Planning for US DOD pharmaceutical benefits procurement: A need to think outside the box and a lesson for the EU

The US Department of Defense (DOD) offers health care coverage through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. Its current contract for the management of pharmaceutical benefits expires in the fall of 2014 and DOD has already started planning the next stage of procurement.

 

According to the US Government Accountability Office (GAO) report of 30 September 2013,

During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told [GAO] that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract.

At first sight, this looks like a proper exercise of procurement planning and one that is specifically concerned with promoting effective competition in the next stage of pharmaceutical benefits management procurement. However, GAO has very high standards and considers that the exercise carried out by DOD is insufficient and that the Department needs to think outside of the box (of the current structure of benefit management contracts) to see if an even better scenario is achievable. In that regard, GAO considers that

DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts—a carve-in structure—or a structure that incorporates certain components of DOD’s pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD’s current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries.

DOD is now required to conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. GAO will report again once this additional exercise is completed.

 

In my view, this case shows how important it is to develop effective and demanding standards of market investigation and procurement planning in order for contracting authorities to reap all the benefits of effective market competition. It may well be that the result of the enquiry shows that current structures are the most efficient. But, even in that case, the additional market research would not have been an sterile exercise. By avoiding path dependency and seeking for alternative modes of provision (ie by actually knowing the markets where they contract from), contracting authorities can obtain true value for money.

 

Hence, this type of mandatory market intelligence should be seen as best practice and, in my opinion, imported into the procurement systems of many European countries (and, definitely, Spain). Only in that way will public procurement really contribute to smart growth and be truly aligned with the Europe 2020 strategy. Hopefully the revision of the domestic procurement systems as a part of the process for the transposition of the soon to be adopted new EU rules on procurement will offer Member States an opportunity to also reflect on these issues and to strengthen their market intelligence requirements and infrastructures.

UK's Competition Commission findings on private healthcare markets unfair, says UK CAT

The UK's Competition Appeals Tribunal has disapproved the Competition Commission's provisional findings on private healthcare markets published at the end of August 2013 (see CPI press release here). 

 

In its Judgment of 2 October 2013, the UK CAT found that "the Commission’s rules governing the disclosure room were not fit for the purpose of allowing a proper and informed response to be made to the Commission’s provisional findings. Accordingly, the decision was in breach of the Commission’s statutory duty in section 169 of the Enterprise Act 2002 and in breach of the rules of natural justice". In my view, the path through which the UK CAT reaches this decision deserves some attention.

 

Generally, the UK CAT finds no fault in the design of the access to confidential information by means of a data room: "We do not consider that the decision of the Commission, in this case, to protect the Confidential Information by way of a data room instead of one or more of the other ways contemplated in paragraph 9.14 of the CC7 Guidance, to be susceptible of criticism. We accept the Commission’s view that the confidential material in this case was extremely sensitive and, in all the circumstances, the decision to protect the "specified information" in this case by way of a data room is unchallengeable on a judicial review basis." (para 49).

 

However, the UK CAT takes issue with the specific rules on access to the data room that the Commission imposed, which restricted access to the legal and economic advisers of the undertakings concerned and which prevented them from taking copies of the information (and only notes, subjected to scrutinity and redaction by the Commission could be retained). In the UK CAt's view:

62. The short conclusion is that consideration by the Applicants of the Confidential Information is the starting point for examining what fairness requires. It will be the Applicants who will be affected by any adverse decision of the Commission, not their advisers. Implicit in this starting point is the fact that it is for the Applicants to decide how they wish to respond. In cases like the present, doubtless that will involve the retention of an expert legal team, and expert economists and accountants. But, at the end of the day, what the "interested person" (we shall use this term as shorthand to refer to parties like the Applicants, who may be affected a decision, and who are entitled to be consulted on it) chooses to do to respond is a matter for that person, and not for that person’s legal or advisory team, still less for the body whose provisional decision is being responded to. [...]

63. This starting point may be modified and derogated from to take account of the confidential nature of the information in question. We recognise that market investigations involve – as here – considerable amounts of very confidential material, and that if that material is not appropriately safeguarded, confidence in Commission investigations will be eroded and – quite possibly – damage done to the operation of markets because of the market sensitivity of the information involved. But it must always be borne in mind that derogations from the starting point that we have identified must be such as to enable the party affected to respond.

67. A data room operates very differently from a confidentiality ring. Not only is access to the room limited to a defined class of person (in this, data rooms are similar to confidentiality rings), but also the confidential information is retained at a secure location – in the data room. This prevents the sort of accidental disclosure of confidential information that can occur in the case of confidentiality rings.

68. Use of a data room will certainly involve additional inconvenience to an interested party and its advisers. It may well mean more than this: it may mean that the drafting of a response is made materially more difficult. But this additional burden can be justified provided:

(i) the sensitivity of the material in question warrants it; and (ii) the interested person is still – despite the additional difficulties – able to make worthwhile representations [...]

69. This means that where a data room is deployed to protect sensitive information, there must be facilities available in the data room so as to enable a proper and informed (or "worthwhile") response.

After setting this background, the UK CAT considers that the rules governing the Competition Commission were faulty in three main aspects. First, "confining the Advisers to recording in their notes only Own Client Data or information derived solely from Own Client Data and/or from data in the public domain is wrong in principle" (para. 71), despite the fact that, informally, the Commission decided to oversee breaches consisting of the taking of notes concerned with other confidential information and to treat them as further disclosures of evidence (para. 58). Secondly, the UK CAT criticises the fact, that while at the data room, advisors were not provided with means to draft a response to the confidential information they could not take away (para. 72). Finally, the UK CAT considers that "the period of time in which the Advisers were allowed access to the Disclosure Room [ie 2 working days] was unreasonably short" (para. 73).

Interestingly, the UK CAT also expressly dismissed the Commission's argument that the applications against its (process leading to its) provisional findings were premature and rejected the contention that the Commission could cure any shortcomings in the access to confidential information during the remainder of the procedure (or, indeed, even after releasing the provisional findings, as they are still under review and the Commission has until April 2014 to publish its final findings and recommendations). The UK CAT considered that an initial restriction to the amount of information and the conditions for access to that information by counsel of some of the main players involved in the market investigation suffices to taint the procedure with unfairness. However, the UK CAT made no finding as to the appropriate relief and waits for the parties to request a hearing, if needed.

 

In my view, this is a case where 'due process' rights have been upheld to the highest possible level (maybe even to excess), and even in a setting that is not properly leading to the imposition of fines, but more of a regulatory exercise. Instances such as these may become even more common after the EU accedes the EU Convention on Human Rights and, if not properly weighed, may create a significant burden for competition law investigation and enforcement [for general discussion, see my "The EU’s Accession to the ECHR and Due Process Rights in EU Competition Law Matters: Nothing New Under the Sun?"].

 

Therefore, it will be interesting to see whether the Competition Commission's investigation in this sector can proceed after this significant blow by the UK CAT and, if so, whether the UK Competition Commission amends significantly its rules on access to evidence. The knock-on effect of this case on 'proper' competition law investigations in infringement procedures by the new Competition and Markets Authority (or the European Commission, as a spillover and due to the anglosaxon influence in Luxembourg) seems hard to predict, but I would submit that it will not be neutral.