This week, I’m rerunning some popular posts while we put the finishing touches on DCI’s new 2024-25 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.Click here to see the original post from June 2024.
- About 33,000 pharmacy locations—more than half of the entire U.S. pharmacy industry—act as contract pharmacies for the hospitals and federal grantees that participate in the 340B program.
- Five multi-billion-dollar, for-profit, publicly traded pharmacy chains and pharmacy benefit managers (PBMs)—Cigna (via Express Scripts), CVS Health, UnitedHealth Group (via OptumRx), and Walgreens, Walmart—continue to dominate the 340B contract pharmacy market.
- Federal grantees are aligned primarily with the vertically intergated organizations' retail pharmacies, while hospitals rely on mail and specialty pharmacies.
Over the past four years, manufacturers’ restrictions on 340B contract pharmacies have led hospitals to deepen their relationships with the largest PBMs—even as those PBMs have simultaneously limited hospitals’ direct participation in specialty pharmacy networks.
For an updated look at what’s next for the 340B contract pharmacy market, join Adam J. Fein, Ph.D., on June 21 for his latest live video webinar: The 340B Drug Pricing Program: Trends, Controversies, and Outlook.
340BACKGROUND
Over the years, we have written extensively about the roles and profits of 340B contract pharmacies. For a comprehensive deep dive into the 340B Drug Pricing Program, see Section 11.5 of DCI’s 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
Briefly, the 340B program mandates that pharmaceutical manufacturers provide outpatient drugs to certain healthcare providers—known as eligible covered entities—at significant discounts. To be eligible for program participation, providers must be one of six designated hospital types or be a federal grantee—an entity that receives federal grants administered by different agencies within the U.S. Department of Health and Human Services (HHS). Hospitals account for 87% of total 340B purchases. Disproportionate share hospitals (DSHs)—one of the six eligible hospital types—account for most of hospitals’ 340B purchases.
In 2010, the Health Resources and Services Administration (HRSA), the HHS agency that oversees the 340B program, introduced subregulatory guidance permitting covered entities to access 340B pricing through an unlimited number of contract (external) pharmacies. These actions remain controversial and are the subject of complex, multiparty litigation.
To profile the 340B contract pharmacy market for 2024, Drug Channels Institute examined HRSA’s Contract Pharmacy Daily Report, as published on June 1, 2024. 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.
340BOOM
Since HRSA’s 2010 change in guidance, the number of pharmacy locations in the 340B program has skyrocketed. For 2024, the number of pharmacy locations stabilized for the first time since DCI began analyzing the market.
Here are some observations on this growth:
Note that the number of locations provides a misleading picture of the 340B contract pharmacy marketplace. That is 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 BIG FIVE
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. For 2024, these companies accounted for more than 75% of total contract pharmacy/covered entity relationships. That’s comparable to their share over the past three years.
Our 2024 analysis highlights important differences among 340B covered entities:
BEST OF FRENEMIES
Over the past four years, 36 manufacturers have altered their policies regarding 340B discounts available at contract pharmacies. Specific policies vary by company, but many manufacturers now require a covered entity to use an on-site pharmacy and/or designate a single, external contract pharmacy. Most also request or require that the covered entity share deidentified claims data in order for those claims to be eligible for 340B discounted pricing.
Due to these policies, growth in 340B-eligible purchases at retail and mail pharmacies has slowed sharply. These policies have also altered hospitals' strategies:
The Inflation Reduction Act of 2022 will dramatically alter the 340B marketplace. Key changes include greater transparency for manufacturers, sharply lower profits for covered entities, an oversight crisis for the federal government, and much more.
For more on the outlook for manufacturers, pharmacies, PBMs, and covered entities, tune in on June 21 at 12:00 P.M. ET for DCI's live video webinar: The 340B Drug Pricing Program: Trends, Controversies, and Outlook.
This article was coauthored by Adam J. Fein, Ph.D., and Bar Stern, M.S.
For an updated look at what’s next for the 340B contract pharmacy market, join Adam J. Fein, Ph.D., on June 21 for his latest live video webinar: The 340B Drug Pricing Program: Trends, Controversies, and Outlook.
340BACKGROUND
Over the years, we have written extensively about the roles and profits of 340B contract pharmacies. For a comprehensive deep dive into the 340B Drug Pricing Program, see Section 11.5 of DCI’s 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
Briefly, the 340B program mandates that pharmaceutical manufacturers provide outpatient drugs to certain healthcare providers—known as eligible covered entities—at significant discounts. To be eligible for program participation, providers must be one of six designated hospital types or be a federal grantee—an entity that receives federal grants administered by different agencies within the U.S. Department of Health and Human Services (HHS). Hospitals account for 87% of total 340B purchases. Disproportionate share hospitals (DSHs)—one of the six eligible hospital types—account for most of hospitals’ 340B purchases.
In 2010, the Health Resources and Services Administration (HRSA), the HHS agency that oversees the 340B program, introduced subregulatory guidance permitting covered entities to access 340B pricing through an unlimited number of contract (external) pharmacies. These actions remain controversial and are the subject of complex, multiparty litigation.
To profile the 340B contract pharmacy market for 2024, Drug Channels Institute examined HRSA’s Contract Pharmacy Daily Report, as published on June 1, 2024. 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.
340BOOM
Since HRSA’s 2010 change in guidance, the number of pharmacy locations in the 340B program has skyrocketed. For 2024, the number of pharmacy locations stabilized for the first time since DCI began analyzing the market.
Here are some observations on this 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 mid-2024, DCI counted 32,883 unique locations acting as 340B contract pharmacies. This figure is slightly below the 2023 figure and marks the first year since 2010 that the number of locations decreased.
- These nearly 33,000 pharmacies have more than 220,000 contractual relationships with more than 11,500 340B covered entities, i.e., there are more than 220,000 unique contract pharmacy/covered entity relationships.
Note that the number of locations provides a misleading picture of the 340B contract pharmacy marketplace. That is 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 BIG FIVE
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. For 2024, these companies accounted for more than 75% of total contract pharmacy/covered entity relationships. That’s comparable to their share over the past three years.
[Click to Enlarge]
Our 2024 analysis highlights important differences among 340B covered entities:
- Federal grantees almost exclusively utilize retail pharmacies. For 2024, federal grantees had about 104,000 total relationships with contract pharmacies. The largest five companies accounted for 72% of this total figure. Nearly all (97%) of these relationships were with retail pharmacy locations.
Walgreens and CVS Health remain the two most active 340B contract pharmacy participants with federal grantees.
- Hospitals rely much more heavily on PBMs. For 2024, hospitals had about 116,000 total relationships with contract pharmacies. The largest five companies accounted for 79% of this total figure. In contrast to the federal grantees, most (70%) of these relationships were with the mail, specialty, and infusion pharmacies of the largest five contract pharmacy market participants.
Over the past four years, 36 manufacturers have altered their policies regarding 340B discounts available at contract pharmacies. Specific policies vary by company, but many manufacturers now require a covered entity to use an on-site pharmacy and/or designate a single, external contract pharmacy. Most also request or require that the covered entity share deidentified claims data in order for those claims to be eligible for 340B discounted pricing.
Due to these policies, growth in 340B-eligible purchases at retail and mail pharmacies has slowed sharply. These policies have also altered hospitals' strategies:
- Hospitals are investing more in their in-house specialty pharmacies and pursuing alternative distribution models. Consistent with DCI’s previous analyses and predictions, hospitals and health systems have emerged as the fastest-growing direct participants in the specialty pharmacy market. For 2023, they accounted for one out of four accredited specialty pharmacies. Some hospitals rely on such external companies as Shields Health Solutions (now owned by Walgreens Boots Alliance) and Trellis Rx (now owned by CPS Solutions) for specialty pharmacy services.
Changes in manufacturers’ 340B contract pharmacy policies have accelerated hospitals’ investments in in-house specialty pharmacy operations. The latest data from IQVIA show that 340B-eligible purchases at retail and mail pharmacies have slowed sharply, while hospital purchases have continued to grow at 15% to 20% annually.
As we discuss in Section 12.3.5. of our 2024 pharmacy/PBM report, some hospitals are also using alternative distribution models. Under these approaches, 340B-eligible products are initially delivered directly to a covered entity’s pharmacy and then subsequently transferred to a contract pharmacy for dispensing. These arrangements face regulatory and practical limitations.
- PBMs have gained 340B market share. Hospitals have long relied on 340B contract pharmacies to profit from prescriptions dispensed by external pharmacies—especially when a hospital has been excluded from payers’ or manufacturers’ networks. External 340B contract pharmacies often coexist with a hospital’s internal specialty pharmacy.
But when forced to choose a single contract pharmacy partner, hospitals and health systems have been gravitating to the large PBM-owned specialty pharmacies. This has shifted dispensing to the largest specialty pharmacies owned by vertically integrated organizations, which have superior access to drugs in limited dispensing networks. Consequently, PBMs have gained a greater share of overall 340B contract pharmacy business, even as growth in the overall 340B mail and specialty pharmacy business slowed.
The chart below illustrates this phenomenon by showing the number of relationships between hospitals and the 340B contract pharmacies operated by the three largest PBMs. We compare the contract pharmacy marketplace prior to the implementation of any manufacturer restrictions (July 2020) with the June 2024 market.
[Click to Enlarge]
As you can see, the number of 340B contract pharmacy relationships has skyrocketed between hospitals and the largest three PBMs. What’s more, this increase was not the result of more mail/specialty/infusion locations, but rather came from a greater number of relationships per location.
The Inflation Reduction Act of 2022 will dramatically alter the 340B marketplace. Key changes include greater transparency for manufacturers, sharply lower profits for covered entities, an oversight crisis for the federal government, and much more.
For more on the outlook for manufacturers, pharmacies, PBMs, and covered entities, tune in on June 21 at 12:00 P.M. ET for DCI's live video webinar: The 340B Drug Pricing Program: Trends, Controversies, and Outlook.
This article was coauthored by Adam J. Fein, Ph.D., and Bar Stern, M.S.
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