Omnicare's argument that the Federal Trade Commission has already declared the institutional pharmacy market competitive fails to take into account the full impact of Medicare Part D.

The Covington, Ky.-based company raised that assessment in defense after the FTC sued to block its hostile takeover of Louisville, Ky.-based PharMerica Corp. in late January. The FTC alleges the deal is anti-competitive and could lead to higher drug prices for the 1.6 million Medicare beneficiaries who reside in skilled nursing homes.

The FTC last evaluated the long-term-care pharmacy market in 2005, about six months before the Medicare Part D drug program went into effect. At that time, Omnicare sought to acquire NeighborCare, one of the largest institutional pharmacies in the U.S.

“The FTC has already examined the institutional pharmacy industry, noting the numerous players and explaining how the ease of entry and other market conditions facilitate competition,” Omnicare said in a statement responding to the FTC administrative complaint. “The institutional pharmacy business is competitive and Omnicare is confident it would remain so after the transaction.”

However, the introduction of Medicare Part D, including the “convenient access” rule, which requires Part D sponsors to provide each enrollee with convenient access to their long-term-care pharmacy, has significantly changed the payment structure and the makeup of the institutional pharmacy market. The CMS introduced the rule in 2005.

According to the FTC, Omnicare and PharMerica combined would control 57% of the institutional pharmacy market. Omnicare is the largest institutional pharmacy provider based on the number of skilled-nursing facility beds it services.

“The competitive dynamics are different,” said Jason Gurda, a Leerink Swan analyst. “There is an opportunity for institutional pharmacies with scale to try to use their leverage to get better rates.”

Before 2006, long-term-care pharmacies were reimbursed at the same rate through state Medicaid programs. Now, institutional pharmacies secure private contracts with Part D sponsors, such as UnitedHealth Group and Humana. They also contract with skilled-nursing homes.

Even the FTC's investigation in 2005 noted the “substantial changes” that Part D would bring into the market. Part D revenue made up about 45% of total revenue for both Omnicare and PharMerica in 2010.

Increased share in the institutional pharmacy market would provide Omnicare with “unparalleled power” when negotiating with sponsors. Because the CMS can bar Part D sponsors that do not satisfy the convenient access requirement, sponsors may be willing to accept less favorable rates from Omnicare.

“Post-consolidation, it would be virtually impossible for a sponsor to establish convenient access without the combined firm in its network due to the sheer number of LTC pharmacies that Omnicare would own,” a CMS official told the FTC, according to the complaint.

Omnicare and PharMerica may have increased bargaining leverage with Part D sponsors, but both companies have lost some market share with skilled-nursing homes over the past three years, Gurda said. He noted that local pharmacies that are willing to provide more flexibility on pricing remain competitors for Omnicare and PharMerica in some instances.

The FTC also said that the deal, though it could lead to higher reimbursement rates paid by the sponsors and beneficiaries, would not likely increase prices for skilled-nursing facilities.

A spokeswoman for the American Health Care Association, which represents long-term-care providers, said pharmacy size does not affect how a skilled-nursing facility chooses a pharmacy. “Little has changed in terms of how a facility determines which pharmacy or pharmacies to work with to ensure patients and residents receive needed prescription medication,” the spokeswoman wrote in an e-mail.

The National Community Pharmacists Association opposes the deal. About 34% of its 23,000 members serve a long-term-care facility. In a Dec. 2 letter to the FTC, the NCPA wrote that it believes Omnicare's acquisition of PharMerica would “lead to reduced access and fewer local services for residents in nursing homes and other senior- care facilities.”

“Having them compete with each other and with independent pharmacies is rather healthy for the marketplace,” Bill Popomaronis, the NCPA's vice president of long-term and home healthcare pharmacy services, said in an interview.

PharMerica, which opposes the deal, began to publicly question the feasibility of the transaction last summer.

“Antitrust clearance to combine the No. 1 and No. 2 players in institutional pharmacy is likely to be difficult to achieve and involve lengthy administrative and court proceedings,” PharMerica CEO Gregory Weishar said in a letter to Omnicare CEO John Figueroa.