Vertical integration among insurers, PBMs, specialty pharmacies, and providers within U.S. drug channels gets most of the attention. But a parallel vertical integration has been occurring among hospitals, specialty pharmacies, and physicians. Manufacturers and payers must adapt to the growing power and market tactics of hospital-owned specialty pharmacies.

The 340B Drug Pricing Program incentivizes hospitals to operate specialty pharmacies. About 98% of the respondents to the ASHP survey participated in the ever-expanding 340B Drug Pricing Program. Hospitals can generate substantial profits by acquiring discounted specialty drugs and dispensing them from internal pharmacies. What’s more, changes in manufacturers’ 340B contract pharmacy policies have accelerated hospitals’ investments in in-house specialty pharmacy operations.

Hospitals also rely on 340B contract pharmacies to profit from prescriptions dispensed by external pharmacies in limited networks. Strategies used by payers, PBMs, and manufacturers have narrowed specialty drug channels. This has shifted dispensing to the largest specialty pharmacies owned by vertically integrated organizations. (See DCI’s Top 15 Specialty Pharmacies of 2022: Five Key Trends About Today’s Marketplace.) Most hospitals identified manufacturers’ “refusal to engage” and being “frozen out or blocked by payers” as the biggest barriers to access. (See Table 8 in the full article.)

Consequently, 61% of the 340B-eligible respondents to the ASHP survey contracted with an external pharmacy to provide specialty medications to health-system patients. Most of these hospitals reported using contract pharmacies to dispense medications for which the hospital was excluded from payers’ or manufacturers’ networks. External 340B contract pharmacies often coexist with a hospital’s internal specialty pharmacy.

As we document in For 2023, Five For-Profit Retailers and PBMs Dominate an Evolving 340B Contract Pharmacy Market, the largest five companies—CVS Health, Walgreens, Walmart, Cigna, and UnitedHealth Group—account for three-quarters of total contract pharmacy/covered entity relationships. The superior profitability of a 340B prescription lets hospitals offer generous pharmacy fees and still share a percentage of the prescription savings with the contract pharmacy vendor. Patients, payers, and taxpayers fund these 340B profits.