Proposed agreement follows court ruling on Surescripts’ dominant 95% “supershare.”
Health information technology company Surescripts, LLC has agreed to stop engaging in exclusionary conduct and executing or enforcing employee non-compete agreements. The Federal Trade Commission, which sued the company in 2019, says the settlement will resolve charges that Surescripts used anticompetitive tactics to illegally monopolize two electronic prescription drug markets.
Based in Arlington, Va., Surescripts provides electronic prescribing (e-prescribing) services to healthcare providers, pharmacies, and payers. One service facilitates the secure routing of prescription information between healthcare providers and pharmacies. Another service assists with the insurance prior-authorization process, which is often required by carriers to determine a patient’s eligibility of coverage for certain treatments.
The FTC sued Surescripts alleging two violations of Section 2 of the Sherman Act with regard to the company’s conduct in the electronic routing market and the electronic eligibility market – two sub-markets of the e-prescription market. The FTC and Surescripts both filed motions for summary judgment.
The settlement came four months after Judge John D. Bates of the District of Columbia found that Surescripts possesses monopoly power in electronic prescribing services with a 95 percent “supershare,” which creates significant barriers to entry.
Monopoly and Relevant Market
Before addressing the arguments, Judge Bates provided a brief primer on how one examines monopoly power under Section 2 of the Sherman Act. A threshold concept, he explained, is that there must be a relevant product market that includes only products that are reasonably interchangeable. Not every functionally interchangeable product should be included in the relevant market definition, he explained, saying the proper test is the availability of substitute commodities. Further, as the Supreme Court wrote in Brown Shoe v. U.S., there must be “industry or public recognition of the submarket as a separate economic entity of the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Brown Shoe v. U.S., 370 U.S. 294, 325 (1962).
The FTC argued in its motion that “analog methods of routing and eligibility are not reasonable substitutes for electronic routing and electronic eligibility,” so a definition of the relevant markets must exclude non-electronic alternatives. Surescripts said these facts were in dispute and should be held for examination at an evidentiary hearing or trial. Judge Bates found for the FTC, saying market definitions are commonly and appropriately addressed via summary judgment.
Time Period for Assessing Relevant Market
The parties disagreed about the proper time period for assessing the relevant markets. The FTC said the court should measure the “cross-elasticity of demand in the present day; thus, the appropriate question in determining if the relevant markets include analog methods is whether consumers would switch back from e-prescribing to analog methods today.” Surescripts countered that the relevant markets must be assessed back to at least 2010 to determine whether its loyalty provisions allowed it to create or maintain monopoly power. The FTC says Surescripts’ loyalty provisions have been unlawful since at least that year. The company says the correct question is “whether a price increase would have stymied initial switching from analog methods to electronic methods of routing.” Siding with the FTC, Judge Bates wrote, “Many courts have looked at present-day realities to assess the relevant market despite the alleged anticompetitive conduct having begun earlier.”
Reasonable Substitutes
The judge next addressed whether the market definition should include both electronic and analog methods of routing and eligibility, or whether they are separate markets. After reviewing the facts, Judge Bates wrote that “while functionally similar,” analog methods are “less desirable than e-prescribing on every major metric and more expensive.” Even Surescripts’ employees and economic expert, the judge wrote, “[B]elieve that customers are unlikely to switch back to analog methods as a result; hence, the undisputed evidence suggests that e-prescribing and analog methods are not ‘reasonably interchangeable’ in the relevant sense.”
The court went on to discuss other factors offered by Brown Shoe, such as whether products have distinct prices, whether sales are sensitive to price changes, and whether products have peculiar characteristics, different vendors, distinct production facilities, and distinct customers, and whether there exists a wide recognition of a “submarket as a separate economic entity.” After reviewing the evidence, Judge Bates said nothing in Brown Shoe would bar summary judgment.
Who’s Got the Power?
Judge Bates next turned to whether Surescripts has monopoly power and whether that power creates barriers to entry. Noting the company’s 95 percent share of both electronic routing and eligibility markets since 2010, the judge said that is “dominance by any definition of the metric.” Surescripts has been able to maintain its dominance due to “several challenges faced by would-be entrants,” the judge wrote.
Increased prices and less production are among the potential and frequent negative effects of a monopoly. Surescripts argued, though, that the opposite has taken place, that prices have gone down while production has gone up. They argued this undermined the FTC’s claims, but these conditions are not inconsistent with monopoly power, the FTC countered. Again, the agency prevailed. Judge Bates said courts have held that such “calling cards” of a competitive market “do not by themselves negate the existence of monopoly power as a matter of law.”
“Surescripts only points to the fact that prices fell and output increased over the relevant period,” the judge wrote, “—it does not attempt to show that prices fell below or output increased above the competitive level. The FTC argues, and the Court agrees, that without an attempt to show that prices were lower and output higher than the competitive level, the ‘direct evidence’ Surescripts offers is of little value.”
Finally, Surescripts argued that the FTC failed to prove that Surescripts’ loyalty pricing contracts disadvantaged competitors. It also argued it was at least winding down this program. The FTC said this was not appropriate for summary judgment given the number of material facts in dispute. While reserving judgment pending further developments on the mootness of the issue, the judge commented: “[A]lthough its loyalty programs may be defunct now—a development which will certainly alter the focus of Surescripts’s summary judgment motion—the Court is unaware of any rule that the FTC must show that the challenged conduct is still ongoing to prove anticompetitive effects in the market and for liability to accordingly attach.”
The judge encouraged the parties to explore the issues further, which they obviously did. The FTC filed a proposed order for the court to enforce the settlement.