Exclusive: 340B Continues Its Unbridled Takeover of Pharmacies and PBMs

Drug Channels Institute’s latest review of contract pharmacies in the 340B Drug Pricing Program reveals that an astonishing 30,000 pharmacy locations—half of the entire U.S. pharmacy industry—now act as contract pharmacies for the hospitals and other healthcare providers that participate in the 340B program.

Over the past 12 months, the number of pharmacies in the program has grown by more than 2,000 locations.

As you will see below, multi-billion-dollar, for-profit, publicly traded pharmacy chains and PBMs—Walgreens, CVS Health, Express Scripts, OptumRx, and Walmart—dominate 340B contract pharmacy relationships with covered entities. 

You can keep your dogecoin and your stonks. The real money lies in the still-booming 340B contract pharmacy business.

I’ll provide more details and crucial context during DCI’s upcoming June 25 live video webinar, Drug Channels Update: 340B Controversies and Outlook. Click here to learn more and sign up.

340BACKGROUND

The 340B program mandates that pharmaceutical manufacturers provide outpatient drugs to certain healthcare providers—known as eligible covered entities—at significant discounts. The Health Resources and Services Administration (HRSA), an agency of the U.S. Department of Health and Human Services, oversees the program through its Office of Pharmacy Affairs (OPA).

In 1996, HRSA issued guidance stating that a covered entity can purchase and dispense 340B drugs through an internal or a single external (contract) pharmacy. In 2010, HRSA issued additional guidance stipulating that eligible entities (including those that have an in-house pharmacy) could access 340B pricing through an unlimited number of contract pharmacies. These subregulatory actions remain controversial and are now the subject of complex, multiparty litigation.

Two other observations on the role of contract pharmacies in the 340B program:

• By using external pharmacies, a 340B covered entity profits from prescriptions filled by a pharmacy that is not owned or operated by the covered entity. It does this after the prescription has been adjudicated and paid by such third-party payers as Medicare Part D and commercial health plans. (Medicaid prescriptions are excluded by statute. However, a significant number of Medicaid prescriptions dispensed at contract pharmacies still receive 340B discounts, a.k.a., the “duplicate discount” problem.)

• Pharmacies profit from per-prescription fees paid by a 340B-qualified entity. These profits are much higher than a pharmacy’s typical gross profit from a third-party payer—especially when a 340B covered entity shares a portion of its 340B earnings with the pharmacy.

The contract pharmacy process is complex and confusing. For more details, see Section 11.5 of our 2021 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

You should also check out my follow-the dollar math in How Hospitals and PBMs Profit—and Patients Lose—From 340B Contract Pharmacies

Click here to review my more than 100 Drug Channels articles on the 340B program.

340BOOM CONTINUES

In profiling the 340B contract pharmacy market, Drug Channels Institute examined HRSA’s Contract Pharmacy Daily Report, as published on June 2, 2021. We screened out all contracts that had been terminated before that date. Using our proprietary database, we classified all contract pharmacy locations by parent organization. Most chains and many PBM-owned pharmacies are listed with multiple alternate names.

Since HRSA’s 2010 change in guidance, the number of pharmacies in the 340B program has skyrocketed:

• In January 2010, fewer than 1,300 unique locations acted as 340B contract pharmacies.

• As of June 2021, DCI found 29,971 unique locations acting as 340B contract pharmacies. Since our 2020 analysis, the number of 340B contract pharmacies has grown by more than 2,000 locations (+7%).

• These nearly 30,000 pharmacies have more than 140,000 contractual relationships with more than 8,000 340B covered entities. The number of contractual relationships has grown more quickly than has the number of contract pharmacy locations. Since our 2020 analysis, the number of contractual pharmacy relationships has grown by more than 27,000 relationships (+24%).
  
  Nearly 70% of contract pharmacy relationships in 2021 are with disproportionate share and children’s hospitals.

BIG MONEY PLAYERS

Consistent with our previous analyses, companies with retail pharmacies account for more than two-thirds of the 340B program’s total contract pharmacy locations. These companies include Walgreens, CVS Health, Walmart, Rite Aid, Kroger, and Albertsons.

However, the number of locations provides a misleading picture of the 340B contract pharmacy marketplace. That’s because an individual contract pharmacy location can have relationships with multiple covered entities. A typical mail and specialty location operates as a 340B contract pharmacy for hundreds of covered entities. By contrast, a typical retail pharmacy location operates as a contract pharmacy for fewer than five covered entities.

The chart below shows the seven largest contract pharmacy participants based on the total number of relationships with 340B covered entities. These companies are among the largest U.S. pharmacies.

[Click to Enlarge]

These data weave a complex tale:

• Walgreens and CVS Health remain the two most active 340B contract pharmacy participants. More than 80% of all Walgreens locations and more than two-thirds of all CVS locations are now 340B contract pharmacies.

• The two large PBMs that lack retail pharmacies—the Express Scripts business of Cigna and the OptumRx business of UnitedHealth Group—are among the most active participants when measured by the number of 340B contract pharmacy agreements with covered entities.

• These companies are aligned with thousands of covered entities. For instance, Walgreens, CVS Health, and Walmart each are partnered with more than 2,000 covered entities. Express Scripts and OptumRx each work with about 1,000 340B covered entities.

• The three largest PBMs—CVS Health (including Caremark and Aetna), Express Scripts, and OptumRx—collectively have 142 non-retail mail and specialty pharmacy locations acting as 340B contract pharmacies. Combined, these locations have more than 25,000 relationships with covered entities. Consequently, the big three PBM’s non-retail pharmacies account for only 0.5% of 340B contract pharmacies—but 18% of 340B contract pharmacy relationships. (CVS Health and OptumRx operate a further 49 infusion pharmacy locations that are not included in these totals.)
  
  The presence of PBM-owned pharmacies helps to explain why 340B sales through mail and specialty pharmacies grew by 55% in 2020, as I discuss in my April news roundup. I covered the logic behind hospital-PBM partnerships in 2019’s As Hospitals Pursue Specialty Pharmacy (and Walgreens Bets More on 340B), PBMs Become Their Best Frenemies.

Over the past 12 months, the role of contract pharmacies in the 340B program has become highly controversial. Some manufacturers began limiting 340B discounts for some or all prescriptions dispensed via contract pharmacies. There are multiple lawsuits related to these actions.

During my June 25 live video webinar, I’ll do a deep dive into the 340B contract pharmacy market so you can understand what the latest developments mean for payers, PBMs, manufacturers, covered entities, public policy, and more. I'll also be taking your live questions. See you then!