Background

The 340B Drug Pricing Program was established in 1992 to help certain safety-net providers, known as covered entities (CEs), purchase covered outpatient drugs at substantial discounts. CEs can save as much as 25–50% on the cost of outpatient drugs relative to list price. Neither statute nor regulation requires CEs to pass discounts to patients taking 340B medicines or to report how program savings are used otherwise.

In 1996, the Health Resources and Services Administration (HRSA) issued guidance that allowed covered entities to contract with an external pharmacy to dispense 340B drugs when unable to do so onsite. In a follow-up 2010 guidance, HRSA permitted covered entities to use an unlimited number of contract pharmacies (CPs). Since then, the number of CP arrangements has increased by more than 4,000%. The discounted purchases under the 340B program reached $54 billion in 2022, representing a 42% increase since 2020. Given this growth, some stakeholders have questioned whether the program is meeting its mission to treat underserved populations.

Current State of Play

Various stakeholders have voiced concerns around the appropriate interpretation of the 340B statute. Of particular interest are any policy parameters related to contract pharmacy use, since the current 340B statute is silent on the matter.

Previously, Avalere examined the connection between contract pharmacy locations and the income and demographics of the patients served. To further investigate the contract pharmacy landscape and help inform the policy debate, Avalere analyzed HRSA’s OPAIS and NCPDP’s DataQ  pharmacy data from 2023 to identify evolving program trends and characteristics with a focus on contract pharmacies.

Avalere analyzed some of these trends among specific hospital types with a focus on Sole Community Hospitals (SCH), Critical Access Hospitals (CAHs), Rural Referral Centers (RRC) and Disproportionate Share Hospitals (DSHs). SCHs are defined as the only source for hospital services in a geographic area, while CAHs are small hospitals in rural areas that provide essential, critical, and emergency care to residents at least 35 miles from another hospital. Despite their name, RRCs do not have to be located in rural areas and DSHs are primarily in urban areas.

Findings

Avalere conducted exploratory analytics across a range of CP characteristics with the goal of answering key policy questions:

1. What types of pharmacies operate as 340B contract pharmacies?

Most 340B contract pharmacies are chain pharmacies (see Figure 1). In 2023, chain pharmacies accounted for 68% of all pharmacies in arrangements, but just 29% of all pharmacies not contracting with 340B covered entities. Independent pharmacies represented 15% of 340B contract pharmacies, but 46% of pharmacies not contracting with 340B covered entities. Avalere also explored the use of chain vs. independent pharmacies by hospital type and found that DSH and RRCs had the highest share of chain pharmacy contract arrangements, at 76% and 78% respectively.

Figure 1. 340B Contract Pharmacies and Pharmacies Not Contracting with 340B Covered Entities

Note: “Other” includes Alternate Dispensing Sites, Franchise Pharmacies, Government Pharmacy, and Unknown Dispensing Class.

2. What is the relationship between the number of contract pharmacies a covered entity has and the amount of charitable and Medicaid-covered care the covered entity provides?

The dollar amount of charitable care and Medicaid-covered care delivered varied across the four types of hospitals included in this analysis. Avalere’s analysis did not find a correlation between the number of CPs and the amount of charitable or Medicaid-covered care delivered for any of the hospital types (charity care measured as a share of total operating costs. Medicaid patients served measured as total Medicaid revenue as a share of total revenue)

3. Do different hospital types have distinctive patterns of contract pharmacies use related to the rural vs urban residence of patients?

Avalere’s analysis found that certain key hospital types had more contract pharmacy arrangements, on average, than other hospital types. On average, DSHs and RRCs had more contract pharmacy relationships (57 and 47, respectively) than SCHs and CAHs (23 and 12, respectively). And, as shown in Figure 2, for each of the three hospital types that have rural and non-rural locations, the hospitals in rural areas had fewer contract pharmacy arrangements on average than those in non-rural areas.

Figure 2. Average Number of 340B Contract Pharmacy Arrangements per Hospital Type, 2023

Note: RRCs were excluded due to low sample size. Less than 10 RRCs are located in a rural area.

Avalere’s analysis also found that the number of contract pharmacy arrangements per covered entity varies by state (see Figure 3), though it does not appear to be related to the share of the state’s population whose residences are rural. For example, the average number of contract pharmacy arrangements per DSH in Massachusetts was 118, while Mississippi DSHs had an average of 41 contract pharmacy arrangements each. For comparison, 9% of Massachusetts’ and 54% Mississippi’s’ population lived in rural areas in 2020, as defined by the US Census Bureau.

Figure 3. Average Number of 340B Contract Pharmacy Arrangements per DSH by State, 2023

Note: There are no 340B DSH in WY.

What’s Next

Earlier this year, a bipartisan group of six US senators released the Supporting Underserved and Strengthening Transparency, Accountability, and Integrity Now and for the Future of 340B (SUSTAIN 340B) Act, requesting feedback on various aspects of the program, including “how to achieve the correct balance of patient access, accountability, and program integrity in the use of contract pharmacy arrangements.” More recently, representatives in the House introduced additional bills. The 340B PATIENTS Act (H.R. 7635) would codify the ability to use unlimited number of contract pharmacies under any circumstances, while the 340B Affording Care for Communities & Ensuring a Strong Safety-net (ACCESS) Act seeks to segment the ability to use contract pharmacies differently between hospitals and federal grantees and also to explicitly require CEs and their contract pharmacies to use the discounts to reduce out-of-pocket costs for low-income patients.

These legislative reforms vary in their approaches, demonstrating a lack of consensus on the path forward among stakeholders. With significant dollars at stake coupled with ongoing litigation and state legislative activity, the 340B program will continue to be a priority heading into the next Congress.

To learn how Avalere can help you shape your 340B policy priorities, connect with us.