Drugmakers limiting discounted prescription sales to some pharmacies participating in a federal program intended for safety-net providers could pressure profits at the largest pharmacy benefit managers.
Congress developed the 340B drug discount program in 1992 to offer hospitals that care for large numbers of low-income and uninsured patients big drug discounts, with the intent that participating hospitals will reinvest the savings into charity care. Cancer centers, children's hospitals, rural providers and other hospitals often contract with outside pharmacies to fill 340B prescriptions for patients. Altogether, about 2,600 hospitals participate in the program.
PBMs profit from the program by steering patients to pharmacies owned by the same parent company as them and by charging providers referral and dispensing fees for filling their patients' prescriptions.
Drugmakers say hospitals' 340B contract pharmacy use has exploded in recent years and that PBMs' influence in the program contributes to rising drug costs.
A federal appeals court ruled earlier this year that drugmakers do not have to deliver 340B-discounted drugs to an unlimited number of contract pharmacies. At least 21 manufacturers restrict 340B sales to contract pharmacies, according to the National Association of Community Health Centers.
Earlier this month, CVS Health said it anticipated manufacturers' 340B contract pharmacy restrictions to lower profits at its Caremark PBM by $200 million this year, and that in part prompted the company to decrease its profit guidance for 2023.
"The 340B impact, it's a very fluid situation. We're reacting to what actions that various manufacturers are taking," Chief Financial Officer Shawn Guertin said during CVS' first-quarter earnings call.
CVS declined to answer a reporter's questions, referring Modern Healthcare to the Pharmaceutical Care Management Association, a lobbying group for PBMs. The association declined comment.
Among the largest PBMs, CVS has the most to lose because it operates the largest retail store footprint, said Michael Cherny, managing director of Bank of America Merrill Lynch's healthcare technology practice. CVS counts more than 9,000 brick-and-mortar pharmacies nationwide.
"CVS is preparing for a world where they'll serve the market as much as it's needed, understanding that there's some actions and activities that are out of their control," Cherny said.
The company has inked the most agreements with 340B providers to fill prescriptions. It operates more than 50,600 retail, mail-order, specialty and infusion contract pharmacies, according to a report last year from Drug Channels Institute, a research firm.
Competitor Cigna Group also anticipates a decline in 340B prescriptions this year and has factored that into its financial expectations for Express Scripts, CEO David Cordani said last month during the company's first-quarter earnings call. Express Scripts operates 9,600 mail-order, specialty and infusion contract pharmacies in the 340B program, making it the fourth-largest contract pharmacy operator after CVS, Walgreens and Walmart, according to Drug Channels.
The drug discount program is not a material driver of profits for Cigna's healthcare services arm and the company can manage the financial impact of drugmaker restrictions, Cordani said. Investor fears are overblown, he said.
"Specific to 340B, we've seen some recent extrapolation of what potential exposure could be for us based upon what some others said or the size of certain other programs. We think those estimates are overstated," Cordani said.
Express Scripts did not respond to an interview request.
UnitedHealth's OptumRx is another one to watch. It operates 8,300 mail-order, specialty and infusion contract pharmacies in the program, making it the fifth-largest contract pharmacy, according to Drug Channels. OptumRx did not respond to an interview request.
CVS, Cigna and UnitedHealth controlled more than 80% of the PBM market last year and filled 65% of all specialty prescriptions, according to Drug Channels.
"There is a ton of money that's concentrated within a small sliver of pharmacies and those are specialty pharmacies," said Antonio Ciaccia, CEO of drug pricing research firm 46brooklyn Research and president of 3 Axis Advisors, a consultancy. "There's more margin and opportunity within those smaller footprints."
Because specialty pharmacies often fill the most expensive prescriptions, they present the greatest opportunity for PBMs to profit from spread pricing, Ciaccia said. Spread pricing occurs when PBMs charge payers more than they reimburse pharmacies for a drug and keep the difference.
Drugmakers started withdrawing from the discount program in 2020 and the appeals court ruling opened the door to more exits. Data indicates PBMs already have seen a profit decline.
Retail and mail-order pharmacy 340B sales grew just 4.9% in 2022, compared with an increase of 16.4% the year before, according to IQVIA, a research firm. Despite manufacturers' contract pharmacy restrictions, sales through the program grew to a record high of more than $100 billion, up 12.2% and driven by purchases from providers, IQVIA said.
Critics contend some hospitals fail to reinvest the drug savings into programs to benefit poor patients and instead rely on the program as a profit generator. This has resulted in lawsuits involving drugmakers, providers and state and federal officials, some of which are pending.
Federal law prohibits manufacturers from having to provide a discounted 340B price and a Medicaid, Medicare or commercial rebate for the same drug, but drugmakers often lack big-picture insight into which claims qualify for 340B discounts and other rebates. That allows some PBMs to double-dip on the discounts they collect on the same prescription from drugmakers.
This is one reason lawmakers and regulators are scrutinizing PBMs. Congress should restrict PBMs' ability to profit from the program by limiting 340B providers' contract pharmacies agreements, said Nicole Longo, senior director of public affairs at PhRMA.
"Our response to PBMs acknowledgment that they are not making as much money off the program is that we don't believe they should be," Longo said. "They're for-profit entities. That's not who this program was created to support."