Sterling Drug currently owns what originally had been the family-owned Slindee Pharmacy in Harmony; prior to its purchase by Sterling, the pharmacy was owned by Witt Pharmacy, a community chain based in Rushford. (All photos courtesy of Luke Slindee)

Essay: Pharmacies in the Root River Valley: A Recent History

Editor’s note: Following the publication of his July, 2023 commentary on corporate consolidation in the pharmacy industry in the Minnesota Reformer, contributor Luke Slindee was asked to expand on the topic with a specific focus on southeast Minnesota’s Root River Valley, where he grew up. The views expressed are his.

 

ROOT RIVER VALLEY– In 1984, the year I was born, most area towns each had a locally owned independent pharmacy. Numerous, diversified, and prosperous locally owned businesses are the most surefire way to build lasting wealth and pride within a community. 

However, today, several of those towns, including my hometown of Harmony, lack a pharmacy entirely, and all of the remaining pharmacies belong to just three organizations, none of which are locally owned.

So, what happened? This is what I have found.

The National Landscape

In the early Reagan administration, several prominent legal scholars and appointees sought to change existing norms related to federal antitrust enforcement that began in FDR’s New Deal. They succeeded.

One of the important antitrust laws they targeted for incapacitation was the Robinson-Patman Act of 1936, which prohibited price discrimination. From Wikipedia, the legislation:

“…was designed to protect small retail shops against competition from chain stores by fixing a minimum price for retail products. Specifically, the law prevents suppliers, wholesalers, or manufacturers from supplying goods to “preferred customers” at a reduced price. It also prevents coercing suppliers into restrictions as to whom they can and can’t sell goods.”

Once antitrust enforcement against price discrimination effectively ended, in retail industries that derive their revenue from purchasing goods at one price point and reselling the same goods at a higher price, all economic incentives encouraged businesses to get bigger. Large firms have more negotiating leverage on pricing with suppliers and purchasers.

Walmart was the first major retailer to exploit Robinson-Patman non-enforcement, followed later by current behemoths like Target, Kroger, Costco, and digitally by Amazon. However, while these mass merchants have been a thorn in the side of small-town pharmacies, the real threat came from the pharmacies’ suppliers (called drug wholesalers), and their purchasers (called pharmacy benefit managers or PBMs; this is the card in your purse or wallet). 

Once general antitrust enforcement ceased, an extensive series of mergers and acquisitions resulted in three corporations (AmerisourceBergen, Cardinal Health, and McKesson) now controlling around 95% of the drug wholesale market, and three corporations (Cigna (Express Scripts), CVS Health (Caremark), and UnitedHealth Group (OptumRx)) controlling around 85% of the PBM market. All six of these firms are in the Fortune 20.

Independent pharmacies are subject to price discrimination from both sides. Through contract negotiations, wholesalers charge smaller pharmacies more to acquire the same drug products that large chains buy. Also via contracts, PBMs pay smaller pharmacies less than PBMs would pay a large chain pharmacy to dispense the exact same prescriptions. 

Not surprisingly, independent pharmacies often feel like they are being crushed between two massive boulders. In addition, PBMs also often attempt to steer patients to have prescriptions filled by PBM-owned mail order pharmacies. Under these circumstances, many owners of small pharmacies have chosen to sell their business to a larger chain, or close it entirely.

Closer to Home

How did this play out in the Root River Valley? (A note for geography nerds, I used this cool website to define the Root River Valley.)

Starting in the early 2000s, these market dynamics led many owner-operated pharmacies to sell to, and join, larger local chains. My family sold ownership of Slindee Pharmacy in Harmony to Witt Pharmacy based in Rushford, which over time also acquired the pharmacies in Caledonia, Houston, La Crescent, and Spring Grove. 

Meanwhile, Haugan’s Pharmacy in Preston, owned by the family of my school classmate, was sold to a Rochester-based chain called Weber & Judd, which also picked up the pharmacies in Chatfield, Saint Charles, Spring Valley, and Stewartville.

But eventually, even these small chains became non-viable. In 2012, Witt Pharmacy was sold to a larger chain based in Austin, Minnesota called Sterling Drug. All the storefronts changed. Over time, Sterling closed the pharmacies in Harmony, Houston and Spring Grove. Rural towns and urban neighborhoods lacking pharmacy access are now called “pharmacy deserts”.

In November 2018, Weber & Judd closed the pharmacy in Chatfield. Three months later, the entire remaining Weber & Judd chain was sold to Hy-Vee.

Sensing the vacuum in Chatfield, in early 2020 the Olmsted Medical Center health system opened a new pharmacy located in the grocery store. While the old pharmacy in Chatfield was in Fillmore County, appropriate to the new ownership, the new location lies north over the county line. 

This new pharmacy opening was emblematic of recent national trends, where local hospital-based health systems, which can profit from a controversial federal government program called 340B, now own many rural “satellite” pharmacies not located in a hospital or clinic. This is also now the case across the state border to the south (in Upper Iowa River territory), in Cresco and Decorah.

 

Where Do We Go From Here?

To create a better future, we must learn from the mistakes of the past. The pharmacy profession must reform the insurance/PBM models that determine how pharmacies are paid to dispense prescriptions. 

With the benefit of hindsight, it has clearly been a mistake to derive pharmacies’ revenues on variable mark-up margins from the difference between the price a pharmacy pays to stock a drug product on its shelves, and the price the pharmacy is paid for the same product by a PBM. As these margins have been gradually squeezed over time by wholesaler and PBM monopolies exerting market power, small locally owned pharmacies, like the ones that historically serve most rural areas, have gone out of business. 

The solution lies in understanding that pharmacies provide an economic service, not an economic “good.” As such, pharmacies should fully disclose their drug acquisition costs to the public, and pass through those prices to their patients, without a mark-up. The pharmacy’s revenue instead should come from a separate, fully disclosed fee for providing the service of dispensing the prescription and counseling the patient. This type of model is referred to as “cost-plus” and has already been implemented in Medicaid Fee-For-Service (FFS) programs, and makes it easier for locally owned pharmacies to survive in rural areas, by changing the economic incentives. 

Unfortunately, for patients with prescription insurance coverage through their employer, Medicare, and Medicaid Managed Care, the original model based upon price discrimination, and encouraging consolidation, still rules the day, although reformers are pushing for change in St. Paul.

There is also a movement of new pharmacies that charge patients directly without using insurance coverage. Around 90% of all prescriptions in America are for generic medications, which, when priced competitively, can be very inexpensive. Blueberry Pharmacy and Honest Rx in other states have shown that this could be a model for pharmacies focusing on generic drugs to reopen in small towns without influence from far-away insurance middlemen.

Lastly, advocates for locally owned pharmacies need to collaborate with our natural small business allies, especially independent grocery stores and community banks. These coalitions of businesses negatively affected by monopolistic competitors need to unite in influencing state and federal elected officials to reinstate appropriate antitrust enforcement, and work with local government to restrict the infiltration of predatory, value extractive corporations like Dollar General and Dollar Tree. 

A more robust and equitable economy in rural areas like the Root River Valley, as well as more autonomy and pride for its residents, is possible via the power of local businesses. 

 

Contributor

Luke Slindee, formerly of Harmony, lives in Hopkins, Minnesota and is a pharmacist who studies monopolies and anticompetitive business practices in the healthcare industry.