On Sept. 6, 2023, the Oregon Health Authority (OHA) stated it had completed a 30-day preliminary review of the proposed merger of Kroger and Albertsons Companies Inc. and would proceed with a comprehensive review under its Health Care Market Oversight (HCMO) program.
The HCMO program — first launched in 2022 and modeled on similar healthcare transaction review programs in Massachusetts, Washington and other states — requires certain healthcare entities to provide the OHA with advance notice of transactions that meet or exceed materiality thresholds and fulfill other requirements. Until the Kroger-Albertsons filing, HCMO reviews largely were limited to reviews of transactions between traditional healthcare providers, management services organizations and payors, although the statute used a broad definition of covered "healthcare entities," including professional providers, hospitals, health plans, managed care organizations, and "any other entity that has as a primary function the provision of health care items or services" or that is a parent of, or closely related to, any entity that provides such services.
OHA's review of the proposed Kroger-Albertsons merger — based on the fact that both grocery store chains have pharmacies — demonstrates that the door is open for OHA to expand the scope of its review to include a broad category of transactions that may not involve traditional provider entities.
In addition, on Oct. 8, the governor of California (which already has a statute requiring pre-close notice of healthcare provider transactions going into effect in April 2024) signed into law a statute requiring that qualifying retail grocery and pharmacy transactions be subject to review by the California attorney general. Like Oregon's HCMO program, the California statute requires that notice be filed 180 days in advance of the date on which the relevant transaction becomes effective.
For companies exploring transactions in the pharmacy space, it will be necessary to consider how these state laws impact the timing and regulatory risk associated with potential deals.
Kroger-Albertsons Merger and OHA's Preliminary Review
In October 2022, Kroger announced that it had agreed to acquire fellow U.S. grocery chain Albertsons for $24.6 billion. As noted in the HCMO filing related to the potential merger, some of Kroger's and Albertsons' stores have pharmacies, including a total of 159 retail pharmacies in Oregon between the two companies and their respective subsidiaries. According to OHA's preliminary review, Kroger- and Albertsons-owned pharmacies have provided prescriptions to 22% and 25% of all people who had prescriptions filled in Oregon in 2022, respectively.
On Aug. 8, 2023, OHA accepted as complete Kroger's filing pursuant to HCMO, kicking off a preliminary review. Pursuant to the statute's implementing rules, OHA's preliminary review analysis focused on how the Kroger-Albertsons merger may affect cost, quality, access and health equity in Oregon. OHA's preliminary review report noted that 99% of the population of the state lives in a county with a Kroger and an Albertsons location, meaning that a tremendous number of its citizens stand to be affected by the transaction. The following are some key takeaways from the OHA's preliminary review report regarding the potential transaction:
- Increased Market Share. Using state pharmacy claims data, OHA staff calculated that Albertsons and Kroger currently each have approximately 15% of the retail prescription drug market in Oregon. Notably, the analysis assumed a geographic market of the entire state of Oregon and did not examine local markets. OHA concluded that, post-transaction and without divestitures, the merged entity's share of the retail prescription drug market in the state would be 29%, more than double the share of the next-closest competitor, increasing the level of market concentration in Oregon to "moderate" from "low." The report noted that "[t]ransactions occurring in more concentrated markets and those involving a significant change in concentration are more likely to have adverse effects on competition and lead to price increases."
- Potential Reduction to Access. OHA indicated that the parties had announced a plan to divest certain stores to a newly formed public company as part of addressing regulators' competitive concerns. OHA estimated that up to 30% of Oregon's population lives in zip codes with both a Kroger and an Albertsons store. OHA noted that in those locations, the success of any divested stores would be critical to maintaining not only competition but also access — particularly in rural areas. Citing prior unsuccessful divestitures involving the parties, the OHA expressed some measured skepticism regarding divestiture as an effective remedy. In addition, the OHA report noted that beginning in 2023, Kroger pharmacies stopped accepting TRICARE insurance, which covers veterans and military families. OHA expressed concern that if Albertsons locations also ceased accepting TRICARE, 69,000 veterans and military families in Oregon could have higher barriers to obtaining prescription drugs.
Based on its preliminary review, OHA found that none of the "approval criteria" articulated in the statute's implementing rules was satisfied and, therefore, that a comprehensive review was necessary. A comprehensive review can take up to 180 days, or more if extended. In its comprehensive review, OHA will look more in-depth at the potential effects on cost, quality, access and health equity, and either approve, approve with conditions or withhold approval for the transaction.
California Considers Legislation Allowing for Similar Reviews
California is also expanding merger review of retail pharmacy transactions (and grocery transactions that could impact access to pharmacies). On Oct. 8, Gov. Gavin Newsom signed into law a bill (AB 853) that requires parties to provide the California attorney general a notice of transactions in the retail drug and grocery industries and allow for an in-depth, 180-day review of the relevant transaction.
Under the bill, parties who are required to make federal filings under the Hart-Scott-Rodino Act will have to forward those filings to the California attorney general. However, even parties that do not have to file under the Hart-Scott-Rodino Act would still be required to provide notice concerning transactions that involve as few as 20 retail drug or grocery stores. In both instances, the required notice would have to be provided before the transaction could be made effective, and failure to make the requisite notice could result in steep fines.
Looking to the Future
Anyone considering a merger or acquisition in a healthcare-related market, including in the pharmacy space or potentially in other healthcare adjacent spaces (e.g., durable medical equipment, healthcare apps or software, etc.) must now carefully consider whether these transactions are subject to review requirements. McGuireWoods continues to monitor this evolving regulatory landscape and has significant experience navigating state healthcare filings. If you have any questions, please reach out to the authors or your McGuireWoods contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
