Wednesday, August 14, 2019

As Hospitals Pursue Specialty Pharmacy (and Walgreens Bets More on 340B), PBMs Become Their Best Frenemies

The American Society of Hospital Pharmacists (ASHP) has just released its latest national survey of pharmacy practice in hospital settings. Download it here. (Available for purchase.) I always enjoy this annual treasure trove of insights.

This year’s survey updates our understanding of hospitals’ and health systems’ all-out pursuit of specialty pharmacy dispensing revenues. In 2018, more than 75% of the largest hospitals operated a specialty pharmacy. Check out the data below.

The 340B Drug Pricing Program has—and will continue to—encourage even more specialty pharmacy growth at hospitals. It is also providing a new way for Walgreens Boots Alliance to profit from 340B.

Amidst this growth, hospital-owned specialty pharmacies find themselves competing for prescriptions against pharmacy benefit managers (PBMs). These PBMs have built benefit networks that shift prescriptions away from hospitals in favor of the PBMs’ own specialty pharmacies.

Hospitals can fight PBMs for network access—or they can befriend a PBM-owned 340B contract pharmacy and still earn super-size profits. As you’ll see below, the odd combination of narrow networks and 340B is creating unexpected frenemies in the drug channel.

CHASING SPECIALTY

The specialty pharmacy component of the 2018 ASHP survey includes responses from 744 hospitals. These show that a growing share of hospitals now have specialty pharmacy operations:
  • In 2018, about 20% of hospitals owned a specialty pharmacy, compared with less than 9% in 2016. Larger hospitals were much more likely to have a specialty pharmacy. (See chart below.)
  • For 2018, more than three-quarters (76%) of the hospitals with more than 600 beds operated a specialty pharmacy. That’s a sharp increase from the less than half (47%) of large hospitals in 2016.
[Click to Enlarge]

The chart above compares the new data with result from the 2016 survey. The hospital-owned specialty pharmacy trend is unambiguous. Factors motivating this expansion include hospitals’ and health systems’ desires to:
  • Provide integrated, comprehensive care for patients with complex, chronic conditions that are typically treated with specialty medications.
  • Integrate specialty pharmacy services with Accountable Care Organizations (ACOs), which coordinate care across different providers. Risk-based contracting with third-party payers provides incentives for greater patient monitoring and adherence services.
  • Increase revenues and reduce internal benefit costs by steering hospital employees to in-house pharmacies.
  • Generate super-size profits by acquiring discounted specialty medications under the 340B Drug Pricing Program.
Note that hospital-based locations are also aggressively pursuing accreditation. Pharmacy locations owned by healthcare providers—hospitals, health systems, physician practices, and providers’ group purchasing organizations—now account for more than one-quarter of all accredited specialty pharmacy locations. See The Specialty Pharmacy Boom: Our Exclusive Update on the U.S. Market.

THE 340B MONEY TRAIN

Of the four factors listed above, I believe that 340B program is the most important—and a key reason why growth will continue.

Last week, I explained the phenomenal prescription profitability for 340B hospitals that purchase specialty drugs at discounts of 70% to 100% off the list price. See Here’s How PBMs and Specialty Pharmacies Snag Super-Size Profits from the 340B Program.

A hospital that operates its own specialty pharmacy avoids paying fees to a 340B contract pharmacy. Instead, the hospital incurs the costs and risks associated with launching and operating an in-house specialty pharmacy.

Of course, the profits from 340B prescriptions significantly lessen any financial risk, encouraging hospital CEOs to invest in specialty pharmacy.

This growth also creates business opportunities for companies that can facilitate the 340B money flow. Consider Shields Health Solutions, which has created hundreds of specialty pharmacies at more than 30 health systems. The hospitals own these pharmacies, but Shields reportedly earns fees and a share of profit for managing them.

Walgreens Boots Alliance (WBA) and the private equity firm Welsh, Carson, Anderson & Stowe have just made a major growth equity investment that reportedly valued Shields at nearly $900 million. Pretty sweet for a company that works with so-called non-profit, safety-net hospitals.

BEST OF FRENEMIES

Patient-administered specialty products are typically reimbursed under a pharmacy benefit, not as a buy-and-bill medical benefit product. To generate revenues and profits, hospitals’ pharmacies must therefore be included in the third-party payer’s pharmacy networks managed by PBMs. Here’s where the relationships get tricky.

As regular readers know, PBMs and health plans typically limit the number of specialty pharmacies by requiring patients to use the specialty pharmacy that the plan or PBM owns and operates. That’s a crucial factor behind the specialty pharmacy industry’s concentration in the hands of the largest PBMs.

Consequently, many hospitals are discovering that their patients may be unable to fill (or refill) prescriptions at the provider-owned facility. Hospitals and PBMs have become specialty pharmacy competitors.

But an unusual compromise exists for those hospitals willing to compromise on their dreams of owning a specialty pharmacy.

Instead of fighting PBMs, hospitals are choosing to establish 340B contract pharmacy partnerships … with a PBM-owned specialty pharmacies. Abracadabra, problem solved!

And as I showed last week, a 340 hospital can generate amazing profits without any of the headaches of operating a specialty pharmacy. That’s why the biggest PBM-owned specialty pharmacies have thousands of contract pharmacy relationships with 340B hospitals and other covered entities. AllianceRx Walgreens Prime, the specialty pharmacy owned by Walgreens Boots Alliance and Prime Therapeutics, is the leader in 340B contract specialty pharmacy.

Hospitals have apparently learned from the wisdom of Michael Corleone: Keep your friends close, but your enemies closer. Today, we call them frenemies.

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