Tuesday, July 16, 2013

Walgreens Dominates 340B Contract Pharmacy Mega-Networks

Last week, the Safety Net Hospitals for Pharmaceutical Access (SNHPA) launched a new defense of the 340B drug discount program in Setting the Record Straight on 340B: A Response to Critics. (free download) The reports takes aim at multiple critics, including an apparently notorious “Fein Blog.” Despicable me!

SNPHA rightly states that 340B contract pharmacies should “…maintain or expand access to affordable drugs for vulnerable patient populations in more convenient locations within their communities.”

So, let’s look at the reality of today’s booming 340B contract pharmacy market:
  • One out of five retail pharmacies is now a contract pharmacy for a 340B entity.
  • Walgreens dominates the market, with nearly 5,400 340B contract pharmacies. Other chains are distant also-rans.
  • While many networks are small, some hospitals now have networks with more than 100 retail pharmacies.
  • Despite being located in densely populated urban areas, some hospitals’ networks extend to  pharmacies that are more than 50 miles away or located in other states.
Clearly, the 340B contract pharmacy market is larger and much more developed than many people believe. At this point, it's not clear that multi-billion dollar health systems' mega-networks, featuring mega-chains, are truly serving the neediest patients in local communities.

THE GRU-SOME DATA

In Hospitals twist prescription assistance program for their own benefit, I summarize how 340B hospitals are profiting from fully-insured, third-party paid prescriptions. Contract pharmacies are a crucial, but little understood, cog in this 340B machine.

To profile the 340B contract pharmacy market, Pembroke Consulting examined HRSA’s Contract Pharmacy Daily Report, as published on June 27, 2013. We screened out all terminated contracts (n=3,625) and any contracts that began after 6/27/13 (n=63). Then, we classified pharmacies by parent organization. For instance, our analysis classified Duane Reade and Happy Harry’s pharmacies as Walgreens pharmacies.

MANY MINIONS

We found 4,155 340B entities with 31,789 contract pharmacy relationships.


There are 12, 635 unique pharmacy locations, which is about 20% of the 62,000 retail, mail, and specialty pharmacy locations in the U.S. (See Exhibit 2 of the 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.)

Walgreens is the biggest player, with 42% of all 340B contract pharmacy locations. The other major chains—Walmart, Rite Aid, and CVS—lag far behind. There are also thousands of independent drugstores and small chains.


I estimate that Walgreen’s profits from 340B prescriptions are at least twice as large as its usual third-party payer margins.

IT’S SO FLUFFY!

The average 340B entity has 7.7 ( = 31,789 / 4,155) contract pharmacies in its network. However, the median network size is only 2 pharmacies, because about half of 340B entities use a single contract pharmacy.


Digging deeper, we discovered that 101 340B entities (mostly hospitals) have built mega-networks with 50 or more pharmacies. Some of these networks have nearly 300 contract pharmacies.

A geographic analysis (not presented here) shows many contract pharmacies that are (1) located 50 to 100 miles away from its 340B hospital sponsor, or (2) operate hundreds of miles away in a different state. Many mega-networks are affiliated with urban hospitals, so 50 miles can hardly be considered the "local community."

WHO IS DESPICABLE?

As I said in my Fein blog: “Hospitals’ use of contract pharmacy networks should be scrutinized to be consistent with the program’s true intent.” In its report, SNHPA appears to agree by suggesting that multiple pharmacy arrangements “…should be studied to ensure that they are effective and advancing the purpose of the contract pharmacy program.”

Fair enough. But in the three years since HRSA's notice permitting pharmacy networks, the 340B contract pharmacy market has expanded in ways that no one anticipated. As the data show, hospitals are now building mega-networks that extend far beyond their "community," raising further questions about the economic motivations for this explosive growth.

Remind me again: Which side of the debate can truly claim membership in the Anti-Villain League?

9 comments:

  1. Good analysis... I like that you noted the median number is only two. A select number of health systems inflate those numbers. AND there are health systems out there that establish networks just for their own employees. Original intent of the program? hmmm. Within their rights? Yep.

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  2. AWESOME blog! You hit the nail right on the head!

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  3. By definition, those out of state patient 50-100 miles away, must be under the care of the 340B entity hospital. Patients often travel that far to get high-quality specialized care. So, whether they are 'local community" or not, they are benefiting from the care of the 340B hospital, which is using that contract pharmacy agreement to help fund those patient care programs. Your focus on network size and patient distance has nothing to do with whether the 340B program is meeting it's intended goal of helping safety net hospitals fund clinical services. They won't continue to qualify for 340B if thier local and distant patients aren't still classified as a vulnerable patient population. Would you suggest instead that tertiary care services be needlessly and expensively duplicated in every community hospital, so all patients are part of the "local community"?

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  4. Adam,

    Great analysis on the 340B system and the issues associated with this program. I’m sure I’ve missed it somewhere in your articles but what is the incentive for a hospital to establish a large retail network that extends well beyond their operating region? I certainly recognize the benefit for the retailer but I’m not clear on the benefit to the hospital establishing the network.

    Thanks for any clarification and keep up the pressure on this increasingly abused program.

    John Kalada
    Communications Impact, LLC

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  5. Short answer: Bigger networks = more 340B revenues for the hospital

    Longer answer:

    The program’s advocates continually emphasize that the 340B program is designed for “vulnerable patients.” A 2011 SNHPA report even claimed: “340b program savings reduce the cost of pharmaceuticals to vulnerable patients.”

    However, the disclosures prompted by Senator Grassley document that the vast majority of 340B patients have insurance from Medicare, Medicaid, or a commercial payer. At Duke, only 5% of 340B patients are uninsured, cash-pay patients. See .

    Under current program operations, a 340B hospital can profit from everyday outpatient prescriptions—drugs that are dispensed by a local pharmacy and are already fully paid by an insurance company. I graphically summarize this process in Exhibit 82 (page 135) of the 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.

    Given HRSA’s vague definition of an “eligible patient,” hospitals have an incentive to create very broad networks that can generate revenue from as many insured prescriptions as possible. (Notably, hospitals have no specific obligations to share these savings with vulnerable or uninsured patents.) Since sophisticated pharmacies can generate higher profits from 340B fees than from third-party reimbursements, the large chains have incentives to market these mega-networks to the hospitals.

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  6. Perhaps. But given the current methods that identify "eligible patients" at the pharmacy switch, I believe many patients have a much more tenuous affiliation to a 340B entity.

    And as I point out in Hospitals' Extraordinary 340B Pharmacy Profits from Insured Patients, the vast majority of a hospital's 340B revenues do NOT come from vulnerable or uninsured patients.

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  7. Adam:
    "I estimate that Walgreen’s profits from 340B prescriptions are at least twice as large as its usual third-party payer margins." How did you arrive at that estimate?

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  8. I am guessing that Dr. Fein factored in the discounts that big pharma typically remit to 340b pharmacies versus a "regular" pharmacy.

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  9. A 340B contract pharmacy's prescription margins are determined by the fees paid by a 340B entity. Based on our research, we estimate that Walgreen's per-prescription fees from 340B entities exceed its typical prescription gross margin (spread + dispensing fee) from a third-party payer.


    If anything becomes public, I will share the info on Drug Channels.

    ReplyDelete

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