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Kroger-Albertsons deal puts Oregon’s health care merger program to the test

In a state where retail pharmacies have been disappearing fast, merger of pharmacy operators could hurt Oregonians' access. The state has scheduled a public hearing for comment.
A mix of colorful pills spread out on a counter.
April 16, 2024

Oregon’s fledgling program to screen health care business deals is grappling with its most complex case yet: the Kroger Co.’s  proposed purchase of the Albertsons Companies grocery chain, and its effect on pharmacy services in the state.

The merger would remake Oregon’s pharmacy landscape. Kroger owns Fred Meyer, and Albertsons merged with Safeway years ago. Combined,  the companies operate 159 pharmacies in the state, mostly in the Portland metro area and the Willamette Valley. Those outlets dispense about 30% of all prescriptions in the state, state officials estimate.

The state has scheduled a two-hour public hearing on the deal, including time for public comment, for April 24. Representatives from Kroger/Fred Meyer and Albertsons/Safeway have been invited to attend and answer the public’s questions, as have their counterparts with C&S – the company that plans to take over 49 Albertsons or Kroger grocery stores and their pharmacies in Oregon. 

Two-year-old office deploys new features

The Legislature in 2021 approved legislation creating the merger oversight office to ensure major transactions don’t increase costs or hurt access to care.

Since its launch on March 1, 2022 the office has considered 17 transactions.

But for the Kroger-Albertsons proposal, state officials are invoking a never-before-used element of the two-year-old program: Convening a statewide community review board to hold a public hearing and make a recommendation. The state is also levying a $100,000 fee on Kroger to pay for a “comprehensive review” by Oregon Health Authority staff. The agency said it has not previously charged the applicant for the review. And OHA is hiring consultants to help evaluate the deal, for a to-be-determined cost to be paid by Kroger. 

The companies have not yet identified who will speak on their behalf at the upcoming meeting, OHA staff told the review board at its April 10 meeting.

The public can comment remotely during the virtual session.

Of the 77 comments already received by the market oversight program, only one has favored the deal. The rest criticized it, with many saying it would reduce pharmacy competition, and let Kroger/Albertsons raise prices and close pharmacies, which would hurt consumers.

The OHA in late December sent C&S, a privately-owned grocery wholesaler and retailer, a list of questions about its intentions for the in-store pharmacies at the 49 stores it would acquire in Oregon. So far, the New Hampshire-based company has not replied, OHA officials told the review board.

“It just seems kind of unprofessional for C&S to have had (the questions) going on four months and not to respond,” said community review board member Craig Newton at the April 10 meeting. “It concerns me that they don’t show the professionalism to at least send a one-paragraph response.”

Oregon Sues To Nix the Deal

The health agency’s bid to evaluate the deal’s impact on pharmacies comes as another state agency is trying to kill the entire merger. The Oregon Department of Justice has joined with other states and the Federal Trade Commission to sue the companies in federal court in Portland. They allege the deal would violate federal law by substantially reducing grocery competition in many of the 49 states in which the two chains operate a total of nearly 5,000 stores. The companies have not yet filed responses in court.

The Oregon Health Authority review is narrowly focused on pharmacy services in Oregon, where Kroger subsidiary Fred Meyer operates 53 pharmacies, and Albertsons/Safeway operates 106.

To overcome anti-trust objections, Kroger and Albertson say they would sell off some stores around the country, including 49 unspecified stores in Oregon, to C&S – which has virtually no experience operating retail pharmacies.

If those plans are approved in Oregon, the merged company would hold 110 pharmacies, and C&S 49.

State can set conditions

Under Oregon’s merger review law, the state can deny a proposal if it, among other things, has “material anticompetitive effects,” and does not benefit the public and improve health services.

If the companies prevail in federal court, but the Oregon Health Authority denies the merger’s Oregon pharmacy component, it is unclear how the deal would proceed.

The health authority could also set conditions under which it would allow the pharmacy ownership merger, such as guarantees of continued services.

Some review board members were skeptical about the state’s ability to ensure the merged entity and C&S would keep all the pharmacies open.

“It seems that once these deals are done, there is very little ability to enforce anything that they promise,” said board member Laura Johnson. OHA staff said the state could resort to financial penalties.

Would the deal benefit Oregonians?

The companies say the deal will benefit pharmacy users in Oregon. But the health authority said that’s a tough question to answer.

 The merger review program is now pursuing a wide-ranging evaluation – called a comprehensive review. The state will examine the deal’s likely impacts on pharmacy access, cost, quality and equity and see if it meets approval thresholds.

 “It’s difficult to assess what will happen (to pharmacies in the merger), because of the complexity of the supply chain” for pharmacies, OHA policy advisor Jenny Grunditz told the review board. 

For example, the merged Kroger/Albertsons, with its massive size, could have more ability to negotiate lower pharmaceutical prices from wholesalers and better deals with pharmacy benefit managers, the companies that act as middlemen between pharmacies and health insurance companies, Grundtiz said.

At the same time, the state’s preliminary analysis found that in 38 “service areas” around the state, the merger would have an “anticompetitive” effect by consolidating ownership of pharmacies, Grunditz told the panel.

Review board member David Hill said he wants to know how C&S, a nationwide grocery wholesaler with only a single retail pharmacy, would handle providing  pharmacy services at 49 locations in Oregon.

No closures planned, companies say

In their filings, the companies contend the deal would be good for consumers. They said they have “no current plans to change pharmacy operations” at Oregon stores and that by “sharing best practices,” the pharmacy services provided by the two companies “can be improved.” They’ve said they will retain all “front-line” workers.

They have not specified the duration of the no-closure promise, noted Diana Bianco, a Portland consultant hired by the OHA to help run the review board.

In filings with the state, Kroger said C&S’s purchase of 49 grocery stores and pharmacies in Oregon “will benefit consumers by creating a strong new player that can compete effectively to supply pharmacy and prescription drug services to customers in Oregon.”

The companies have submitted to the state an “Oregon white paper” on how the divestiture of Oregon stores and pharmacies to C&S overcomes anti-competitive objections. But Kroger said the state must keep that and many other business-related filings secret under Oregon’s public records laws.

In their filings, the companies noted that there are many retail pharmacies in Oregon. The state pharmacy board says there are 1,431. 

Kroger and Albertsons said their retail pharmacies amount to only 11% of that total. But that belies the fact that the two companies are dominant players in major metro areas, handling a huge volume of pharmacy business. The state said that if the deal were to proceed, the merged Kroger/Albertsons would control 28% of the Oregon pharmacy market, C&S would control 7%, and three other major competitors would collectively have 50%.

A complicating factor is that the merger plan has been a moving target. Initially announced in late 2022, the deal did not include selling stores to C&S. In its initial analysis in September 2023, the state merger program found that the merger would create a “moderate concentration” of the pharmacy industry in Oregon, compared to its “relatively unconcentrated” current condition. The merged Kroger/Albertsons would control 30% of the pharmacy market in Oregon, the state found. But in December, Kroger announced it had lined up C&S to buy stores that would be divested. The effect in Oregon: the Kroger/Albertsons share of the pharmacy market would be 28%.

Market in flux

In their initial analyses, health agency officials said the pharmacy market is in flux. Many pharmacies are closing, there’s a chronic shortage of pharmacists and pharmacy assistants, and large chains have come to dominate the sector. Plus, the pharmacy business is financially convoluted. Manufacturers sell drugs to wholesalers that re-sell them to pharmacy chains or individual stores. Most pharmaceutical sales are covered by health insurance. So, after selling the drugs to consumers, the pharmacy companies seek reimbursement from insurers. This transaction is handled by third-party go-betweens called pharmacy benefit managers. Through all these transactions, the pharmacy, ideally, is able to clear a margin that covers personnel and other operating costs and provides a profit to the owners.

The community review board public hearing will take place as a virtual meeting April 24, 1-3 p.m. The state is asking people to register.

At the hearing, officials will provide information about the proposed deal and the health agency’s review; let company representatives provide testimony and answer questions; and hear comments from the public.

The review board is developing questions that it will pose to the companies.

Members of the public will be able to sign up during the hearing in order to provide verbal comments. Written comments can be submitted to [email protected].

You can reach Christian Wihtol at [email protected].