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Executive Summary

FTC HEARING FOR NY DRUG CHAINS charged with illegal insurance boycott of the state's Employee Prescription Program is tentatively set for July 7. The alleged boycott was intended, according to the Federal Trade Commission, to force higher reimbursement levels for drug ingredient costs to pharmacies. FTC filed complaints April 26 against eight retail drug chains alleging that they "agreed to refuse" or "threatened to refuse" to participate in the plan "at the proposed reimbursement level, for the purpose of increasing the level of reimbursement offered by the State of New York" under the plan after July 1, 1986. The FTC hearing will be before one of the commission's administrative law judges. The chains conspired to restrain trade, the complaint alleges, through a series of meetings and communications among themselves, other chains, the Chain Pharmacy Association of New York State and Rite Aid's VP of Government Affairs James Krahulec, who headed the association in 1986. The association and Krahulec are also named in the complaint. Some of the boycott meetings were private, an FTC spokesperson maintains. As a result of the alleged restraint of competition, New York State paid out an additional $ 7 mil. in reimbursements in the first 18 months following the July 1, 1986 start-up, the FTC charges. Additionally, the commission says, consumers have been harmed because "price competition among pharmacy firms with respect to third-party prescription benefit plans has been and continues to be reduced" and "the State of New York was coerced into raising the prices paid to pharmacies" under the PAID Prescriptions, Inc. plan. Rite Aid, Fay's, CVS, Peterson's and Kinney's drugstore chains were named as respondents in the complaints. The chains had each participated in the state's prescription drug benefit programs prior to July 1, 1986. The state legislature eventually revised the proposed changes in the plan. The proposed modifications to the pharmacy plan in 1986 would have lowered the formula for the ingredient reimbursement, increased professional fees and offered additional reimbursements for the dispensing of generics. Three other chains charged in the complaint -- Brooks Drug, Carl's Drug and Genovese -- agreed to settle the issue by signing consent agreements. The consent agreements do not constitute admissions of wrongdoing but require that the chains do not enter into any agreements similar to those lodged in the complaint for a period of up to 10 years. Fay's Drug said in an April 26 press statement that the lobbying activities alleged in the complaint were in response to New York State's "proposed substantial reduction" in the reimbursement rate and the proposed differentiation between that rate for chain and independent drug stores. Fay's said the state's proposed formula "also failed to take into consideration the direct and indirect costs of providing full pharmacy services to plan participants." Rite Aid said "its actions and those of its employees were lawful lobbying activities" and that it "intends to defend this action vigorously." A Kinney Drug spokesperson concurred, calling the complaint "false." Outside counsel for Peterson Drug's said the chain will also oppose the charges.

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