Tuesday, July 14, 2015

More than One in Four U.S. Pharmacies is Now a 340B Contract Pharmacy; Walgreens Still Dominates

The pharmacy industry’s 340B Drug Pricing Program cash grab continues.

Our latest analysis finds that 17,000 pharmacy locations contract with a 340B-eligible covered entity (usually a hospital). Walgreens remains the biggest player, although Walmart, CVS, and Rite Aid collectively now account for about one-quarter of contract pharmacy locations.

Since we first deeply examined contract pharmacies, two years ago, they have grown by 4,600 locations (+37%). Specialty pharmacies’ participation also is up sharply.

These relationships threaten to disrupt third-party payers’ pharmacy networks and confound manufacturers’ channel strategies. The new GAO report provides further evidence of problems. Let’s hope that the Health Resources and Services Administration’s (HRSA) upcoming mega-guidance finally enacts some rules to govern this out-of-control expansion.

THE DATA

To profile the 340B contract pharmacy market, Pembroke Consulting examined HRSA’s Contract Pharmacy Daily Report, as published on July 5, 2015. We screened out all contracts that were terminated before 7/1/15. Using our proprietary database, we classified all contract pharmacy locations by parent organization.

You can download the data from HRSA’s 340B Drug Pricing Program Database page.

HOW MANY?

As you can see in the chart below, the number of contract pharmacies keeps growing. As of July 2015, there are 5,226 340B entities with 37,778 contract pharmacy relationships. We identified 16,965 unique pharmacy locations, which accounts for more than 25% of the retail, mail, and specialty pharmacy locations in the U.S.

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Compare these results to our analysis of the July 2013 HRSA database, where we found 4,155 340B entities and 12,635 unique pharmacy locations. Thus, over the past two years, the number of 340B entities with contract pharmacies has grown by 26%—and the number of contract pharmacy locations has grown by 34%.

Since 2010, the number of contract pharmacy locations has grown by almost 600%! Must be a good business!

WHO?

Walgreens remains the dominant 340B contract pharmacy participant, accounting for 35% of all locations. (See chart below.) As of July 2015, Walgreens had about 6,000 locations acting as 340B contract pharmacies. The other three major retail chains—Walmart, CVS, and Rite Aid—now account for a combined 25% of 340B pharmacies.

[Click to Enlarge]

Section 8.5 (page 160) of our 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies  tracks the flow of funds and product 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 this government program remains top secret. However, we estimate that hospitals often pay fees that are two to three times larger than a pharmacy’s typical gross profit from a third-party payer.

WHO’S BUSIEST?

Some pharmacies work with many covered entities. Here are the pharmacy locations with the most contracts:
  • Walgreens Mail Service, Inc. (Tempe, AZ): 529 contracts
  • Walgreens Mail Service, Inc. (Orlando, FL): 311 contracts
  • Public Health – Downtown Central Pharmacy (Seattle, WA): 110 contracts
  • Avita Drugs, LLC (Baton Rouge, LA): 107 contracts
  • Wal-Mart Central Fill (Spring, TX): 87 contracts
  • Wal-Mart Pharmacy (Orlando, FL): 86 contracts
  • Rx Blue Star Solutions, LLC (Warrendale, PA): 85 contracts
  • Walgreens Specialty Pharmacy LLC (Frisco, TX): 82 contracts
  • Walgreens Specialty Pharmacy LLC (Carnegie, PA): 82 contracts
  • Walgreens Specialty Pharmacy, LLC (Canton, MI): 82 contracts
  • Walgreens Specialty Pharmacy, LLC (Beaverton, OR): 82 contracts
WHY WE SHOULD CARE

Many of these pharmacies are part of hospital mega-networks. Just 310 healthcare providers—about 1 percent of all 340B covered entities—account for more than 40% of the program's 38,000 contract pharmacy agreements. Of the 310 providers, 166 are disproportionate share hospitals and 113 are children’s hospitals. This small group has built networks that average 52 pharmacies, but some have nearly 300 pharmacies.

These mega-networks are designed seemingly to enrich hospitals and pharmacies, not to benefit needy and uninsured patients. In last year’s One Percenters: The Real Facts Behind Hospitals' 340B Contract Pharmacy Mega-Networks, I outlined the following four questions about these networks:
  • Do covered entities need such large networks to reach vulnerable patient populations?
  • To what extent are these providers creating broad networks to generate revenue from as many fully-insured prescriptions as possible?
  • How are 340B entities monitoring these large networks?
As I have argued before, some 340B entities truly require additional financial support. However, there are others that appear to be taking advantage of the program by using 340B revenues in ways that can’t be linked to the drug discount program’s initial purpose.

Consider this telling example from Transparency: Best Medicine for drug-Pricing Program, a recent editorial about the 340B situation in Kentucky:
"For instance, there’s a stark difference in Louisville between University Hospital, where, according to the Centers for Medicare and Medicaid Services, charity cases comprised nearly 10 percent of their patient load in 2014, and Norton Healthcare, which, despite $1.5 billion in revenues and 53 contracted pharmacies, reported less than 1 percent of vulnerable patients. Still, both are considered 'Disproportionate Share Hospitals,' allowing them to purchase highly discounted 340B medicines."
Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals, a new U.S. Government Accountability Office report, also raises serious concerns about the 340B program:
"Medicare uses a statutorily defined formula to pay hospitals at set rates for drugs, regardless of their costs for acquiring them, which CMS cannot alter based on hospitals’ acquisition costs, and the 340B statute does not restrict covered entities from using drugs purchased at the 340B discounted price for Medicare Part B beneficiaries. Consequently, there is a financial incentive at these hospitals to prescribe more drugs and more expensive drugs to Medicare beneficiaries in order to maximize the revenue generated by the difference between the cost of the drug and Medicare’s reimbursement." (emphasis added)
HRSA will soon release draft mega-guidance and allow for public comment. Managed care stakeholders and pharmaceutical manufacturers should pay close attention to this debate.

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