The Antisubstitution Laws and Physician‐Ownership of Drug Repackagers

During the 1964 Hearings on Physician‐Ownership held by the Senate Subcommittee on Antitrust and Monopoly witnesses charged that certain medical doctors were establishing firms that purchased prepared drugs in bulk, packaged them, and then marketed the drugs in smaller quantities under brand names. Physicians with interests in drug repackagers would write prescriptions specifying brands marketed by their firms, and antisubstitution laws would prevent the pharmacist from using other brands. Critics of the practice argue that physicians purchase drug repackagers and tie drugs to extend their monopoly power into the ethical drugs market with the resulting foreclosure of independent firms. This paper argues that physicians purchase drug interests not to create a new monopoly, but rather to extract more monopoly profits from their original markets. But evidence exists that in doing so physician‐owners impose a welfare loss on their patients. The paper concludes with an analysis of efforts made thus far to end the practice and suggests that amendment of state antisubstitution laws would make it more difficult for physician‐repackager owners to tie drugs.