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Steven Pearlstein

A Prescription For Antitrust Violations

By Steven Pearlstein
Wednesday, November 24, 2004; Page E01

There's a tendency to get all nostalgic when a big chain moves into the neighborhood and drives the local bookstore or hardware store out of business. But in the long run it probably turns out to be something of a mixed bag. I suspect most of us would probably miss Barnes & Noble and Home Depot if they were to disappear. And the marketplace is sufficiently competitive that there are still a few surviving independents that offer superior service and more interesting product selection for slightly higher prices.

So what should we think about CVS, now the nation's largest drugstore chain, which for years has pursued a strategy of buying up independent pharmacies, shutting them down and transferring the prescription files to one of their existing outlets?

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That's exactly what happened in my neighborhood a few years back, when CVS paid an undisclosed sum to Anchor Pharmacy to close its struggling store on MacArthur Boulevard in the District. But what CVS didn't count on was that, this time, the District's newly renamed and reinvigorated Office of the Attorney General would file an antitrust suit, claiming the transaction had no other purpose but to reduce competition. Nor did it reckon that the D.C. Superior Court -- not known for its antitrust jurisprudence -- would deal a major setback by refusing to summarily dismiss the case, ordering instead that it go to a full trial, sometime next year.

Unfortunately, the judge has put too many of the juicy details of this case under seal at CVS's insistence. But from the pleadings, orders and exhibits that are available, it is pretty clear that CVS paid a big premium to Anchor and its pharmacist to close up shop and refrain from doing business in the neighborhood for three years. One expert testified that such a premium could have made economic sense only if CVS expected to capture most of Anchor's business and gain enough market power to raise prices. And, indeed, according to the company data reviewed by the expert, that is precisely what happened.

As you might imagine, CVS is shocked -- shocked! -- that anyone would think its aim is to lessen competition. As the company sees it, it is merely helping aging or financially challenged pharmacists get a good price for the businesses they've built up over the years. When I asked what benefit consumers got, spokesman Todd Andrews cited CVS's longer hours, bigger stores, easier parking and the ability to get prescriptions filled at any of CVS's dozens of locations.

As an antitrust defense, this is laughable. All of those "benefits" were available before Anchor Drug was induced to close its doors, so there is no net gain for consumers. Meanwhile, consumers have lost a pharmacy where they could get their prescriptions filled within 15 minutes or delivered to their homes and where pharmacists weren't too busy to give advice about a bad back, mix a compound when necessary or add a flavoring to a yucky-tasting antibiotic.

What this means is that people in my neighborhood (and probably yours, as well) are paying the same price for inferior service, with the only convenient alternative being a Rite Aid a mile away where the service is even worse. In economic terms, that amounts to a higher price. In legal terms, it was imposed unilaterally on consumers by a dominant firm with a 54 percent share of the regional market. If that's not an antitrust violation, I don't know what is.

Ah, but what about the possibility of another full-service store opening up nearby? Not bloody likely. Because a handful of pharmacy benefit managers, hired by insurance companies, have been allowed to capture virtually all of the profit in the distribution channel for prescription drugs (another antitrust screw-up), net profit margins for filling prescriptions have been squeezed to 2 or 3 percent. The only reason to do it at all is to bring in customers to buy others things, whether it's hair coloring at CVS or oxygen tanks and wheelchairs at many of the surviving independents.

CVS is as much a victim of this dysfunctional drug market as other retailers. But the solution is not to compound the problem by letting it buy up and close down what little real competition remains.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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