On July 28, 2022, the Attorney General of the State of New York (NYOAG) flexed its antitrust muscle and brought suit against CVS Health in Manhattan state court. The NYOAG accuses CVS of violating the Donnelly Act, New York's state antitrust law, by illegally tying access to Contract Pharmacy services at CVS retail and specialty pharmacies to use of CVS third-party administrator (TPA) services through Wellpartner, a company CVS acquired in 2017. The NYOAG seeks not only to enjoin the illegal conduct, but also an order that Wellpartner be divested.

340B Background

The 340B program requires pharmaceutical manufacturers, as a condition for participating in Medicaid and Medicare Part B, to sell prescription drugs at discounted prices to hospitals and clinics that care for mostly uninsured and low-income patients. These healthcare organizations are called "Covered Entities." Congress intended the program to help Covered Entities stretch limited resources, allowing 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 within the Department of Health and Human Services (HHS), calculates a maximum price for each covered prescription drug, which typically is substantially less than the wholesale retail price of the drug. Hospitals participating in the 340B program can then purchase covered drugs from the drug's manufacturer at the 340B price.

Drugs purchased through the 340B program can be dispensed at the hospital's in-house pharmacy or, more frequently, at a "Contract Pharmacy" that dispenses 340B prescriptions. The patient or third-party payor pays the usual contract price and the 340B hospital then retains the difference between the 340B price and the insurance reimbursement, minus any fees paid to the contract pharmacy. This surplus is referred to as the hospital's "340B savings."

Hospitals typically retain a TPA to ensure the hospital is complying with all 340B regulations, that savings are properly tracked, and that drug inventories are replenished. The TPA serves as an interface between the hospital and its contract pharmacy or pharmacies.

NYOAG's Allegations

CVS is integral to 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 the TPA of their choosing when interfacing with CVS. That changed in 2017 when CVS acquired 340B TPA Wellpartner. After that acquisition, CVS required 340B hospitals seeking to use its pharmacy services to hire Wellpartner as their TPA. That requirement, NYOAG alleges, is an illegal tie that violates both the state prohibition against unreasonable restraints of trade (comparable to Section 1 of the Sherman Act) as well as New York Executive Law§ 63(12) which prohibits "repeated fraudulent or illegal acts."

The NYOAG's complaint describes how CVS unlawfully tied together two distinct markets. The "tying" market is the market for CVS's provision of 340B contract pharmacy services. The complaint explains how several peculiarities of the 340B program and health insurance industry influence the dynamics of this market.

• First, 340B regulations prohibit hospitals from steering 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 change pharmacies when their usual pharmacy starts overcharging their hospital.
• Third, hospitals typically seek contact arrangements with pharmacies based on the number of patients filling prescriptions at that pharmacy. The more patients going to CVS, the more 340B savings a hospital stands to make by contracting with CVS—or lose by dropping CVS.
• Fourth, CVS's relationship with CVS Caremark, a Pharmacy Benefit Manager (PBM) allows it to accumulate even more patients to itself by designating itself as in-network for numerous 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 take them. Hospitals are powerless to steer patients toward a more competitively priced pharmacy, the patients are unlikely to steer themselves, and the hospital cannot afford to drop a large pharmacy without leaving significant 340B savings on the table. This gives each 340B contract pharmacy monopoly power in the market for its services.

The "tied" 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 demand supra-competitive fees in the market for TPA services. Wellpartner no longer needed to innovate to offer a better price or quality. It could raise prices and simply rely on CVS's leverage in another market to not lose customers. Hospitals that already had no choice but to use CVS as a 340B contract pharmacy now had no choice but to use Wellpartner as a 340B TPA. This deprives 340B hospitals of the full financial benefits of the program Congress intended and frustrates the hospitals' ability to pass on 340B savings to New York's most vulnerable patients in the form of more affordable or expanded services.

The Relief Sought

As is typical, the NYOAG requests civil monetary penalties and disgorgement, and seeks to prevent future harm through an order enjoining CVS's anticompetitive conduct and requiring CVS to notify New York 340B hospitals that exclusive use of Wellpartner is no longer required. More surprisingly, the NYOAG also seeks "equitable relief which could include an injunction and an order of divestiture" of the Wellpartner business.

Significance of the NYOAG's Suit

It is always noteworthy when a state pursues aggressive antitrust enforcement, and the NYOAG's complaint against CVS is no different. NYOAG levies tying allegations that, if proven, could constitute illegal tying conduct under the Sherman Act as well in any geography where CVS exercises "monopoly power as to contract pharmacy services for 340B prescriptions filled at CVS pharmacies." The NYOAG contends "there is no interchangeable product" because "Covered Entities cannot direct patients to another pharmacy in the event of a price increase or quality decrease." The test for illegal tying under the Donnelly Act is the same modified per se test as under the Sherman Act: "Tying arrangements are prohibited when the seller has some special ability—usually called market power—to force a purchaser to do something that he would not do in a competitive market."¹

While this case brought under the Donnelly Act is limited to conduct in New York, a divestiture remedy, if obtained, could apply nationwide. Most states have their own antitrust statutes, and they will likely be monitoring this case closely.

Second, the possibility exists for New York to seek the unwinding of the Wellpartner acquisition, perhaps reminiscent of the current litigation against Meta f/k/a Facebook for its acquisitions of Instagram and WhatsApp.

Third, this suit opens yet another front in the widening battle around 340B. The 340B program has been fraught with controversy, ranging from accusations that providers use the system to capture additional revenue and take advantage of opaque discounting policies, to allegations that some pharmaceutical manufacturers illegally "imposed onerous and non-statutory restrictions on providers' access to 340B-discounted drugs."² When HHS took administrative actions against the manufacturers, the manufacturers brought their own suits against HHS claiming its enforcement efforts violated the Administrative Procedure Act. This activity has even generated accusations by a putative class of hospitals alleging that three insulin manufacturers illegally conspired to coordinate their limitations on 340B participation. The NYOAG complaint adds to the fray and underscores the need for a fresh look at the program.

[1] Victoria T. Enters., Inc. v. Charmer Indus., Inc., 881 N.Y.S.2d 570, 572, (Sup. Ct. 2009) (quoting and endorsing (Illinois Tool Works Inc. v Independent Ink, Inc., 547 US 28, 36 (2006)).

[2] Defendant’s Motion to Dismiss, Sanofi-Aventis U.S., LLC v. United States Dep’t of Health & Human Servs., No. 3:21-cv-634 (D.N.J.), ECF No. 62-1, at 11 (April 19, 2021).