Wednesday, August 10, 2016

Six Retail Chains Now Dominate the Still-Booming 340B Contract Pharmacy Business

The pharmacy industry’s role in the 340B Drug Pricing Program continues to expand.

Our latest analysis finds that nearly 18,000 pharmacy locations contract with 340B-eligible covered entities. That accounts for more than one in four U.S. retail, mail, and specialty pharmacy locations.

Walgreens remains the biggest player, with about the same number of locations as those of Walmart, CVS, Rite Aid, Kroger, and Albertsons combined. If Walgreens acquires Rite Aid, it will account for more than 4 out of 10 340B contract pharmacy locations. Despite retail chains’ dominance, I didn’t hear NACDS even mention 340B during this week’s Total Store Expo.

Amidst the contract pharmacy boom, we’re still left wondering what’s really going on. How many prescriptions do contract pharmacies provide at discounted prices to uninsured, underinsured, and low-income patients? Who is really benefiting from the contract pharmacy business?


The 340 Drug Pricing Program mandates that pharmaceutical manufacturers provide outpatient drugs to certain healthcare entities—known as eligible covered entities—at significant discounts. The 340B program is highly controversial, partly because the 340B legislation does not specify or restrict how covered entities should utilize funds generated by the program. I highlight some of these issues in Challenges for Managed Care from 340B Contract Pharmacies, my peer-reviewed commentary in the Journal of Managed Care & Specialty Pharmacy. According to the JMCP website, it remains the journal’s “Most Read” article. Cool.

A covered entity can purchase and dispense 340B drugs through internal or external (contract) pharmacies. In 2010, 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. For more on pharmacies’ role and profits from 340B, see Section 10.4 of our 2016 Economic Report on Retail, Mail, and Specialty Pharmacies .


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 7, 2016. We screened out all contracts that had been terminated before 7/1/16.

Using our proprietary database, we classified all contract pharmacy locations by parent organization. Many chains are listed with alternate names. Walgreens stores, for example, appear in the database as: Walgreens; Bond Drug Company Of Illinois, L.L.C.; Duane Reade; Happy Harry’s; May's Drug Stores, Inc.; Pharm-Mart Pharmacy Of Warren, Inc.; Stephen L. Lafrance Pharmacy, Inc.; Super D Drugs Acquisition Co.; and USA Drug. Similarly, the Kroger data account for multiple banners (store names) in the HRSA data. These include Kroger, City Market, Dillons, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs, Roundy’s, and Smith’s.

A small number of locations are central distribution centers or mail and specialty pharmacies. Since last year, the Walgreens distribution centers have been removed from the data.


Since HRSA’s 2010 change in guidance, the number of contract pharmacies has exploded. As of July 2016, there were 17,784 unique pharmacy locations, which equate to more than one in four U.S. retail, mail, and specialty pharmacy locations. You don’t have to be a rocket surgeon to detect a trend in the chart below.

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These nearly 18,000 locations have broad and deep relationships with providers. As of July 2016, there are 5,649 340B covered entities with 42,490 contract pharmacy relationships. Over the past three years, the number of 340B covered entities with a 340B contract pharmacy relationship has increased by 36%.

A few weeks ago, I pointed out that the 340B program is now 4% (not 2%) of the U.S. drug market. It seems likely that the increase in contract pharmacies is partly responsible for the program’s rapid growth.


Six large retail pharmacy chains account for two out of three 340B contract pharmacy locations. Walgreens remains the dominant 340B contract pharmacy participant. More than 6,000 Walgreens act as a 340B contract pharmacy, so it accounts for more than one-third of all locations. Other major retail chains—Walmart, CVS, Rite Aid, Kroger, and Albertsons—account for a further 5,800 340B pharmacies. Thousands of independent drugstores and small chains participate, too. Even mail and specialty pharmacies play a role.

[Click to Enlarge]

As I discuss in Walgreens to Valeant: You’ve Got a Friend in Me (PLUS: A Rite Aid Deal Update), Walgreens Boots Alliance (WBA) believes that it is still on track to complete its acquisition of Rite Aid. Excluding any possible store divestitures, WBA would have almost 7,500 340B contract pharmacy locations. That’s 42% of the total locations.

I wonder if 340B is figuring into the government’s review of the Walgreens-Rite Aid deal.

Note that a 340B contract pharmacy doesn’t earn traditional spreads and dispensing fees. They instead profit from fees paid by the 340B entity. Given providers’ substantial profit opportunities, a 340B entity can afford fees that often far exceed a pharmacy’s typical profits from dispensing a third-party-paid prescription.

There are many other profit opportunities. Walgreens, for example, is the only contract pharmacy provider that offers both dispensing and administrative services fees for assisting covered entities with the program. Walgreens operates many on-site pharmacies inside hospitals, which probably pay a premium to Walgreens for it helping stretching the program's boundaries.


The extensive use of 340B contract pharmacies allows hospitals and other providers to benefit from 340B drug discounts earned from commercially paid prescriptions dispensed by contract pharmacies.

Do needy patients benefit? No one knows. Covered entities are not specifically obligated to share any 340B savings with financially needy or uninsured patents, nor are they required to disclose how they use profits from the 340B program. As the Office of Inspector General (OIG) tartly noted in its February 2014 report Contract Pharmacy Arrangements in the 340B Program:
“[T]he 340B statute speaks only to covered entities’ eligibility and compliance; it does not specify how savings from the 340B Program should be used.”
Indeed, the OIG found that two-thirds of the hospitals did not offer the 340B price to uninsured patients at their contract pharmacies! See the evidence in New OIG Report Confirms Our Worst Fears About 340B Contract Pharmacy Abuses. The OIG used a small sample, but I have seen no hard data to contradict its findings.

At the risk of being redundant, repetitive, and redundant, I will again highlight the conclusion from my editorial Hospitals Twist Prescription Assistance Program For Their Own Benefit in The Hill:
“To ensure that the program’s funds are being used appropriately, Congress should require that hospitals fully disclose how they use their 340B pharmacy profits. By allowing hospital’s to retain and then spend all 340B pharmacy profits, neither Medicare nor patients benefit from 340B drug discounts...It’s time to modernize the 340B program and help the neediest patients access valuable medicines.”
Given ongoing growth in 340B contract pharmacies, is that really too much to ask?

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