Introduction

The federal antitrust agencies are continuing to focus on anticompetitive practices by healthcare companies, most recently in the dental industry. Last month, the Federal Trade Commission (FTC) sued three dental supply companies for allegedly conspiring to avoid discounts for buying groups. While buying groups are technically combinations of competitors, they serve a procompetitive function and are permissible under the antitrust laws. Coordinated efforts to counteract the leverage of buying groups—particularly in the healthcare field—will be scrutinized under the antitrust laws.

The FTC’s Complaint

On February 12, 2018, the FTC filed an administrative complaint against three distributors of dental products—Benco Dental Supply Company, Henry Schein, Inc., and Patterson Companies, Inc.—alleging that they violated the antitrust laws by conspiring to refuse to provide discounts to group purchasing organizations (GPOs) representing individual dentists and small businesses. The three distributors, who offer a broad range of supplies, including gloves, cements, sterilization products, dental chairs and more, are the only three national dental supply companies and collectively control more than 85% of the $10 billion market.

Buying groups offer solo practitioners and small groups the opportunity to obtain volume discounts without having to join a larger practice. Despite the fact that buying groups represent groups of competitors, the FTC and the Department of Justice’s (DOJ) Antitrust Division maintain that they are generally not anticompetitive, because they generate efficiencies and consumer benefits. The FTC and DOJ Statements of Antitrust Enforcement Policy in Health Care provide a safety zone for buying groups if (1) the purchases account for less than 35% of the total sales of the purchased product and (2) the cost of the products accounts for less than 20% of the total revenues from all products or services sold by each participant in the buying group. Even buying groups that fall outside the safety zone do not necessarily raise antitrust concerns where their activities are carried out under antitrust safeguards.

According to the complaint, Benco had consistently maintained a policy of refusing to provide discounts to buying groups, whereas Schein had worked with some GPOs. Following communications between executives at the two firms around July 2012, however, Schein began refusing to provide discounts or compete for GPO business. The FTC further alleged that Patterson, which historically had sold to GPOs, joined the agreement around February 2013, quoting an email exchange between Benco and Patterson executives.

Documents concerning communications between the distributors’ executives uncovered during the FTC’s investigation play a leading role in the complaint. For example, in February 2013, a Benco executive wrote to Patterson, saying, “FYI: Our policy at Benco is that we do not recognize, work with, or offer discounts to buying groups (though we do work with corporate accounts) and our team understands that policy.” In response, the Patterson executive allegedly wrote: “Thanks for the heads up. I’ll investigate the situation. We feel the same way about these.” The complaint details several additional communications between the distributors’ executives that the FTC describes as attempts to monitor and ensure compliance with the illegal agreement.

Benco was also separately charged for inviting Burkhart Dental Supply, a regional distributor and the fourth-largest full-service distributor in the United States, to join the agreement. Burkhart never joined the agreement, but the FTC frequently prosecutes “invitations to collude” under Section 5 of the FTC Act.

According to the FTC, the agreement eliminated price and service competition among the distributors for the GPOs’ business. This in turn distorted prices and undermined the ability of independent dentists to obtain lower prices and discounts for dental products. The distributors’ conduct also allegedly unreasonably reduced the output of dental products to GPOs. To date, only Schein has filed an answer, stressing its “unique and long-standing history of doing business with numerous group purchasers, including buying groups[,]” and denying the allegations, as well as stating that the FTC mischaracterized or took out of context statements of its executives.

Takeaways

It can be tempting to assume that because buying groups leverage the collective purchasing power of smaller groups to negotiate lower prices, it is only fair for suppliers to counteract that leverage through coordination with competitors. But such actions are illegal. Buying groups serve as permissible means for individuals and small groups to take advantage of discounts, and coordinated efforts to avoid offering discounts will come under antitrust scrutiny. The FTC’s reliance on written communications also underscores the need for executives to carefully consider the content of any communications with competitors.