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110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     110-898

======================================================================



 
                COMMUNITY PHARMACY FAIRNESS ACT OF 2007

                                _______
                                

 September 28, 2008.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

    Mr. Conyers, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 971]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on the Judiciary, to whom was referred the bill 
(H.R. 971) to ensure and foster continued patient safety and 
quality of care by making the antitrust laws apply to 
negotiations between groups of independent pharmacies and 
health plans and health insurance issuers (including health 
plans under parts C and D of the Medicare Program) in the same 
manner as such laws apply to protected activities under the 
National Labor Relations Act, having considered the same, 
reports favorably thereon with an amendment and recommends that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     1
Purpose and Summary..............................................     3
Background and Need for the Legislation..........................     3
Hearings.........................................................     6
Committee Consideration..........................................     7
Committee Votes..................................................     7
Committee Oversight Findings.....................................     7
New Budget Authority and Tax Expenditures........................     7
Congressional Budget Office Cost Estimate........................     7
Performance Goals and Objectives.................................    12
Constitutional Authority Statement...............................    12
Advisory on Earmarks.............................................    12
Section-by-Section Analysis......................................    12

                             The Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Community Pharmacy Fairness Act of 
2007''.

SEC. 2. APPLICATION OF THE ANTITRUST LAWS TO INDEPENDENT PHARMACIES 
                    NEGOTIATING WITH HEALTH PLANS.

    (a) In General.--Any independent pharmacies who are engaged in 
negotiations with a health plan regarding the terms of any contract 
under which the pharmacies provide health care items or services for 
which benefits are provided under such plan shall, in connection with 
such negotiations, be entitled to the same treatment under the 
antitrust laws as the treatment to which bargaining units which are 
recognized under the National Labor Relations Act are entitled in 
connection with activities described in section 7 of such Act. Such a 
pharmacy shall, only in connection with such negotiations, be treated 
as an employee engaged in concerted activities and shall not be 
regarded as having the status of an employer, independent contractor, 
managerial employee, or supervisor.
    (b) Protection for Good Faith Actions.--Actions taken in good faith 
reliance on subsection (a) shall not be the subject under the antitrust 
laws of criminal sanctions nor of any civil damages, fees, or penalties 
beyond actual damages incurred.
    (c) No Change in National Labor Relations Act.--This section 
applies only to independent pharmacies excluded from the National Labor 
Relations Act. Nothing in this section shall be construed as changing 
or amending any provision of the National Labor Relations Act, or as 
affecting the status of any group of persons under that Act.
    (d) Effective Date.--The exemption provided in subsection (a) shall 
apply to conduct occurring beginning on the date of the enactment of 
this Act.
    (e) Limitations on Exemption.--Nothing in this section shall exempt 
from the application of the antitrust laws any agreement or otherwise 
unlawful conspiracy that--
            (1) would have the effect of boycotting any independent 
        pharmacy or group of independent pharmacies, or would exclude, 
        limit the participation or reimbursement of, or otherwise limit 
        the scope of services to be provided by, any independent 
        pharmacy or group of independent pharmacies with respect to the 
        performance of services that are within the scope of practice 
        as defined or permitted by relevant law or regulation;
            (2) allocates a market among competitors;
            (3) unlawfully ties the sale or purchase of one product or 
        service to the sale or purchase of another product or service; 
        or
            (4) monopolizes or attempts to monopolize a market.
    (f) Limitation Based on Market Share of Group.--This section shall 
not apply with respect to the negotiations of any group of independent 
pharmacies with a health plan regarding the terms of any contract under 
which such pharmacies provide health care items or services for which 
benefits are provided under such plan in a PDP region (as defined in 
subsection (j)(4)) if the number of pharmacy licenses of such 
pharmacies within such group in such region exceeds 25 percent of the 
total number of pharmacy licenses issued to all retail pharmacies 
(including both independent and other pharmacies) in such region.
    (g) No Effect on Title VI of Civil Rights Act of 1964.--Nothing in 
this section shall be construed to affect the application of title VI 
of the Civil Rights Act of 1964.
    (h) No Application to Specified Federal Programs.--Nothing in this 
section shall apply to negotiations between independent pharmacies and 
health plans pertaining to benefits provided under any of the 
following:
            (1) The Medicaid Program under title XIX of the Social 
        Security Act (42 U.S.C. 1396 et seq.).
            (2) The State Children's Health Insurance Program (SHIP) 
        under title XXI of the Social Security Act (42 U.S.C. 1397aa et 
        seq.).
            (3) Chapter 55 of title 10, United States Code (relating to 
        medical and dental care for members of the uniformed services).
            (4) Chapter 17 of title 38, United States Code (relating to 
        Veterans' medical care).
            (5) Chapter 89 of title 5, United States Code (relating to 
        the Federal employees' health benefits program).
            (6) The Indian Health Care Improvement Act (25 U.S.C. 1601 
        et seq.).
    (i) Definitions.--For purposes of this section:
            (1) Antitrust laws.--The term ``antitrust laws''--
                    (A) has the meaning given it in subsection (a) of 
                the first section of the Clayton Act (15 U.S.C. 12(a)), 
                except that such term includes section 5 of the Federal 
                Trade Commission Act (15 U.S.C. 45) to the extent such 
                section 5 applies to unfair methods of competition; and
                    (B) includes any State law similar to the laws 
                referred to in subparagraph (A).
            (2) Health plan and related terms.--
                    (A) In general.--The term ``health plan''--
                            (i) means a group health plan or a health 
                        insurance issuer that is offering health 
                        insurance coverage;
                            (ii) includes any entity  that contracts 
                        with such a plan or issuer for the 
                        administering of services under the plan or 
                        coverage; and
                            (iii) includes a prescription drug plan 
                        offered under part D of title XVIII of the 
                        Social Security Act and a Medicare Advantage 
                        plan offered under part C of such title.
                    (B) Health insurance coverage; health insurance 
                issuer.--The terms ``health insurance coverage'' and 
                ``health insurance issuer'' have the meanings given 
                such terms under paragraphs (1) and (2), respectively, 
                of section 733(b) of the Employee Retirement Income 
                Security Act of 1974 (29 U.S.C. 1191b(b)).
                    (C) Group health plan.--The term ``group health 
                plan'' has the meaning given that term in section 
                733(a)(1) of the Employee Retirement Income Security 
                Act of 1974 (29 U.S.C. 1191b(a)(1)).
            (3) Independent pharmacy.--The term ``independent 
        pharmacy'' means a pharmacy that has a market share of--
                    (A) less than 10 percent in any PDP region; and
                    (B) less than 1 percent in the United States.
        For purposes of the preceding sentence, all pharmacies that are 
        members of the same controlled group of corporations (within 
        the meaning of section 267(f) of the Internal Revenue Code of 
        1986) and all pharmacies under common control (within the 
        meaning of section 52(b) of such Code but determined by 
        treating an interest of more than 50 percent as a controlling 
        interest) shall be treated as 1 pharmacy.
            (4) PDP region.--The term ``PDP region'' has the meaning 
        given such term in section 1860D-11(a)(2) of the Social 
        Security Act (42 U.S.C. 1395w-111(a)(2)).
    (j) 5-Year Sunset.--The exemption provided in subsection (a) shall 
only apply to conduct occurring during the 5-year period beginning on 
the date of the enactment of this Act and shall continue to apply for 1 
year after the end of such period to contracts entered into before the 
end of such period.
    (k) General Accounting Office Study and Report.--The Comptroller 
General of the United States shall conduct a study on the impact of 
enactment of this section during the 6-month period beginning with the 
5th year of the 5-year period described in subsection (j). Not later 
than the end of such 6-month period, the Comptroller General shall 
submit to Congress a report on such study and shall include in the 
report such recommendations on the extension of this section (and 
changes that should be made in making such extension) as the 
Comptroller General deems appropriate.
    (l) Oversight.--Nothing in this section shall preclude the Federal 
Trade Commission or the Department of Justice from overseeing the 
conduct of independent pharmacies covered under this section.

                          Purpose and Summary

    H.R. 971 allows independent pharmacists to negotiate 
collectively on the terms and conditions of their reimbursement 
from Pharmacy Benefit Managers (PBMs). It does this by granting 
groups of pharmacists a waiver from Federal antitrust laws and 
treats them as employees, able to bargain collectively, under 
the National Labor Relations Act. This exemption will allow 
small pharmacies to compete with large retail pharmacies, and 
will allow them to negotiate better reimbursement rates and 
terms.

                Background and Need for the Legislation

    Pharmaceutical care is one of the most important parts of 
the entire health care system. Pharmacies serve as the 
interface between consumers and their medications. Independent 
pharmacies provide necessary and important services to patients 
all over the country, but they are struggling to find ways to 
compete and make a profit in today's marketplace.
    Independent pharmacies report that they cannot compete 
effectively with massive pharmacy chains. While the chains can 
negotiate profitable reimbursement rates with Pharmacy Benefit 
Managers (PBMs) for prescription drugs, the independent 
pharmacies have no leverage over the PBMs and are often left 
with ``take-it-or-leave-it'' offers. They also report that the 
lag-time between dispensing the drug and receiving the payment 
can upend their business' fiscal solvency. The pharmacies must 
make difficult financial decisions in order to remain open, 
sometimes taking on debt or limiting their services. In 
communities dominated by particular insurers (if, for example, 
more than half of a pharmacy's patrons have insurance through 
their work at a local factory), the independent pharmacies can 
have little choice but to accept the PBMs' negotiated payment 
offers without question.
    This legislation will allow independent pharmacies to 
collectively bargain so that they can negotiate with the 
insurance companies on the reimbursement rates and terms. H.R. 
971 allows pharmacies negotiating contracts with health 
insurers to receive the same treatment under the antitrust laws 
as bargaining units recognized under the National Labor 
Relations Act (NLRA). This would permit pharmacies to be 
considered employees under the NLRA for purposes of the Act and 
not subject to treble damages under the antitrust laws. The Act 
defines independent pharmacies as those that are neither owned 
nor operated by a publically traded company.\1\
---------------------------------------------------------------------------
    \1\Duane Reade, Inc provides one well-known example of such a 
pharmacy.
---------------------------------------------------------------------------
How the system works
    Pharmacies purchase their pharmaceutical products from drug 
wholesalers and manufacturers. The pharmacies purchase the 
pharmaceutical at a price known as the wholesale acquisition 
cost (or WAC). The pharmacy sells the medication to consumers, 
and when the consumer is the beneficiary of a prescription drug 
plan, the pharmacy receives funds from the consumer in the form 
of a co-payment, and from a Pharmacy Benefit Manager (PBM) in 
the form of a reimbursement. The reimbursement price, or the 
``negotiated payment,'' constitutes the drug's average 
wholesale price (or AWP) less the discount that the PBM will 
offer on the particular drug (and plus, usually, an 
administrative fee for the process). A PBM might reimburse a 
pharmacy with a rate, for example, of negotiated payment = [AWP 
- 15%] + $2. This transaction, however, can become protracted 
over several months as funds flow from the health insurer (be 
it the Federal Government or a private insurance company) to 
the PBM and then to the pharmacy.
What are Pharmacy Benefit Managers?
    Pharmacy Benefit Managers (PBMs) are the middlemen that 
administer the prescription drug benefit portion of health 
insurance plans for private companies, unions, and governments. 
PBMs are responsible for processing and paying prescription 
drug claims, for developing formularies,\2\ contracting with 
pharmacies, and negotiating discounts and rebates with drug 
manufacturers.\3\ PBMs manage 95% of all prescriptions sold in 
the United States.
---------------------------------------------------------------------------
    \2\Formularies are drug lists that PBMs develop and use to manage 
drug spending. By charging less for certain brands of drugs, PBM 
formularies steer health care consumers and their physicians into using 
particular drugs for particular therapeutic needs. The consumer pays a 
higher co-pay (and the health plan pays the PBM more) for drugs that 
are not in the ``preferred'' category on the PBM's formulary. The 
health plan may provide no coverage for drugs that are not on the list.
    \3\Because of their large purchasing pool for prescription drugs, 
PBMs can negotiate rebates and discounts on behalf of their clients.
---------------------------------------------------------------------------
    PBMs operate on different business models. Most implement 
``spread pricing,'' where PBMs execute contracts with their 
clients (employers) that allow the PBMs to purchase drugs at 
lower prices but to invoice the clients at higher prices, thus 
profiting from a ``spread'' in the pricing. Another business 
model is the ``pass through'' model, where PBMs execute 
contracts that require the PBMs to pass through to the clients 
the precise purchase or reimbursement cost. In this situation, 
PBMs generate profits by charging a flat, per claim or per 
member, administrative fee.
Concerns about PBM Business Practices
    PBMs do not sell drugs directly to pharmacies, but their 
monolithic role in negotiating with HMOs (Health Maintenance 
Organizations), employers, unions, preferred providers, 
pharmaceutical companies, and their own mail-order companies 
has raised several questions about the transparency and 
openness of the pharmaceutical marketplace. PBMs also operate 
mail-order pharmacies, and due to the companies' involvement in 
price and formulary negotiations, concerns have also arisen 
over drug-price inflation and anti-competitive drug 
distribution schemes.
    Several calculations and actors come into play in valuing a 
pharmaceutical product's average wholesale price, or AWP, as 
the amount is set by both the drug manufacturer/labeler and 
wholesalers. Because the AWP is neither standard nor immune to 
market fluctuations, drug pricing becomes vulnerable to 
potential manipulation on several fronts by the PBMs. One 
possible source for manipulation comes from their mail-order 
pharmacies, as PBMs can effect the market value of a drug when 
they become involved in the marketing of drugs. Through the 
course of their mail-order operations, PBMs can obtain 
``repackager'' licensing from the Food and Drug Administration. 
Repackaging licenses allow an entity to repackage drugs (when a 
licensee purchases10,000 tablets from a manufacturer, for 
example, they can redistribute the order among 50-tablet 
bottles), and the repackaged product's price will contribute to 
the drug's overall AWP. If a PBM artifically inflates an AWP 
through its repackaging and pricing practices, it can then 
increase its market share by offering artificially large 
discounts on the inflated drug price.
    The PBMs can further increase their market share by 
compelling consumers to use their mail-order service by way of 
their relationships with managed care providers. In negotiating 
their contracts, PBMs can develop co-pay plans with insurers 
under which consumers pay a lower co-pay for prescriptions when 
they use the PBMs' mail-order services versus filling 
prescriptions at a community pharmacy.
    In addition to unease over PBMs' alleged mail-order and 
price-bargaining practices, significant concerns have surfaced 
over PBMs' role in the management of drug formularies. 
Formularies, in essence, consist of lists that outline and set 
drug spending patterns. When a PBM develops its formulary--or 
its ``menu'' of drug prices--and charges less for a particular 
product, the PBM naturally guides consumers and physicians to 
purchase particular products. The health plan managing the 
prescription benefit, in turn, uses its PBM's formulary to 
create ``preferred'' lists of drug therapies, and can levy 
higher co-pays on or deny coverage to consumers for drugs that 
to do not appear on these lists.
    It is argued that control over formularies endows PBMs with 
considerable influence over pharmaceutical companies. Drug 
manufacturers seek to secure favorable placements on the PBMs' 
formularies, for a favorable placement can determine a 
product's commercial success. Manufacturers compete with each 
other through a combination of rebates and administrative fee 
structures.
Need for the Legislation
    Supporters of H.R. 971 expect that allowing pharmacists to 
bargain collectively will enable the newly formed alliances to 
more equitably compete with national chains and mail-order 
pharmacies. Because the purchase power of an independent 
community pharmacy pales in comparison to that of a chain 
pharmacy, the independent community pharmacies are often forced 
to accept the rates that a PBM offers, with no negotiation. If, 
for example, over half of a pharmacy's patrons have their 
prescription coverage administered by one PBM, the pharmacy is 
left with little choice but to accept the contract that the PBM 
offers.
    With an antitrust exemption to negotiate collectively, 
independent pharmacies could pool their combined purchasing 
power to negotiate lower drug purchasing plans with the PBMs. 
Because PBMs would broker with a wider range of pharmacies, the 
marketplace would become more competitive and pro-consumer.
    Independent pharmacists believe their situation is quite 
different from a normal competitive marketplace: here, small 
independent businesses must compete directly with much larger 
companies at the retail level, with all retailers reimbursed by 
a few large middlemen instead of the consumer.
    Of further concern is that one of the largest retail 
competitors (CVS) also owns one of the largest PBMs (Caremark). 
The vertical nature of this arrangement within the market 
creates concern at several layers of the industry. There is 
great concern that a single, dominant corporation has an 
exclusive role in determining a drug formulary, the AWP for 
those drugs in the greater market, and the delivery of those 
drugs to consumers.

                                Hearings

    The Committee on the Judiciary, Antitrust Task Force held 
one hearing on the ``Impact of Our Antitrust Laws on Community 
Pharmacies and Their Patients'' on October 18, 2007. Testimony 
was received from Mr. Mike James, President, Association of 
Community Pharmacies Congressional Network, and Pharmacist and 
Owner, Person Street Pharmacy, Raleigh, NC; Dr. Peter J. 
Rankin, Principal, CRA International; Mr. David Wales, Deputy 
Director, Bureau of Competition, Federal Trade Commission; Mr. 
David Balto, on behalf of the National Community Pharmacists 
Association; and Mr. Robert Dozier, Executive Director, 
Mississippi Independent Pharmacies Association.

                        Committee Consideration

    On November 7, 2007 Committee met in open session and 
ordered the bill H.R. 971 favorably reported with an amendment, 
by voice vote, a quorum being present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that there 
were no recorded votes during the Committee's consideration of 
H.R. 971.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 971, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 26, 2008.
Hon. John Conyers, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 971, the Community 
Pharmacy Fairness Act of 2007. This estimate updates and 
supersedes a previous CBO cost estimate transmitted on January 
11, 2008. The updated estimate reflects changes in baseline 
projections (underlying the current budget resolution), and 
results in an estimated 10-year deficit impact that is $87 
million lower than estimated under CBO's previous baseline.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Andrea Noda, 
who can be reached at 226-9010.
            Sincerely,
                                           Peter R. Orszag,
                                                  Director.

Enclosure

cc:
        Honorable Lamar S. Smith.
        Ranking Member
H.R. 971--Community Pharmacy Fairness Act of 2007.

                                SUMMARY

    H.R. 971 would create an exemption to antitrust laws for 
five years to permit independent pharmacies to negotiate 
collectively with health plans and issuers of health insurance 
over payment rates and other contract terms. That exemption 
would apply to negotiations between independent pharmacies and 
operators of prescription drug plans offered under part D of 
Medicare. However, the exemption would not apply to most other 
Federal health insurance programs.
    Enacting the bill would affect Federal revenues and direct 
spending for Medicare Part D, Medicaid, and the Federal 
Employees Health Benefits (FEHB) program, beginning in 2009. 
CBO estimates that enacting the bill would reduce Federal tax 
revenues by $105 million over the 2008-2013 period and by $120 
million over the 2008-2018 period. Social Security payroll 
taxes, which are off-budget, would account for about a third of 
those totals.
    CBO estimates that enacting the bill would increase Federal 
direct spending for health benefits by $488 million over the 
2008-2013 period and by $520 million over the 2008-2018 period. 
The combined effect of the estimated changes in revenues and 
direct spending would reduce surpluses or increase deficits by 
$640 million over the 2008-2018 period.
    In addition, CBO estimates that enacting the bill would 
increase discretionary spending by Federal agencies for FEHB 
premiums for current employees by $9 million over the 2009-2013 
period, assuming appropriation of the necessary amounts.
    H.R. 971 contains an intergovernmental mandate as defined 
in the Unfunded Mandates Reform Act (UMRA) because it would 
preempt State antitrust laws. CBO estimates that because the 
preemption would only limit the application of State law, the 
mandate would impose no costs on State, local, or tribal 
governments.
    As a result of this legislation, some State, local, and 
tribal governments would incur higher expenses as purchasers of 
health care for their employees and as providers of health care 
under Medicaid. However, those costs would not result from 
intergovernmental mandates.
    This bill contains no private-sector mandates as defined by 
UMRA.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    The estimated budgetary impact of H.R. 971 is shown in the 
following table. The costs of this legislation fall within 
budget functions 550 (health) and 570 (Medicare).

                           BASIS OF ESTIMATE

    H.R. 971 would allow independent pharmacies to negotiate 
collectively with health plans and issuers of health insurance 
over payment rates and other contract terms. Under the bill, 
such negotiations would be entitled to the same treatment under 
the antitrust laws as the treatment to which bargaining units 
that are recognized under the National Labor Relations Act are 
entitled. To qualify for the exemption, the pharmacies 
participating in a collective negotiation could not constitute 
more than 1 percent of the U.S. market or 10 percent of the 
market in a region (as defined by the Medicare Part D program). 
That exemption from the antitrust laws, however, would not 
apply to negotiations between independent pharmacies and health 
plans pertaining to most Federal health insurance benefits, 
with the exception of prescription drug plans offered under 
part D of Medicare. The exemption from antitrust law for 
independent pharmacies would be effective for five years 
beginning on the date of the enactment of this bill.

                                                         ESTIMATED BUDGETARY EFFECTS OF H.R. 971
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By Fiscal Year, in Millions of Dollars
                                                    ----------------------------------------------------------------------------------------------------
                                                      2008   2009   2010   2011   2012   2013   2014   2015   2016   2017   2018  2008- 2013  2008- 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                   CHANGES IN REVENUES
Income and HI Payroll Taxes (on-budget)............      0     -5    -10    -15    -20    -20    -10      0      0      0      0       -70         -80

Social Security Payroll Taxes (off-budget).........      0      0     -5    -10    -10    -10     -5      0      0      0      0       -35         -40

    Total Changes..................................      0     -5    -15    -25    -30    -30    -15      0      0      0      0      -105        -120

                                                               CHANGES IN DIRECT SPENDING
Medicare...........................................
  Estimated Budget Authority.......................      0     20     70    120    110    140     30      0      0      0      0       460         490
  Estimated Outlays................................      0     20     70    120    110    140     30      0      0      0      0       460         490

Other Federal Programs.............................
  Estimated Budget Authority.......................      0      1      4      7      8      9      2      0      0      0      0        28          30

  Estimated Outlays................................      0      1      4      7      8      9      2      0      0      0      0        28          30

Total Changes......................................
  Estimated Budget Authority.......................      0     21     74    127    118    149     32      0      0      0      0       488         520
  Estimated Outlays................................      0     21     74    127    118    149     32      0      0      0      0       488         520
                                                            NET IMPACT ON THE FEDERAL BUDGET
Estimated Increase in Deficits or Decrease in            0     26     89    152    148    179     47      0      0      0      0       593         640
 Surpluses.........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: HI = Hospital Insurance (Part A of Medicare).
  Implementing H.R. 971 would increase discretionary spending by Federal agencies for health insurance premiums for current employees enrolled in the
  Federal Employees Health Benefits program by an estimated $9 million over the 2009-2013 and $17 million over the 2009-2018 periods, assuming
  appropriation of the necessary amounts.

                                REVENUES

    CBO estimates that H.R. 971, if enacted, would increase 
payments for prescription drugs distributed by independent 
pharmacies by about 1 percent in 2010, when the majority of the 
contracts affected by the policy would have been renegotiated. 
CBO's estimate is based in part on data gathered through 
interviews with industry experts and representatives of the 
pharmacy and health plan industries. CBO's analysis took into 
account both the market shares of independent pharmacies and 
the desire of health plans to establish an attractive network 
of retail pharmacies or to meet adequacy-of-network 
requirements. CBO also took into account the duration of 
typical contracts in estimating the effects of the bill.
    The increased cost to plans for prescription drugs would 
increase premiums for group health insurance by less than 0.1 
percent in 2010, before accounting for the responses of health 
plans, employers, and workers to the higher premiums that would 
likely be charged under the bill. Those responses would include 
reductions in the scope or generosity of health insurance 
benefits, such as increased deductibles or higher copayments. 
CBO expects that those behavioral responses would offset 60 
percent of the potential impact of the bill on the total costs 
of health plans.
    The remaining 40 percent of the potential increase in costs 
would occur in the form of higher spending for health 
insurance. Those costs would be passed through to workers, 
reducing both their taxable compensation and other fringe 
benefits. For employees of private firms, CBO assumed that all 
of that increase would ultimately be passed through to workers. 
The estimate assumes that State, local, and tribal governments 
would absorb 75 percent of the increase and that changes in 
their workers' taxable income and other fringe benefits would 
offset the remaining one-quarter of the increase.
    Those reductions in workers' taxable compensation would 
lead to lower Federal tax revenues. CBO estimates that Federal 
tax revenues would fall by $5 million in 2009 and by $120 
million over the 2008-2018 period if H.R. 971 were enacted. 
Social Security payroll taxes, which are off-budget, would 
account for about one-third of those totals.
Direct Spending
    H.R. 971 would affect negotiations between independent 
pharmacies and health plans that provide prescription drug 
benefits under Part D of Medicare. CBO estimates that the bill, 
if enacted, would increase payments for prescription drugs 
distributed by independent pharmacies by about 1 percent by 
2010, and would therefore increase Federal direct spending for 
Part D of Medicare by $460 million over the 2008-2013 period 
and by $490 million over the 2008-2018 period.
    The bill would maintain antitrust liability for independent 
pharmacies in negotiations with health plans that provide 
prescription drug benefits for certain other Federal health 
programs, such as Medicaid and the FEHB program. However, to 
take advantage of that limitation on the ability of independent 
pharmacies to bargain collectively, health plans would have to 
conduct separate negotiations for their Medicaid or FEHB 
populations and for their commercial business. CBO anticipates 
that some plans would choose not to conduct such separate 
negotiations because that could reduce their leverage for 
obtaining discounts. CBO expects that the effect on Medicaid 
and FEHB of enacting H.R. 971 would be about one-quarter of the 
effect in the private sector. As a result, CBO estimates that 
enacting H.R. 971 would increase Federal spending for Medicaid 
and the FEHB program by $28 million over the 2008-2013 period 
and $30 million over the 2008-2018 period.\1\
---------------------------------------------------------------------------
    \1\Only the government's share of premiums for Federal retirees 
enrolled the FEHB program is classified as direct spending. CBO 
estimates that implementing H.R. 971 would also increase discretionary 
spending by Federal agencies for FEHB premium payments for current 
employees by $9 million over the 2009-2013 and $17 million over the 
2009-2018 periods. (Federal spending for active workers participating 
in the FEHB program is included in the appropriations for Federal 
agencies, and therefore is discretionary.)
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              INTERGOVERNMENTAL AND PRIVATE-SECTOR IMPACT

Intergovernmental Mandates
    H.R. 971 contains an intergovernmental mandate, but CBO 
estimates that the mandate would impose no costs on State, 
local, or tribal governments. By exempting certain pharmacies 
from State antitrust laws, the bill would preempt State law, 
and that preemption would be a mandate as defined in UMRA. 
However, the bill would not require States to take action as 
regulators in order to comply with the new exemption, and in 
some cases it might reduce their oversight responsibilities.
Other Impacts
    With certain pharmacies exempted from antitrust laws, 
State, local, and tribal governments would experience an 
increase in premiums for health insurance for their employees. 
CBO estimates that those governments would face additional 
costs of about $20 million over the 2008-2013 period. This 
estimate reflects the assumption that governments would shift 
roughly 25 percent of the additional costs to their employees.
    The bill would maintain antitrust liability for pharmacies 
that provide services for Federal health benefit programs, 
including Medicaid. However, those programs would not be 
completely shielded from the market changes precipitated by the 
bill. Consequently, CBO estimates that State expenditures for 
Medicaid would increase by about $15 million over the 2008-2013 
period.
    H.R. 971 contains no private-sector mandates as defined by 
UMRA.

                         PREVIOUS CBO ESTIMATE

    On January 11, 2008, CBO transmitted a cost estimate of 
H.R. 971 as ordered reported by the House Judiciary Committee 
on November 7, 2007. The legislative language has not changed. 
CBO's estimate has been updated to reflect the March 2008 
baseline assumptions that underly the current budget 
resolution. Under the updated baseline, we estimate the net 
deficit impact of the bill would be $87 million lower over the 
2008-2018 period than previously estimated. The decrease is a 
result of lower projected Part D spending over that period.

                         ESTIMATE PREPARED BY:

Federal Costs: Andrea Noda and Julia Christensen (226-9010)
Impact on State, Local, and Tribal Governments: Lisa Ramirez-
    Branum (225-3220)
Impact on the Private Sector: Anna Cook and Patrick Bernhardt 
    (226-2666)

                         ESTIMATE APPROVED BY:

Peter H. Fontaine
Assistant Director for Budget Analysis

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
971 allow independent pharmacies to collectively negotiate 
terms and conditions of their PBM reimbursement.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in article I, section 8, clause 3 of the 
Constitution.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 971 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(d), 9(e), or 9(f) of Rule XXI.

                      Section-by-Section Analysis

    The following discussion describes the bill as reported by 
the Committee.
    Sec. 1. Short title. Section 1 sets forth the short title 
of the bill as the ``Community Pharmacy Fairness Act of 2007.''
    Sec. 2. Application of the Antitrust Laws to Independent 
Pharmacies Negotiating with Health Plans. Section 2(a) entitles 
independent pharmacies to the same antitrust law treatment as 
bargaining units recognized under Section 7 of the National 
Labor Relations Act (NRLA). Independent pharmacies would have 
the right to act specifically as ``an employee'' under the 
NRLA. Section 2(b) guarantees that pharmacies acting in good 
faith reliance on subsection (a) would only be subject to 
actual damages and would not be subject to criminal sanctions. 
Section 2(c) specifies that this section does not affect any 
provision of the National Labor Relations Act or the status of 
any group of persons under that Act. Section 2(d) states that 
subsection (a) becomes effective on the date of enactment. 
Section 2(e) prohibits any other agreement or unlawful 
conspiracy that: (1) would have the effect of boycotting any 
independent pharmacy or group of pharmacies; (2) allocates a 
market among competitors; (3) unlawfully ties the sale or 
purchase of one product or service to the sale or purchase of 
another product or service; or (4) monopolizes or attempts to 
monopolize a market. Section 2(f) limits the negotiating groups 
to no more than 25% of the number of licensed, retail 
pharmacies within a Medicare Part D Prescription Drug Plan 
region. Section 2(g) states that this act does not affect the 
application of title VI of the Civil Rights Act of 1964. 
Section 2(h) states that the act does not apply to negotiations 
between independent pharmacies and health plans pertaining to 
benefits under various other Federal programs, such as 
Medicaid, SCHIP and others. Section 2(i) provides definitions 
for ``antitrust laws,'' ``health plan,'' ``health insurance 
coverage,'' ``health insurance issuer,'' ``group health plan,'' 
``independent pharmacy,'' and ``PDP region.'' Section 2(j) 
provides for a 5 year sunset of the antitrust exemption. 
Section 2(k) provides for a GAO study on the impact of 
enactment of this section during the 6 month period beginning 
with the 5th year of the 5 year period. The Comptroller General 
must provide a report to Congress on the study and include 
recommendations on the extension of this section. Section 2(l) 
states that this section does not preclude the FTC or DOJ from 
overseeing the conduct of independent pharmacies covered under 
this section.