Exclusive: Five Pharmacy Chains and PBMs Dominate 2022’s Still-Booming 340B Contract Pharmacy Market

Despite what you may have heard, pharmacy participation in the 340B Drug Pricing Program continues to thrive.

Drug Channels Institute’s latest analysis reveals that an astonishing 32,000 pharmacy locations—more than 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.

What’s more, five multi-billion-dollar, for-profit, publicly traded pharmacy chains and PBMs—CVS Health, Walgreens, Cigna (via Express Scripts), UnitedHealth Group (via OptumRx), and Walmart—account for three-quarters of all 340B contract pharmacy relationships with covered entities. Is this really what Congress intended when the 340B program was established in 1992?

Manufacturers’ contract pharmacy restrictions have slowed the out-of-control program growth—with some unanticipated benefits for the biggest players. Read on for details and my commentary below.

For more on 340B and the specialty market, join me for my upcoming July 29 live video webinar, Specialty Drugs Update: Trends, Controversies, and Outlook.

THE GRU-SOME BACKGROUND

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).

Over time, HRSA has introduced subregulatory guidance permitting covered entities to access 340B pricing through an unlimited number of contract (external) pharmacies. The most significant expansion came in 2010, when HRSA issued final guidance permitting covered entities to work with an unlimited number of contract pharmacies. These actions remain controversial and are 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 (CE) 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. A significant number of Medicaid prescriptions dispensed at contract pharmacies also receive 340B discounts, a.k.a., the “duplicate discount” problem.)

• Contract pharmacies can earn extraordinary profits from the fees paid by a 340B-qualified entity. See my follow-the dollar math in How Hospitals and PBMs Profit—and Patients Lose—From 340B Contract Pharmacies. I discuss the top five players’ profit below.

The contract pharmacy process is complex and confusing. For a comprehensive deep dive, see Section 11.5 of our 2022 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

MANY MINIONS

In profiling the 340B contract pharmacy market, Drug Channels Institute examined HRSA’s Contract Pharmacy Daily Report, as published on June 30, 2022. 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 pharmacy locations in the 340B program has skyrocketed.

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Here are some observations on this never-ending growth:

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

• By 2013, we found more than 12,000 340B contract pharmacy locations. This was DCI’s first public analysis of the contract pharmacy market.

• As of 2022, DCI found 31,937 unique locations acting as 340B contract pharmacies. Since our 2021 analysis, the number of 340B contract pharmacy locations has grown by nearly 2,000 locations (+7%).

• These nearly 32,000 pharmacies have more than 168,500 contractual relationships with more than 8,800 340B covered entities. The number of contractual relationships has grown more quickly than has the number of contract pharmacy locations. Since our 2021 analysis, the number of contractual pharmacy relationships has grown by more than 28,000 relationships (+20%).
  
  Nearly 80% of contract pharmacy relationships in 2022 are with one of the six designated hospital types.

BTW, I’ve been highlighting the out-of-control 340B market for a loooong time. Check out 2013’s prescient The Coming Battle Over 340B Contract Pharmacies.

FIVE #GENTLEMINIONS

Consistent with our previous analyses, companies with retail pharmacies account for a majority 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 five largest contract pharmacy participants based on the total number of relationships with 340B covered entities. These companies are also among the largest U.S. pharmacies by prescription revenues.

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These data highlight the complex ways in which the 340B program interacts with the pharmacy and PBM industries:

• Walgreens and CVS Health remain the two most active 340B contract pharmacy participants. More than 90% of all Walgreens locations and more than three-quarters 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 five companies are aligned with thousands of covered entities. For instance, Walgreens and CVS Health each are partnered with more than 2,500 covered entities. Express Scripts and OptumRx each work with more than 1,200 340B covered entities.

• The three largest PBMs—CVS Health, Express Scripts, and OptumRx—collectively have about 500 mail, specialty, and infusion pharmacy locations acting as 340B contract pharmacies. Combined, these locations have nearly 35,000 relationships with covered entities. Consequently, the big three PBMs’ non-retail pharmacies account for only 1.5% of 340B contract pharmacies—but 21% of 340B contract pharmacy relationships.

• Contract pharmacies earn 25% to 35% of total 340B discounts. For the top five contract pharmacy players, that translated into $3.2 billion in 2021 and a projected $2.9 billion in 2022. But as I explain in Section 11.5.5 of our 2022 pharmacy/PBM report, these companies seem to share their 340B profits with plan sponsors by accepting lower reimbursement rates for preferred participation in narrow networks. Nevertheless, only two of the largest companies—CVS Health and Walgreens Boots Alliance—have reluctantly disclosed that changes to the 340B program could affect their profits.

DESPICABLE WHO? 

Eighteen manufacturers have announced controversial new policies related to covered entities’ contract pharmacies in the 340B Drug Pricing Program. Specific policies vary by company, but most manufacturers require a covered entity to use an on-site pharmacy and/or designate a single, external contract pharmacy. Check out this AmerisourceBergen webpage for summaries of these policies.

These restrictions appear to be having at least three primary effects:

• Hospitals are resetting their specialty pharmacy strategies. Hospitals and health systems have emerged as the fastest-growing participants in the specialty pharmacy market. In response to changes in manufacturers’ policies regarding external contract pharmacies, hospitals have accelerated their investments in in-house specialty pharmacy operations. See my comments in The State of Specialty Pharmacy 2022.

• PBMs are gaining 340B share. When forced to choose a single contract pharmacy partner, hospitals and health systems have been gravitating to the large PBM-owned specialty pharmacies that have access to drugs in limited dispensing networks. Consequently, PBMs are gaining a greater share of overall 340B contract pharmacy business, even as the overall contract pharmacy business shrinks. I wonder if manufacturers really want to increase the revenues flowing through the largest PBMs’ specialty pharmacies.

• Some covered entities are considering sharing claims data. Manufacturers have offered to restore legacy contract pharmacy arrangements in exchange for 340B prescription claims data from covered entities. As far as I know, few CEs have taken advantage of these opportunities. But recent court decisions suggest that the litigation has a long way to go—and may be resolved in the manufacturers’ favor. Perhaps these developments will encourage more 340B market participants to accept some transparency in exchange for their 340B windfalls?

The 340B Drug Pricing Program has become the second-largest government pharmaceutical program, based on net drug spending. But unlike such programs as Medicare Part D and Medicaid, 340B lacks a regulatory infrastructure, well-developed administrative controls, and clear legislation to guide the program.

The 340B program makes even less sense than watching a movie while wearing a suit and carrying bananas. But considering the big money players involved, I remain skeptical about the prospects for timely, appropriate legislative reform of the 340B program. Until then, expect the profiteering to continue.