher Renner, a renowned antitrust lawyer and former Federal Trade Commission official, in a Bloomberg BNA article about the lawsuits.
Indeed. But what truly sets apart CVS from its peers in the annals of corporate cronyism is combining monopolistic predation with a government gravy train so ridiculous it should count as fraud under federal law. Of course, Washington isn’t known for holding its cronies accountable, so I’m not holding my breath.
The 340B program, named after the section in the Public Health Service Act that established it, was intended to increase access to medicine for poor or underserved patients by requiring drug companies to sell at a discount to charitable or community outreach-type medical facilities as a condition of Medicare’s coverage of their drugs.
For nearly two decades after the program was established in 1992, it was small and largely uncontroversial. In fact, it wasn’t until 2005 that Congress held the first hearing about 340B since it was enacted 13 years earlier.
In the 1980s, public choice theory revolutionized political science by applying the lens of economics to politics by analyzing politicians, bureaucrats and other political actors as rational, self-interested individuals.
A key concept in public choice literature is the political entrepreneur. Unlike a business entrepreneur who creates value in the free market through profits earned by providing new products, increased productivity or improved quality, political entrepreneurs apply the same innovative creativity to the end of transferring wealth by political means.
Henry Ford created the assembly line. Steve Jobs created the personal computer. And in 2010, with debate raging about the public option, government-funded abortions, and any number of other hot-button debates surrounding the enactment of Obamacare, some fiendishly clever lobbyists secured one of the most lucrative acts of political entrepreneurship in recent memory, dramatically expanding the 340B program and unleashing a brand new government-driven business model.
In 2016, 340B drugs had become a $16 billion industry, fueled by rapidly accelerating year-over-year growth. Between 2015 and 2016, the 340B market increased 35 percent. At that rate, the 340B market will be bigger ($325 billion) than the entire U.S. airline industry ($235 billion) in less than 10 years!
By identifying increasingly, uh, creative ways to qualify as many drugs as possible under the program, CVS has led the way in this explosion. It’s easy to see why, as the profit margins are incredible, as much as 100 percent. Keep in mind CVS isn’t even a manufacturer.
The news is not so fantastic for the patients the program was supposed to serve. Congress, not foreseeing how CVS and others might weaponize the program decades later, did not require companies that receive 340B discounts to pass those savings on to patients or even provide any transparency about its use of the program.
As a result, patients receiving the discounts on paper almost never have any idea the program even exists. Worse, patients are increasingly steered towards drugs with larger 340B profit margins instead of medicines that would work the best for their particular medical condition.
Wellpartner, the firm recently acquired by CVS and subject to antitrust litigation, is a 340B administrator, helping “covered entities” — bureaucratic lingo for hospitals and other facilities that are eligible for the discounts — manage program eligibility and compliance.
RxStrategies and Sentry, two Wellpartner competitors, allege in the twin suits that CVS officials told hospitals and other covered entities that if they did not use Wellpartner to administer their program, their access to nearby CVS pharmacies — 23.6 percent of all such stores — could be cut off.
This noose that is strangling Americans needs to be removed. Congress needs to close this loophole now.
Meanwhile, the $69 billion merger with Aetna is under review at the Justice Department. Although the deal will likely reduce choice and raise prices for consumers, it’s likely the two companies’ corporate cultures will mesh well: Aetna has been leading the call for an Obamacare bailout, after spending hundreds of millions of dollars helping to pass the law in the first place.
In conclusion, CVS is setting a high bar for its corporate crony peers to match. This is a company trying to monopolize rent-seeking on a program that actually hurts the poor and underserved people it was designed to help. Solyndra, Halliburton, watch out! This noose that is strangling Americans needs to be removed. Congress needs to close this loophole now.
Michael Daugherty is president and chief executive officer of LabMD, an Atlanta-based clinical and anatomic medical laboratory with a national client base. He is the author of “The Devil Inside the Beltway: The Shocking Expose of the U.S. Government’s Surveillance and Overreach Into Cybersecurity, Medicine, and Small Business.”
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