Competition Law and Hospital Formulary Exclusion

1. Introduction

Hospital formulary exclusion occurs when a hospital, hospital network, group purchasing organization, insurer, pharmacy-benefit intermediary, or other healthcare purchaser decides that a particular medicine, medical product, manufacturer, or competing therapeutic alternative will not be included on its formulary, or will receive materially inferior formulary status.

A formulary may determine:

• which medicines physicians are encouraged or permitted to prescribe;
• which drugs are available through the hospital pharmacy;
• which products receive preferred status;
• whether a manufacturer obtains access to hospital patients;
• whether a competing drug is subject to prior authorization or other restrictions; and
• the commercial viability of rival pharmaceutical products.

Formulary exclusion is not automatically unlawful. Hospitals legitimately use formularies for clinical safety, therapeutic interchangeability, procurement efficiency, pharmacoeconomic evaluation, inventory management, and patient-care reasons. Competition law becomes relevant where exclusion is used by a dominant hospital or healthcare intermediary to foreclose competitors, raise rivals' costs, obtain exclusionary payments, impose de facto exclusive dealing, or harm patients through reduced price and therapeutic choice.

The FTC recognizes that competition in healthcare can produce lower costs, better care, and innovation, while recent pharmaceutical enforcement has specifically examined exclusionary formularies and their effect on access and pricing.

2. Meaning of a Hospital Formulary

A hospital formulary is a controlled list of medicines approved or preferred for use within a hospital or healthcare system.

A typical formulary can classify medicines as:

1. Preferred medicines
2. Non-preferred medicines
3. Restricted medicines
4. Specialist-only medicines
5. Non-formulary medicines
6. Substitution or therapeutic-equivalent medicines

For example:

Hospital A places Drug X on its preferred formulary but excludes Drug Y, even though Drug Y is a clinically substitutable competitor.

The competition-law question is not simply whether Drug Y has been excluded. The central question is:

Has the exclusion substantially harmed the competitive process, rather than merely disadvantaging an individual pharmaceutical company?

3. Why Formulary Decisions Can Affect Competition

Hospital formularies can have substantial competitive significance because hospitals may control an important gateway to patients.

A pharmaceutical manufacturer may depend upon:

Manufacturer → Hospital formulary → Physician prescribing → Patient demand

If a hospital controls a significant proportion of local demand, exclusion from the formulary may substantially reduce the manufacturer's ability to compete.

This becomes especially important where:

• the hospital has substantial market power;
• patients cannot realistically obtain treatment elsewhere;
• physicians depend heavily upon the hospital's formulary;
• the excluded drug has no close substitute;
• the hospital operates an integrated pharmacy;
• the hospital has exclusive arrangements with manufacturers;
• rebates are conditional upon exclusion of competing products; or
• exclusion is designed to prevent market entry.

4. Relevant Competition-Law Theories

A. Abuse of Dominance / Monopolization

A dominant hospital or healthcare system may potentially infringe competition law if it deliberately excludes a rival pharmaceutical product without legitimate justification and the conduct produces substantial foreclosure.

The analysis normally requires:

1. defining the relevant market;
2. establishing dominance or monopoly power;
3. identifying exclusionary conduct;
4. establishing competitive harm;
5. considering legitimate business or clinical justification; and
6. assessing whether less restrictive alternatives existed.

B. Exclusive Dealing

A formulary agreement may operate as de facto exclusive dealing.

For example:

A pharmaceutical company offers a hospital a large rebate on Drug A, but the rebate is available only if the hospital excludes competing Drug B from its formulary.

The arrangement may restrict the rival's access to a substantial portion of the market.

The important consideration is generally not merely the existence of exclusivity, but the extent and duration of foreclosure and its effects on competition.

C. Loyalty Rebates

Loyalty rebates can create competition concerns when the economic structure effectively rewards a hospital for refusing to purchase rival products.

Suppose:

• 50% purchases → 2% rebate;
• 70% purchases → 8% rebate;
• 90% purchases → 20% rebate;
• 100% purchases → 35% rebate.

If the hospital would lose a substantial rebate by purchasing from a competitor, the arrangement may function economically as exclusionary conduct.

This was particularly important in the pharmaceutical loyalty-program litigation discussed below.

5. Tying and Bundling

A hospital may potentially engage in problematic tying where it conditions access to one product or service upon acceptance of another product.

For example:

"You can receive preferred hospital procurement terms only if you purchase all oncology medicines from Manufacturer X."

Competition authorities would examine whether:

• two distinct products are involved;
• the hospital has market power in the tying product;
• customers are effectively compelled to accept the tied product; and
• competition in the tied market is substantially foreclosed.

6. Refusal to Deal / Exclusionary Access

A hospital may sometimes control an important distribution channel.

If a dominant hospital:

• removes a rival from its formulary;
• refuses access to its pharmacy;
• prevents physicians from using the rival's medicine;
• refuses reasonable substitution; or
• discriminates against competing suppliers,

the conduct may raise a refusal-to-deal or exclusionary-access issue.

However, competition law ordinarily does not impose a general obligation on businesses to deal with every competitor. Additional circumstances—such as monopoly power, prior dealing, indispensability, discriminatory conduct, or a clear exclusionary strategy—may be necessary.

7. Clinical Justification Is Extremely Important

A formulary exclusion based on legitimate medical considerations is fundamentally different from an exclusion designed to suppress competition.

Legitimate reasons may include:

• patient safety;
• adverse-effect profile;
• clinical efficacy;
• drug interactions;
• therapeutic equivalence;
• quality concerns;
• supply reliability;
• pharmacoeconomic considerations;
• shortage management;
• storage requirements;
• prescribing-error reduction;
• antimicrobial stewardship; and
• evidence-based clinical guidelines.

Consequently, competition authorities should not treat every formulary decision as an antitrust violation.

8. Case Laws

1. Eisai, Inc. v. Sanofi Aventis U.S., LLC, 821 F.3d 394 (3d Cir. 2016)

Facts

Sanofi marketed the anticoagulant Lovenox. It introduced a loyalty-discount arrangement under which hospitals could obtain larger discounts depending upon the proportion of their anticoagulant purchases represented by Lovenox.

The plaintiff, Eisai, alleged that the arrangement disadvantaged competing anticoagulant Fragmin.

The arrangement also involved provisions concerning the hospital's treatment of competing anticoagulants on its formulary.

Issue

Whether Sanofi's loyalty-discount program constituted unlawful exclusionary conduct or de facto exclusive dealing.

Decision

The Third Circuit rejected the antitrust claim at the summary-judgment stage because the plaintiff had not established sufficient evidence of anticompetitive effect.

The court's reasoning is particularly important because it demonstrates that:

A pharmaceutical loyalty program does not become unlawful merely because it makes competition more difficult.

There must be adequate evidence that the arrangement actually foreclosed competition in a substantial portion of the market.

Relevance to formulary exclusion

This is one of the most important cases for hospital formulary analysis.

It demonstrates the importance of examining:

• percentage of hospital demand covered;
• available alternatives;
• contractual duration;
• switching possibilities;
• discount magnitude;
• actual foreclosure; and
• competitive effects.

The case involved a hospital formulary clause restricting the ability to give competing anticoagulants priority status, making it particularly relevant to formulary exclusion.

2. Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984)

Facts

A hospital had an exclusive contract with a particular anesthesiology group.

A competing anesthesiologist challenged the arrangement under antitrust law.

Decision

The Supreme Court examined whether the hospital's exclusive arrangement constituted unlawful tying.

The Court ultimately found insufficient evidence of the necessary market power and competitive effects.

Importance

The case establishes an important principle:

An exclusive hospital arrangement does not automatically constitute an antitrust violation.

For formulary cases, the analogy is significant.

A hospital's exclusive relationship with a pharmaceutical supplier does not automatically violate competition law. Authorities must examine:

• market power;
• the competitive significance of the exclusion;
• alternative suppliers;
• actual foreclosure; and
• consumer consequences.

3. Reazin v. Blue Cross & Blue Shield of Kansas, Inc., 899 F.2d 951 (10th Cir. 1990)

Facts

A hospital and health insurer became involved in a dispute concerning hospital contracting and reimbursement.

The conduct had the effect of affecting the competitive position of the hospital.

Decision

The Tenth Circuit considered whether exclusionary conduct within healthcare markets could violate the Sherman Act.

The case illustrates that healthcare markets are subject to ordinary antitrust principles even though medical institutions have specialized functions.

Relevance

The case is useful for formulary disputes because it demonstrates that:

• healthcare institutions can possess market power;
• contractual restrictions can affect competition;
• foreclosure must be assessed within the actual healthcare market; and
• the special nature of healthcare does not create blanket antitrust immunity.

4. FTC v. Phoebe Putney Health System, Inc., 568 U.S. 216 (2013)

Facts

Phoebe Putney Health System sought to acquire a competing hospital.

The defendants argued that the conduct was protected by state-action immunity.

Decision

The Supreme Court rejected the immunity argument because Georgia law did not clearly articulate and affirmatively contemplate displacement of competition by hospital authorities.

Principle

The case establishes that:

Healthcare entities do not automatically receive immunity from antitrust scrutiny merely because they operate under governmental or healthcare regulatory structures.

Relevance to formulary exclusion

A hospital system cannot necessarily defend an exclusionary formulary arrangement merely by asserting that healthcare regulation or public-health considerations justify the conduct.

If competition is displaced, the relevant statutory or governmental authorization must be sufficiently clear where state-action immunity is claimed.

5. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)

Facts

Aspen Skiing involved four major ski areas. For many years, they cooperated in offering a joint multi-area ticket.

The dominant operator eventually discontinued cooperation with the smaller rival despite apparently sacrificing short-run economic benefits.

Decision

The Supreme Court found the conduct capable of constituting unlawful monopolization.

Importance for hospital formularies

The case is relevant to a hospital that:

1. previously accepted a competing medicine;
2. had an established commercial relationship with the competing supplier;
3. suddenly terminated that relationship;
4. had no convincing legitimate justification; and
5. appeared willing to sacrifice economic benefits in order to eliminate competition.

For example:

If a hospital historically accepted Drug B, then abruptly removes it despite equivalent clinical performance and favourable pricing, while simultaneously adopting an exclusionary arrangement favouring Drug A, the Aspen Skiing principles may become relevant.

The case is particularly useful where the evidence suggests deliberate elimination of an existing competitor rather than ordinary procurement choice.

6. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)

Facts

Microsoft was found to have engaged in various exclusionary practices designed to protect its operating-system monopoly and restrict competing technologies.

Principle

The D.C. Circuit emphasized that exclusionary conduct must be distinguished from competition on the merits.

Relevance to formularies

A dominant healthcare organization may compete legitimately by offering:

• lower prices;
• better clinical outcomes;
• better service;
• superior supply reliability; or
• better value.

But competition concerns arise when market power is used to impose restrictions whose principal purpose or effect is to prevent rivals from reaching customers.

Thus:

Competition on the merits = generally legitimate

versus

Artificial foreclosure of rival access = potentially unlawful.

7. FTC v. Actavis, Inc., 570 U.S. 136 (2013)

Facts

The case involved so-called reverse-payment patent settlements in the pharmaceutical industry.

Brand-name pharmaceutical manufacturers made substantial payments to generic competitors in connection with patent litigation settlements.

Decision

The Supreme Court held that such settlements can sometimes violate antitrust law and should be assessed under the rule of reason.

Relevance to formulary exclusion

Although Actavis did not concern a hospital formulary directly, it demonstrates an important pharmaceutical competition principle:

The patent or regulatory structure of the pharmaceutical market does not automatically immunize exclusionary commercial arrangements from antitrust review.

For formulary disputes, this supports careful examination of arrangements between pharmaceutical manufacturers and healthcare purchasers where commercial incentives may suppress competition from alternative medicines.

8. Abbott Laboratories v. Portland Retail Druggists Association, Inc., 425 U.S. 1 (1976)

Facts

The Supreme Court considered the relationship between pharmaceutical pricing and nonprofit hospitals under the Robinson-Patman Act.

The dispute concerned preferential pharmaceutical pricing and the scope of the statutory exemption for hospitals purchasing medicines for their own use.

Principle

The Court examined when hospital purchases qualify as purchases for the hospital's "own use."

Relevance

The case is important because it demonstrates that hospitals occupy a distinctive position in pharmaceutical distribution.

The legal treatment of hospital purchasing can depend on:

• who purchases the product;
• how the product is used;
• whether it is resold;
• whether the hospital is acting for its own institutional use; and
• the statutory framework applicable to the transaction.

It therefore provides useful background when analysing hospital formularies, hospital procurement and pharmaceutical supplier relationships.

9. Indian Competition-Law Relevance

Hospital formulary exclusion can also be analysed under Sections 3 and 4 of the Competition Act, 2002.

Section 4 becomes particularly important where a hospital is found to occupy a dominant position.

A recent CCI line of investigation concerning private hospitals illustrates the importance of analysing the hospital's control over medicines, consumables, devices and pharmacy services.

In the Max Super Specialty Hospital matter, the investigation considered whether private hospitals could constitute relevant markets for healthcare services provided to admitted in-patients and whether restrictions requiring patients to obtain medicines and consumables through hospital-controlled channels could amount to abusive conduct.

Although this is not identical to a pharmaceutical formulary-exclusion case, it is highly relevant because it demonstrates the CCI's willingness to examine the relationship between:

hospital dominance → captive in-patient demand → control over pharmaceutical/medical-product access → potential competitive harm.

10. Relevant Market Analysis

A formulary-exclusion investigation should carefully define the relevant market.

Possible product markets include:

A. Therapeutic market

For example:

Market for anticoagulant medicines.

B. Drug-specific market

Where a particular medicine has no meaningful substitute.

C. Hospital pharmaceutical procurement

The market could potentially concern procurement by hospitals rather than retail pharmaceutical sales.

D. Hospital healthcare services

In some circumstances, medicines and consumables may be considered complementary products to the primary healthcare service.

The geographic market could be:

• local;
• metropolitan;
• regional;
• national; or
• broader,

depending upon patient mobility, hospital alternatives, physician networks, procurement patterns and other competitive conditions.

11. When Formulary Exclusion Is More Likely to Raise Antitrust Concerns

The following combination is particularly significant:

1. Dominant hospital

The hospital has substantial market power.

2. Captive patients

Patients cannot realistically obtain alternative treatment while hospitalized.

3. No genuine therapeutic justification

The excluded medicine is clinically comparable.

4. Competitor foreclosure

The excluded manufacturer loses access to a substantial proportion of demand.

5. Financial inducement

The hospital receives substantial payments, rebates or discounts conditional upon exclusion.

6. Long duration

The arrangement prevents switching for a significant period.

7. Lack of alternatives

Competing hospitals or prescribing channels are not realistically available.

8. Internal evidence of exclusionary intent

Documents indicate that the objective was to eliminate a rival rather than improve patient care.

12. Legitimate Formulary Exclusion

A hospital should ordinarily be able to exclude a medicine where there is a genuine and documented justification.

For example:

Drug A and Drug B are therapeutically similar, but Drug A has a substantially better safety profile, lower total treatment cost, better supply reliability and stronger clinical evidence.

A hospital selecting Drug A is ordinarily engaging in competition on the merits, not unlawful exclusion.

Similarly, exclusion because of:

• patient safety;
• counterfeit risk;
• manufacturing deficiencies;
• regulatory concerns;
• drug shortages;
• poor clinical evidence;
• dangerous interactions; or
• inadequate quality controls

would normally have a strong legitimate justification.

13. Economic Effects of Formulary Exclusion

Competition authorities should examine both short-term and long-term effects.

Possible anticompetitive effects

• higher drug prices;
• reduced pharmaceutical innovation;
• reduced patient choice;
• exclusion of generic or biosimilar entrants;
• higher hospital procurement costs;
• increased manufacturer bargaining power;
• foreclosure of smaller pharmaceutical companies;
• reduced therapeutic diversity; and
• increased healthcare expenditure.

Possible procompetitive effects

• lower procurement costs;
• reduced administrative expenses;
• improved medication safety;
• better inventory management;
• therapeutic standardization;
• reduced prescribing errors; and
• improved clinical outcomes.

The key question is therefore net competitive effect, rather than simply whether a particular manufacturer lost sales.

14. Formulary Exclusion and Patient Welfare

Healthcare competition presents a special issue because the immediate victim may not be the pharmaceutical competitor.

The ultimate effects may fall upon:

• patients;
• insurers;
• government healthcare programs;
• employers; and
• physicians.

For example:

Manufacturer excluded

↓

Reduced competitive pressure

↓

Fewer therapeutic alternatives

↓

Higher prices or reduced innovation

↓

Higher healthcare expenditure

↓

Patient harm

This makes the analysis of formulary exclusion particularly sensitive to consumer welfare.

Recent U.S. pharmaceutical enforcement illustrates this concern. The FTC's insulin-related case alleged that exclusionary formularies could restrict access to lower-list-price products while creating incentives for manufacturers to maintain higher list prices.

15. Distinction Between Formulary Preference and Formulary Exclusion

This distinction is crucial.

16. Evidence in a Formulary-Exclusion Case

Important evidence may include:

Commercial evidence

• rebate agreements;
• procurement contracts;
• volume discounts;
• formulary agreements;
• exclusivity clauses;
• GPO agreements.

Clinical evidence

• therapeutic equivalence;
• safety reports;
• clinical guidelines;
• comparative effectiveness studies.

Market evidence

• hospital market share;
• patient volumes;
• physician prescribing patterns;
• competing hospitals;
• alternative medicines.

Internal documents

Particularly important are communications showing that the objective was:

"exclude the rival"

rather than:

"select the safest and most cost-effective treatment."

17. Competition-Law Test

A useful analytical framework is:

Step 1 — Identify the decision-maker

Who excluded the medicine?

• hospital;
• hospital network;
• GPO;
• insurer;
• PBM; or
• pharmaceutical manufacturer.

Step 2 — Define the relevant market

Determine the relevant:

• product market;
• therapeutic market; and
• geographic market.

Step 3 — Determine market power

Assess:

• market share;
• barriers to entry;
• patient switching;
• physician dependence;
• hospital alternatives;
• pharmaceutical substitutability.

Step 4 — Identify exclusionary mechanism

Was the exclusion caused by:

• unilateral decision;
• exclusive contract;
• rebate;
• loyalty discount;
• tying;
• bundling;
• retaliation; or
• coordinated conduct?

Step 5 — Measure foreclosure

Determine how much of the market is actually closed to the rival.

Step 6 — Examine justification

Was there:

• clinical justification;
• cost justification;
• quality justification;
• supply justification?

Step 7 — Assess competitive effects

Examine:

• price;
• quality;
• innovation;
• patient choice;
• entry;
• pharmaceutical competition.

Step 8 — Consider less restrictive alternatives

Could the hospital achieve the same clinical objective without completely excluding the competitor?

18. Remedies

If unlawful formulary exclusion is established, possible remedies include:

1. termination of exclusionary agreements;
2. prohibition of discriminatory formulary treatment;
3. removal of exclusive purchasing conditions;
4. modification of loyalty rebates;
5. non-discriminatory formulary criteria;
6. disclosure of material rebate arrangements;
7. access for competing manufacturers;
8. monetary penalties where authorised;
9. behavioural commitments; and
10. monitoring of future procurement practices.

In serious cases, structural remedies may also become relevant where market power results from broader consolidation.

19. Key Legal Principles From the Cases

20. Conclusion

Hospital formulary exclusion is not per se an antitrust violation. Formularies are essential healthcare-management tools and hospitals must be able to make clinically responsible purchasing decisions.

The competition-law problem arises when formulary power is transformed into an exclusionary instrument.

The strongest case for intervention generally exists where:

dominant hospital + substantial captive demand + exclusionary contractual mechanism + absence of legitimate clinical justification + substantial foreclosure + harm to price, choice, quality or innovation

is established.

The leading pharmaceutical example, Eisai v. Sanofi, demonstrates why the analysis must focus on actual foreclosure and competitive effects rather than assuming that every formulary restriction or rebate is unlawful. The hospital cases such as Jefferson Parish, Reazin and Phoebe Putney further demonstrate that healthcare institutions remain subject to competition law, while Aspen Skiing, Microsoft and Actavis provide broader principles concerning exclusionary conduct and pharmaceutical competition.

In India, the CCI's hospital-market investigations are particularly significant because they show how hospital dominance, captive in-patient demand and control over medicines and medical products can intersect with Section 4 of the Competition Act.

Core proposition: A hospital may choose a formulary on the merits; it should not use formulary control as a mechanism for unlawfully foreclosing pharmaceutical competition.