The Evolution of Contract Pharmacies in 340B
The 340B Drug Pricing Program was established in 1992 to help safety-net providers—like community health centers, STD clinics, and rural hospitals—access outpatient drugs at reduced prices. Originally, these providers were expected to dispense 340B drugs through in-house pharmacies. But many smaller or resource-strapped clinics lacked the infrastructure to do so.
To address this, HRSA issued guidance in 1996 allowing Covered Entities to partner with external pharmacies—known as contract pharmacies—to dispense 340B drugs on their behalf. The model was designed for limited use, primarily by smaller providers who couldn’t operate their own pharmacy, with the expectation that most Covered Entities would only contract with one outside pharmacy.
That changed dramatically in 2010, when HRSA lifted the cap on the number of contract pharmacies a Covered Entity could work with. This policy shift sparked explosive growth in contract pharmacy relationships—particularly among large hospitals and health systems, which began partnering with hundreds (sometimes thousands) of large chain and PBM-owned pharmacies.
By 2020, over 30,000 pharmacies were participating in 340B, up from just 1,300 in 2010. This rapid expansion caught the attention of drug manufacturers, who argue the current scale of contract pharmacy use strays far from the program’s original intent. Since 2020, several manufacturers have imposed contract pharmacy restrictions, triggering legal and political pushback from Covered Entities and state legislatures.
How Anti-Competitive PBM Practices Have Impacted Contract Pharmacy Proliferation
Ideal Stewards are Disproportionally Impacted
Hospitals and large health systems have certainly taken advantage of broad patient definitions and expansive contract pharmacy networks to drive 340B revenue, but we’re not here to opine on the merits of their use of the 340B drug program (you can find plenty of 340B critics that will do that on the daily for you), mainly because we are not the experts here.
Instead, we wanted to focus on the often overlooked practices of PBMs that have disproportionately led to adverse effects on smaller Covered Entities and the underserved populations they serve. At Alchemy, we work exclusively with this originally intended cohort of Covered Entities - FQHCs, Ryan Whites, and STD clinics that are largely viewed as good stewards of the 340B program.
Retail Chain and PBM-owned pharmacies are the hidden backdrop of 340B.
Anti-competitive PBM practices have driven contract pharmacy proliferation - let me explain. As it stands today, contract pharmacies and TPAs are capturing a significant share of the 340B revenue stream, at the expense of both covered entities and patients. What is less understood and documented, however, is that an overwhelming majority of contract pharmacies are owned by big pharmacy chains and PBMs (for example Optum and Genoa are owned by UnitedHealth Group].
When looking at Covered Entities who manage 100+ contract pharmacy relationships, our data shows that over 90% of the contract pharmacies fall into the category of pharmacy chains or PBM-owned pharmacies. As a specific example, let’s look at an STD clinic in Massachusetts (CE name redacted) that manages 132 contract pharmacy relationships. Of the 132 contract pharmacies they work with, a whopping 94.7% (125 of 132) of the contract pharmacies are PBM-owned or large pharmacy chains. Thus, you have to start to look more closely into the relationship between PBM practices and the proliferation of contract pharmacies and TPAs owned by the PBMs.
Rising Fees and Patient Steerage
It is well known in the 340B industry that CVS Health, Optum and Walgreens charge complex and rising fees to covered entities. These fees include dispensing fees, administrative fees, and per-claim TPAs costs—many of which increase automatically each year. Covered entities report these rising costs strain financial resources and reduce the ability to deliver care, because they are stripped of their 340B revenue.
Combine all this with common PBM practices of steering patients to their own pharmacies and using take-it-or-leave-it contracts, and you start to now get closer to the ground reality of what is actually happening in the 340B industry. Furthermore, it has been well documented in recent years that community pharmacies are being “crushed” by these PBM practices, and it should not be lost on anyone that these same community pharmacies include in-house entity-owned pharmacies of Covered Entities.
PBM Practices Force the Use of their Contract Pharmacies and TPAs
So what does all this mean in practical terms? Simply put, when a Covered Entity (in this case an STD clinic) uses their resources to find, test and treat patients in their local communities for diseases like HIV and Hepatitis C, the PBMs are forcing the eventual prescriptions that are written to be routed to their own specialty pharmacies (at an alarming rate), known as “network restrictions" or "network lockouts.” As a result, these covered entities have no other choice but to enter into a contract pharmacy relationship in order to capture at least a portion of 340B revenue, less the fees charged by PBM-owned pharmacies in “take it or leave it” dispensing and TPA fee arrangements. Bottom line - patients should be able to fill prescriptions at the pharmacy that works best for them, not forced to the one owned by the PBM.
To further exacerbate the issue of 340B proceeds leaking out of Covered Entities, we have to look at the type of prescriptions that PBM-owned pharmacies are routing to themselves - specialty medications. While roughly 2% of prescriptions in the U.S. are for specialty drugs, they account for 70–80% of pharmacy profits in some settings (like contract pharmacies) and in some cases very specialized clinics like HIV clinics or Hemophilia clinics, contract pharmacies earn up to 90% of 340B profits from a narrow set of specialty medications.
Why does it matter in the 340B world?
Covered Entities including FQHCs, Ryan Whites and STD clinics often prioritize high-dollar, high-margin specialty medications when managing 340B programs — this allows them to maximize 340B proceeds to then deploy back into community health programs and wrap around services they provide. So when a meaningful portion of these medications are force routed to a PBM-owned contract pharmacy, the pharmacy and TPA partner (also owned by the PBM in many cases, i.e. Wellpartner is the TPA arm of CVS Health) extracts an oversized portion of fees, that results in the Covered Entities retaining a materially smaller portion of the 340B proceeds, compared to if they were able to fill the prescription at their own in-house pharmacy.
“Imagine doing all the painstaking work of going to recovery and addiction centers all around Oklahoma City every single week - to test and identify high risk patients. We identify Hepatitis C positive patients and we battle through housing instability and transportation challenges to get them to our clinic to receive care and medication. And then, we have to tell that patient 60%+ of the time that we cannot hand them their medication when they are standing right in front of the pharmacy counter because their PBM is forcing them to use their own pharmacy. This is the harsh reality we deal with every single day, and the sad part is many of these patients fall out of care because of the inherent friction built into the PBM-controlled pharmacy world. There is no scenario in which it is not better for that patient to receive their Hepatitis C medication right then and there versus having to jump through hoops and hurdles of getting their medication filled by a PBM-owned pharmacy," says Cody Turpin, CEO of Equality Health, an STD clinic in Oklahoma City.
As the discussions on 340B reform continue to take shape, we hope to shed some light on the much needed PBM reform that is required in parallel, to address the real challenges facing Covered Entities that rely on the 340B drug program to keep their light on and fund valuable healthcare services in their communities. In the coming days, we look forward to sharing more tactical recommendations on how to drive the much needed PBM and 340B reform.
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