Tuesday, July 11, 2017

The Booming 340B Contract Pharmacy Profits of Walgreens, CVS, Rite Aid, and Walmart

Pharmacies continue to ride the 340B Drug Pricing Program’s explosive growth.

Our latest exclusive analysis finds that nearly 20,000 pharmacy locations now act as a contract pharmacy for the hospitals and other healthcare providers that participate in the 340B Program. Fewer than 3,000 pharmacy locations were in the program in 2010.

Large retail pharmacy chains' rapid expansion (per the fourth chart below) into 340B suggests superior profits.
  • Six large chains account for two out of three 340B contract pharmacy locations in 2017. 
  • Walgreens remains the dominant participant, with nearly 6,400 locations in the 340B program. 
  • Over the past four years, CVS, Walmart, and Rite Aid have also deepened their engagement. These three chains collectively now have 5,400 340B contract pharmacy locations. 
Every year, I question the economics behind this astounding growth. How many prescriptions do contract pharmacies provide at discounted prices to uninsured, underinsured, and low-income patients? Are pharmacies engaged in profit-sharing agreements with 340B hospitals? Are they earning fees that far exceed fair market value standards? Who is really benefiting from the contract pharmacy boom?

340BACKGROUND

The 340B program mandates that pharmaceutical manufacturers provide outpatient drugs to certain healthcare entities—known as eligible covered entities—at significant discounts. A covered entity can purchase and dispense 340B drugs through internal or external (contract) pharmacies. In 2010, the Health Resources and Services Administration (HRSA) permitted eligible entities (including those that have an in-house pharmacy) to access 340B pricing through multiple contract pharmacies.

The contract pharmacy process is complex and can be confusing. The chart below lets you follow the dollar for a typical 340B contract pharmacy arrangement between a hospital and a pharmacy.

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Discounted sales under the 340B program hit $16.2 billion in 2016. (See The 340B Program Hits $16.2 Billion in 2016; Now 5% of U.S. Drug Market.) Purchases under the program have been growing by 30% annually for the past three years. Indeed, the 340B program accounted for 5.0% of the total U.S. drug market in 2016.

For more on pharmacies’ role and profits from the 340B program, see Section 10.4 of our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

THE DATA

To profile the 340B contract pharmacy market, Pembroke Consulting examined HRSA’s Contract Pharmacy Daily Report, as published on July 1, 2017. 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 are listed with multiple alternate names. Walgreens locations, for example, appear in the database under 72 unique pharmacy names. CVS locations appear under 80 unique names.

ALL ABOARD!

As of July 2017, there were 19,868 unique pharmacy locations. Since our July 2016 analysis, the number of 340B contract pharmacies has grown by 2,084 locations (+12%).

The chart below shows that since HRSA’s 2010 change in guidance, the number of contract pharmacies has increased sharply.

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The nearly 20,000 locations have broad and deep relationships with providers. As of July 2017, there are 6,059 340B covered entities with 52,613 contract pharmacy relationships. Since 2013, the number of 340B contract pharmacy relationships has increased by 66%.

THE 2017 340BIG CHAINS

Six pharmacy chains account for two out of three 340B contract pharmacy locations. These companies have dominated contract pharmacies for a few years now.

Walgreens remains the dominant 340B contract pharmacy participant. More than 6,300 Walgreens’ locations act as 340B contract pharmacies, so the chain accounts for more than one-third of all locations. Other major retail chains—CVS, Walmart, Rite Aid, Kroger, and Albertsons—account for a further 6,877 340B contract pharmacy locations. Thousands of independent pharmacies and small chains participate, too.

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The chart below shows the growth in 340B participation for the four largest chains since our first analysis in 2013. In line with overall program growth, the largest chains have dramatically increased the number of locations acting as 340B contract pharmacies. This implies that the profits have been substantial enough to justify this expansion.

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WHAT’S GOING ON?

Participation in the 340B program shifts a pharmacy’s profit source from dispensing spreads to per-prescription fees paid by a 340B-qualified entity. In some cases, the pharmacies share in the profits generated by 340B prescriptions, which raises further questions about who benefits from the program. We estimate that a pharmacy’s gross profits from the 340B program are much higher than a pharmacy’s typical gross profit from a third-party payer.

Former Rep. Henry A. Waxman recently claimed that the 340B program "works exactly as intended." But the 340B contract pharmacy market has expanded in ways that few anticipated.

Multiple government studies have documented serious problems with the program. For instance, an Office of Inspector General (OIG) study of 340B contract pharmacies found that two out of three hospitals did not offer the 340B discounted prescription price to uninsured patients via these pharmacies. See New OIG Report Confirms Our Worst Fears About 340B Contract Pharmacy Abuses.

Despite this growth, we still have no transparency into the behavior of these 340B contract pharmacies. None of the public companies reports any information about its participation in the 340B program.

How is the program working as intended when multi-billion dollar, publicly traded pharmacies garner a disproportionate share of 340B profits by dispensing prescriptions to patients with good third-party insurance?

As the saying goes: its good business if you can get away with it!

A small suggestion: The 340B contract pharmacy market would make a great topic for the upcoming House Energy and Commerce Health Subcommittee hearing on the program. In the meantime, the money train will keep chugging along.

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