Competitive Dynamics and the Healthcare Safety-Net: Evidence from 340B Contract Pharmacies
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School of Public Health
University of Minnesota
Title: Competitive Dynamics and the Healthcare Safety-Net: Evidence from 340B Contract Pharmacies
Abstract: The 340B program entitles certain hospitals and clinics to directly purchase outpatient drugs at government-mandated discounts in order to provide drugs to patients who are unable to pay or to generate revenue to fund care to such patients. Participants may dispense discounted drugs through in-house pharmacies registered through the program or so-called “contract” pharmacies located in the community. Since 2010, 340B participants have been able to establish an unlimited number of contract pharmacy arrangements, resulting in significant growth in the number of pharmacy contracts, especially with retail pharmacy chains. The majority of participants rely on third party administrators (TPA) to coordinate pharmacy contracts, ensuring compliance with program requirements and tracking 340B drug volume. In return, TPAs are paid a flat fee per prescription.
The decision to establish a 340B contract pharmacy arrangement depends on the costs and benefits of contracting. In 2018, CVS Pharmacy - a retail pharmacy chain with a significant share of the US retail pharmacy market - acquired its own TPA and required all 340B participants to use it for their contracts with CVS. This action should increase the costs of contracting with retail pharmacies other than CVS. At the same time, CVS formalized its merger with Aetna, a health insurer covering a significant share of the commercial insurance market. This action should increase the benefits of contracting with CVS as health insurers form coverage networks for retail pharmacies. Taken together, these two changes predict significant increases in CVS’s share of 340B contracts and significant decreases in CVS’ competitors’ share after 2018.
We test these predictions using a panel of 340B pharmacy contracts by retail chain at both the CBSA and hospital level using publicly available data on 340B pharmacy contracts. We then use data on US pharmacy locations and ZIP-code level hospital patient flows to construct measures of CVS market share by CBSA and a patient-weighted, hospital-specific measure of CVS market share by hospital. Our identification exploits the timing of the deadline to adopt TPA software and finalization of the CVS Aetna merger in the final quarter of 2018 as well as historical, cross-CBSA and cross hospital variation in CVS market share.
We find a significant, positive trend break in the CBSA-level share of CVS 340B pharmacy contracts and a corresponding, significant negative trend break in CVS’ competitor’s share of contracts in the final quarter of 2018. Comparing hospitals with higher patient-weighted CVS market share to lower, we find that the number of CVS pharmacy contracts per hospital increases more for hospitals in the top quartile of patient-weighted CVS market share than the bottom quartile after CVS mandates its TPA and the Aetna-CVS merger is finalized. At the same time, the number of contracts per hospital decreases for CVS’ competitor’s between hospitals with high and lower patient-weighted CVS market share.
Our results suggest that competitive dynamics in the retail pharmacy market affect the contracting decisions of 340B participants.