More than 15,300 pharmacy locations now have 35,000 contract pharmacy agreements with 340B covered entities. That accounts for nearly a quarter of total U.S. retail, mail, and specialty pharmacy locations. Walgreens still dominates, but its share is shrinking as CVS, Rite Aid, and Walmart pile into the market.
This dramatic growth, combined with pharmacies' 340B profit opportunities, makes me wonder how 340B networks could be undermining payers' network pharmacy models.
Tomorrow, I'll explain how a very small minority of hospitals may be disrupting traditional managed care contracting strategies with large 340B mega-networks.
For background on 340B contract pharmacies, I highly recommend the new AIR340B report The Impact of Growth in 340B Contract Pharmacy Arrangements. (Free download.)
To profile the 340B contract pharmacy market, Pembroke Consulting examined the Health Resources and Services Administration’s (HRSA) Contract Pharmacy Daily Report, as published on July 1, 2014. We screened out all contracts that were terminated earlier than 6/30/14 (n=10,466). Then, we classified pharmacies by parent organization. For instance, our analysis classified Duane Reade and Happy Harry’s pharmacies as Walgreens pharmacies.
The number of contract pharmacies keeps rising. (See chart below.) As of July 1, 2014, there were 4,801 340B entities with 35,343 contract pharmacy relationships. We counted 15,330 unique pharmacy locations, which account for 25% of total U.S. retail, mail, and specialty pharmacy locations.
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Compare this year’s figure to our analysis of the July 2013 HRSA database, where we found 12,635 unique pharmacy locations. Thus, the number of contract pharmacies has grown by an astounding 2,935 locations (+24%) over the past 12 months.
Walgreens continues to dominate the 340B contract pharmacy market, with 37% of all locations. (See chart below.) As of July 1, 2014, Walgreens had 5,735 locations acting as 340B contract pharmacies. The other major chains—CVS, Rite Aid, Walmart, Kroger, and Safeway—now account for a combined 27% of 340B pharmacies.
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Chapter 8 of the 2013-14 Economic Report on Retail, Mail, and Specialty Pharmacies shows the flow of funds in a 340B contract pharmacy network. Rather than earning traditional dispensing spreads and fees, 340B contract pharmacies earn per-prescription fees paid by the 340B entity. These fees can include fixed dollar payments as well as revenue-sharing arrangements. Thus, a pharmacy trades its normal profit margin for the contract pharmacy payments.
Pharmacies’ profitability from these contract arrangements remains top secret. I estimate that a covered entity can easily afford 340B contract pharmacy fees that far exceed a pharmacy’s typical profits from dispensing a prescription paid by such third-parties as Medicare Part D or a commercial health plan. Hmmm.
In 2013, U.S. Senator Charles Grassley (R-IA) grilled Walgreens about its 340B profits. If the senator has received a response, it has yet to be made public.
Tomorrow, I'll examine the hospitals that are driving the contract pharmacy explosion.