Tuesday, July 15, 2014

One in Four U.S. Pharmacies is Now a 340B Contract Pharmacy

As part of Drug Channels’ ongoing coverage of the 340B drug pricing program, I want to highlight our new analysis showing that the 340B drug pricing program continues to expand at a breakneck pace.

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.

9 comments:

  1. This is disturbing information. Can you say more about the profit margins that pharmacies are getting from 340B?

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  2. Adam, I would imagine you won't have to look further than the "PBM" gold rush to establish a presence in 340b. Not too sure how it can undermine network pharmacy contracting however the goal is "Capture" the Rx for the Hospital entity. Once the goal of meeting the capture rate the PBM's start contracting the 340b network starting first with hospital owned pharmacies then on site pharmacies and finally geographic community based pharmacies. Finally, the PBM starts the marketing campaign to meet with projected "Capture" rates. If you can't up the capture rate then the program falls flat on it's face. As we know 340b pricing trumps any retail market based pricing perhaps by which a retail network not contracted under a 340b model might distract or absorb and realign dispensing.

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  3. For a brand-name prescription, I estimate that the fees can be as much as 2-3X as large as the gross profits from dispensing a third-party paid prescription. Some pharmacies get more, some get less.

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  4. Yes, you are reinforcing my point about network contracting.


    Some PBMs oppose 340B, but others view it as a business opportunity. Check out MedImpact's 340B page.

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  5. Not everything in pharmacy is the PBM's fault. It seems that the PBMs have very little to do with 340B networks. Please confirm, but the contracts are between the pharmacy and the hospital. The PBM is left paying full price for a discounted medication. Any effort to get involved is most likely a defensive strategy. Would you agree?

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  6. Joe -


    Correct. Hospitals and pharmacies are collaborating to earn unreported discounts on drugs fully paid by third-party payers (employers, health plans, government, et al). Manufacturers are often paying duplicate discounts on the non-Medicaid claims.


    But as I note, a few PBMs are using 340B as a business development strategy with hospitals, which are large employers.


    Adam

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  7. So...I guess the question is how long will this be allowed to continue. There's lots of discussion of 340B reform, but it takes a long time to make changes. Right now, this profit opportunity is being taken advantage of. It's one of the drivers for community oncology consolidation as buy and bill has basically disappeared.

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  8. So you are stating the the duplicate discounts being paid by the manufacturers (for non-Medicaid claims) are really the PBM rebates? If so, that would be a business relationship between the PBM and the manufacturer. Thus it is a business agreement that can be negotiated, but the 340B discounts and Medicaid rebates are part of federal law (unavoidable).

    On the other note, I see that the PBMs (like insurance companies) have little to no obligation to provide for gaps for out of pocket of indigent or the under insured.

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  9. I am concerned with the term "profit" being used in relation to care of indigent and under reimbursed. This makes it sound like there are a lot a greedy people in healthcare. Many organizations that are involved in this work environment are typically a long way from being well off. Some struggle from quarter to quarter, as seen in any number of media article about layoffs in non-profit healthcare. IE Layoffs, reduction of services, facility closures, etc.
    Healthcare is funded by a resource pool environment and any "surplus funds" tend to cover a company's write-off are due free care and/or under reimbursement (of all types).
    It is also not being discussed in the public media about how a majority of the 340B eligible facilities do not turn away any patient regardless of ability to pay. This is not always true for for-profit facilities that typically are allowed to offset their "profit draining services" by not eliminating services to some or all all patients based upon the payer type thay are associated with (IE Medicare, Medicaid, etc). I like to call this "selective patient care".
    So is it really "profit" in your eyes when it offsets costs to of provide community benefiting services?

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