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.

THAT OTHER AWP

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.

A SUPER LESSON ON CHOICE

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.

A FINAL THOUGHT

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!