On July 28, 2022, the New York State Attorney General (NYOAG) flexed his antitrust muscles and filed a lawsuit against CVS Health in Manhattan state court. NYOAG accuses CVS of violating the Donnelly Act, New York State’s antitrust law, by unlawfully tying access to contract pharmacy services at CVS retail and specialty pharmacies to use of CVS services at third-party administrator (TPA) through Wellpartner, a company acquired by CVS in 2017. The NYOAG seeks not only to prohibit illegal conduct, but also to order the divestiture of Wellpartner.
The 340B program requires pharmaceutical manufacturers, as a condition of participation in Medicaid and Medicare Part B, to sell prescription drugs at discounted prices to hospitals and clinics that primarily serve uninsured and low-income patients. These healthcare organizations are referred to as “covered entities”. Congress intended the program to help covered entities expand their limited resources, enabling them to expand health services to the patients and communities they serve.
Under the 340B program, the U.S. Health Resources and Services Administration, an agency of the Department of Health and Human Services (HHS), calculates a maximum price for each covered prescription drug, which is typically significantly lower than the wholesale retail price of the drug. . Hospitals participating in the 340B program can then purchase covered drugs from the drug manufacturer at the 340B price.
Drugs purchased under the 340B program can be dispensed from the hospital’s in-house pharmacy or, more commonly, from a “contract pharmacy” that dispenses 340B prescriptions. The patient or the third-party payer pays the usual contract price and the 340B hospital then retains the difference between the 340B price and the insurance reimbursement, less any fees paid to the contracting pharmacy. This surplus is called the “340 billion savings” of the hospital.
Hospitals typically keep a TPA to ensure the hospital is complying with all 340B regulations, savings are being tracked correctly, and drug inventories are being replenished. The TPA serves as an interface between the hospital and its contracted pharmacy(ies).
CVS is an integral part of the 340B program in New York in two ways. First, CVS provides contract pharmacy services to covered entities across the country. Due to the ubiquity of CVS stores in New York, the chain is popular among patients filling 340B prescriptions in the state. Second, CVS now operates a TPA. For years, 340B hospitals were free to use any TPA of their choice when interfacing with CVS. This changed in 2017 when CVS acquired 340B TPA Wellpartner. After this acquisition, CVS asked 340 billion hospitals seeking to use its pharmacy services to hire Wellpartner as their TPA. This requirement, according to the NYOAG, is an illegal link that violates both the state’s prohibition against unreasonable restraints on trade (comparable to Sherman Act Section 1) as well as New York Executive Law § 63 (12) which prohibits “fraudulent or illegal repetitions”. deeds.”
The NYOAG complaint describes how CVS illegally linked two separate markets. The “binding” market is the market for the provision by CVS of contractual pharmaceutical services 340B. The complaint explains how several particularities of the 340R program and the health insurance industry influence the dynamics of this market.
- First, the 340B regulations prohibit hospitals from referring patients to a particular contract pharmacy.
- Second, patients are generally unaware of the 340B program because they do not directly benefit from it. Therefore, they have no incentive to switch pharmacies when their usual pharmacy starts to overload their hospital.
- Third, hospitals generally seek contact agreements with pharmacies based on the number of patients filling prescriptions at that pharmacy. The more patients that go to CVS, the more $340 billion a hospital can save by contracting with CVS or lose by dropping CVS.
- Fourth, CVS’s relationship with CVS Caremark, a Pharmacy Benefit Manager (PBM) allows it to accrue even more patients by designating itself as part of the network of many health plans. More patients create even more leverage in the 340B contract pharmacy services market.
The combination of these unique features of the 340B program means that contract pharmacies can set prices and hospitals must accept them. Hospitals are powerless to refer patients to a more competitively priced pharmacy, patients are unlikely to self-refer, and the hospital cannot afford to abandon a large pharmacy without leaving significant cost savings. 340 billion on the table. This gives each pharmacy under 340B contract monopoly power in the market for its services.
The “related” market is the market for the provision of 340B TPA services to Covered Entities. CVS leveraged its monopoly power in the market for its own 340B contract pharmacy services to charge supra-competitive fees in the market for TPA services. Wellpartner no longer needs to innovate to offer a better price or better quality. He could raise prices and just rely on leverage from CVS in another market so he doesn’t lose customers. Hospitals that already had no choice but to use CVS as their 340B contract pharmacy now had no choice but to use Wellpartner as their 340B TPA. This deprives hospitals of $340 billion of all financial benefits of the Congressional program and hampers hospitals’ ability to pass the $340 billion savings to New York’s most vulnerable patients in the form of more affordable services or expanded.
The relief sought
As usual, the NYOAG is seeking civil monetary penalties and reimbursement, and is seeking to prevent future harm through an order prohibiting CVS’s anti-competitive conduct and requiring CVS to notify New York’s 340B Hospitals that Wellpartner’s exclusive use is no longer required. More surprisingly, the NYOAG is also seeking “equitable relief which could include an injunction and assignment order” from Wellpartner.
Meaning of the NYOAG lawsuit
It’s always remarkable when a state pursues aggressive antitrust enforcement, and NYOAG’s complaint against CVS is no different. The NYOAG is levying tied selling allegations that, if proven, could constitute illegal tied selling conduct under the Sherman Act as well as in any geographic area where CVS exercises “monopoly power to contract pharmacy services for 340B prescriptions filled at CVS pharmacies”. The NYOAG argues “there is no interchangeable product” because “covered entities cannot refer patients to another pharmacy in the event of a price increase or decline in quality.” The test for illegal tied selling under the Donnelly Act is the same self-modified test as under the Sherman Act: to force a buyer to do something they would do. not to do in a competitive market.”1
While this case brought under the Donnelly Act is limited to driving in New York, an assignment remedy, if obtained, could apply nationwide. Most states have their own antitrust laws and they will likely be watching this case closely.
Second, the possibility exists for New York to seek the outcome of the Wellpartner acquisition, perhaps reminiscent of the ongoing litigation against Meta f/k/a Facebook over its acquisitions of Instagram and WhatsApp.
Third, this combination opens up yet another front in the battle that widens around 340B. The 340B program has been fraught with difficulties, ranging from accusations that vendors use the system to capture additional revenue and taking advantage of opaque discount policies, to allegations that some pharmaceutical manufacturers “unlawfully imposed onerous, non-statutory restrictions on vendor access to discounted 340B drugs.”2 When HHS took administrative action against the manufacturers, the manufacturers filed their own lawsuits against HHS, claiming that its enforcement efforts violated the Administrative Procedure Act. This activity even generated accusations by a putative class of hospitals alleging that three insulin manufacturers illegally conspired to coordinate their limitations on participation in 340B. The NYOAG complaint adds to the fray and highlights the need for a fresh look at the program.
For more information on the intersection of antitrust and health care, or antitrust investigations by state attorneys general, please contact Beau Buffer, Jamillia Ferris, Scott Sher, Michelle Yost Hale Brendan Coffman, or another member of the cabinet antitrust and competition practice.
 Victoria T. Enters., Inc. v. Charmer Indus., Inc.881 NYS2d 570, 572, (Sup. Ct. 2009) (citing and approving (Illinois Tool Works Inc. v. Independent Ink, Inc.547 US 28, 36 (2006)).
 Defendant’s Motion to Dismiss, Sanofi-Aventis US, LLC v. United States Dep’t of Health & Human Servs., No. 3:21-cv-634 (DNJ), ECF No. 62-1, at 11 (April 19, 2021).