Hospitals Continue Their Startling Expansion into Specialty Pharmacy

Hospitals and health systems are building a major presence in the specialty pharmacy industry.

As we demonstrate below, nine out of ten large hospitals now operate a specialty pharmacy. Hospitals and other healthcare providers account for one-third of all U.S. accredited specialty pharmacies.

Clinical and general financial motivations are driving hospitals’ DIY specialty pharmacy growth. The enormous profit opportunities from the 340B Drug Pricing Program offer further encouragement for hospitals. In-house specialty pharmacies are also a valuable hedge against the potential loss of contract pharmacies.

Manufacturers would be wise to incorporate hospitals into channel strategy planning for their specialty drugs. At the same time, antitrust regulators should weigh the impact of hospitals’ growing clout over prescribers of specialty drugs and attempts to steer patients to in-house pharmacies.

BECOMING SPECIAL

To profile specialty pharmacies at hospitals, we again rely on the American Society of Hospital Pharmacists’ (ASHP) national survey of pharmacy practice in hospital settings. Download the latest report here. (Available for purchase.) I always enjoy this annual treasure trove of insights. The specialty pharmacy component of the 2019 ASHP survey includes responses from 487 hospitals.

The chart below summarizes hospitals’ specialty pharmacies ownership for 2015 (from an earlier survey) and 2019.

[Click to Enlarge]

Observations:

• In 2019, 26% of hospitals owned a specialty pharmacy, compared with 20% in 2018 and less than 9% in 2015.

• Larger hospitals were much more likely to have a specialty pharmacy than were smaller hospitals. For 2019, 89% of hospitals with more than 600 beds operated a specialty pharmacy. That’s a sharp increase from the less than 50% of large hospitals in 2015. It’s also an increase over the 76% figure from the 2018 survey.

• Hospitals can hire such outside companies as Shields Health Solutions and Trellis Rx to reduce the costs and risks associated with launching and operating an in-house specialty pharmacy. The hospitals own the pharmacies, but these private companies earn fees and a share of the profits for managing them. Walgreens Boots Alliance, which is the largest operator of 340B contract pharmacies, is a major investor in Shields.

• The ASHP survey also revealed that about two-thirds of these hospital-owned specialty pharmacies have formal accreditation from Accreditation Commission for Health Care (ACHC), The Center for Pharmacy Practice Accreditation (CPPA), Utilization Review Accreditation Commission (URAC), or The Joint Commission.
  
  This result is consistent with Drug Channels Institute’s exclusive analysis of specialty pharmacy accreditation. (See Section 3.2.2. of our 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.) We found that specialty pharmacies owned by healthcare providers—hospitals, health systems, physician practices, and provider group purchasing organizations—have more than doubled as a share of accredited specialty pharmacy locations, growing from 11% of locations in 2015 to 32% in 2019.

These results also highlight why the share of pharmacists who work at hospitals have reached a new high, per Pharmacist Job Market in 2019: Salaries Grew, Retail-to-Hospital Employment Shift Accelerated. I’ll discuss hospital employment of pharmacists in a future article.

VERTICAL POWERS

Most hospitals can earn extraordinary profits by acquiring discounted specialty drugs under the 340B Drug Pricing Program. That’s because operating an in-house specialty pharmacy allows a hospital’s pharmacy to capture the full value of the difference between:

• The reimbursement paid by patients and their commercial or Medicare Part D plan

• The drug's discounted price provided by the manufacturer to the hospital

In my prescription economics example in How Hospitals and PBMs Profit—and Patients Lose—From 340B Contract Pharmacies, this amount equals item [11] plus item [13]. (Be sure to see the comments below my article, too.)

Market power and vertical integration are crucial for maximizing the value of these prescriptions:

• Prescribing control and network access. Like smaller retail pharmacies, health systems are not always able to join manufacturers’ limited specialty pharmacy dispensing networks. Health systems, however, can influence manufacturers’ pharmacy network strategies far more significantly than can independent specialty pharmacies.
  
  Their physicians can demand that the hospital’s pharmacy gain access to a limited dispensing network. A hospital could direct its employed physicians not to prescribe a new specialty drug unless the manufacturer added the hospital’s specialty pharmacy to its network. A manufacturer may therefore find it undesirable to decline a hospital pharmacy’s request to become part of a network.
  
  Hospitals’ influence with manufacturers has increased, because hospital and health systems have been acquiring physician practices. As practices become integrated into a hospital or health system, physicians become hospital employees. In 2018, more than half of physicians were affiliated with a health system.

• Steering. Physicians who are employed by a health system can be mandated or encouraged to send patients to the health system’s in-house pharmacy. Steering prescriptions and referrals to in-house medical care has become common among hospitals. For 2019, more than one-third of health systems with an in-house pharmacy require employees to fill specialty prescriptions at that pharmacy. (See Exhibit 59 of our 2020 pharmacy/PBM report.)
  

Hospitals’ power isn’t unlimited. To generate revenues and profits, their pharmacies must be included in a third-party payer pharmacy networks managed by PBMs. However, PBMs and health plans typically limit the number of specialty pharmacies by requiring patients to use the specialty pharmacy that the plan or PBM owns and operates.

Consequently, hospitals often must partner with PBM-owned specialty pharmacies. As I explain in PBM-Owned Specialty Pharmacies Expand Their Role In—and Profits From—the 340B Program, the largest PBM-owned specialty pharmacies have more than 17,000 contractual relationships with covered entities. Most of the relationships are with disproportionate share hospitals and children’s hospitals.

External 340B contract pharmacies often coexist with a hospital’s internal specialty pharmacy. Having an in-house pharmacy alleviates a hospital's risks that the contract pharmacy guidance falls away. Recall that the subregulatory notice that created contract pharmacies wasn’t subject to any rulemaking procedures, which is why the Health Resources and Services Administration (HRSA) has acknowledged that its contract pharmacy guidance is “not legally enforceable.” Some manufacturers are now challenging the use of expansive contract pharmacy networks.

But regardless of the approach, hospitals look set to garner a growing share of the specialty pharmacy market. Are you prepared?