Last month CVS Health Corp. (CVS) announced a new component of its otherwise commendable drive to help discourage smoking. The nation’s second largest pharmacy benefit manager (PBM) and retail pharmacy chain will now impose an additional co-pay on customers who use health insurance to fill prescriptions at pharmacies that also sell cigarettes and other tobacco products (“tobacco”). The American Antitrust Institute (AAI) urges the Federal Trade Commission (FTC) to carefully scrutinize this suspect policy, as the facts suggest it may have little to do with ending smoking and tobacco use, and much to do with anticompetitive exclusion of CVS’s retail pharmacy rivals.
CVS as retail pharmacy has chosen to stop selling tobacco in its stores, a decision that has been lauded by anti-tobacco advocates. Now, through its PBM subsidiary CVS Caremark, it will impose up to a $15 higher co-pay each time a customer with CVS Caremark-administered insurance fills a prescription at a pharmacy that sells tobacco. As a PBM, CVS Caremark designs, administers, and manages prescription drug plans for health insurers. The higher co-pay could increase the price of drugs from retail pharmacies selling tobacco by an order of magnitude.
So let’s be clear. If your insurance company contracts with CVS Caremark to manage your drug benefits and you do not use CVS pharmacies, you will probably have to change pharmacies in order to avoid the penalty, if there is no “opt-out” from the new, higher co-pay policy. Walgreens and Rite Aid have no plans to discontinue tobacco sales. The upshot may be no effect on tobacco availability, but rather simply raising prices for consumers that shop at rival pharmacies.
History suggests that the new CVS Caremark co-pay may be a smokescreen designed to disadvantage rivals. The pharmacy behemoth has been the target of persistent allegations of anticompetitive abuses seemingly quite similar to its new co-pay policy. These include allegations that CVS uses its control of CVS Caremark to steer consumers away from its drugstore rivals. Complaints have persisted as long as CVS has owned CVS Caremark, and they have been made by more than a dozen members of the U.S. Senate and House, organizations of independent pharmacies, unions representing insured beneficiaries, and leading consumer organizations. Some prominent figures have gone so far as to ask the FTC to unwind the original CVS Caremark acquisition entirely.
How does CVS wield the market power to successfully implement such a policy? CVS is a multi-function health care firm with a vast span and reach into the U.S. healthcare system. It is currently one of the world’s largest companies, the largest retail pharmacy chain in the U.S. (on the basis of drug sales), and the second largest PBM. CVS Caremark manages nearly a billion prescriptions per year for over 60 million plan members, filled at a network of nearly 68,000 pharmacies. CVS Caremark and the other largest PBM – Express Scripts, Inc. – together manage drug benefits for the vast majority of Americans who have prescription drug benefits.
CVS rose to these dizzying heights largely through merger and acquisition in the retail pharmacy segment, as opposed to organic growth. The firm expanded from a regional player in the 1990s to nearly 8,000 stores nationwide through the acquisition of the Revco and Longs Drugs chains and thousands of stores from Eckerd, Sav-On, Osco, Arbor Drugs, and others. It has pursued a parallel path on the PBM side, with its acquisition of Caremark in 2007.
CVS’s new policy may be more dangerous for competition and consumers than any of its conduct in the past. This is because the markets in which it competes have become more concentrated with each passing year – a development that reflects a general laxness of antitrust enforcement in this important sector. The PBM market now contains two large players and a fringe of smaller firms as a result of successive consolidation, capped off by the 2007 CVS Caremark deal and the 2012 merger of Express Scripts and Medco. The FTC allowed both transactions to proceed. Competition advocates like the AAI have warned about the risks of consolidation in prior policy statements, advocacy letters, and testimony, urging tougher enforcement against health care intermediaries such as PBMs and Group Purchasing Organizations.
Even if CVS’s new co-pay policy is motivated entirely by a desire to discourage smoking, CVS’s use of its market power to bludgeon consumers and rivals into ending tobacco sales at rival pharmacies is not a legitimate form of competition. And to the extent that CVS wants to obtain strategic benefits from its anti-tobacco campaign, it has many alternatives to do so. For example, it can encourage anti-smoking advocacy groups such as the Campaign for Tobacco-Free Kids to urge its members to shop at CVS. It can also continue to promote its anti-tobacco stance in its advertising campaigns.
In short, CVS can use an abundance of techniques for educating consumers as to the advantages of shopping at CVS without putting a higher co-pay gun to their heads if they choose to use a competing pharmacy. It is the difference between fair and unfair competition. Both history and CVS’s current strategic conduct suggest that this latest installment in CVS’s anti-smoking initiative is far from an unalloyed contribution to the public good.
About the American Antitrust Institute:
The AAI is an independent and non-profit education, research, and advocacy organization devoted to advancing the role of competition in the economy, protecting consumers, and sustaining the vitality of the antitrust laws. For more information go to www.antitrustinstitute.org.
 Among other things, PBMs also operate mail order pharmacies and provide formulary management services.
 See, e.g., http://www.ncpanet.org/pdf/leg/dorganklobucharfeingold.pdf and here http://graphics8.nytimes.com/packages/pdf/business/CVSDivestitureConsumer.pdf.