Association Between 340B Contract Pharmacy Growth and Payer-Specific Drug Coverage

ABSTRACT

The 340B Drug Pricing Program entitles participating hospitals and clinics (called covered entities) to purchase outpatient drugs at a substantial discount from manufacturers. Covered entities either distribute 340B drugs at reduced prices to patients or generate a subsidy by charging insured patients market prices for discounted drugs. Drugs purchased through 340B accounted for $66 billion in 2023, with approximately one-fifth of this sum coming from sales through unaffiliated community retail pharmacies, called contract pharmacies. We linked data on contract pharmacy locations to Managed Market Surveyor data to describe the markets in which 340B covered entities locate contract pharmacies. We found that the number of contract pharmacies has grown dramatically over the last decade: From 2010 to 2021, the mean share of pharmacies in a county that dispensed 340B drugs increased from 1.5% to 43.7%. Contract pharmacy growth was positively correlated with Medicare and Medicaid coverage and negatively correlated with uninsured and commercial coverage. Although contract pharmacies were positively associated with Medicaid coverage, this relationship was strongest in states that allowed covered entities to dispense 340B drugs to Medicaid patients through a contract pharmacy. Our findings are consistent with those of other studies that covered entities, particularly hospitals, tend to locate contract pharmacies in markets that maximize the 340B subsidy.

Am J Manag Care. 2026;32(2):108-112. https://doi.org/10.37765/ajmc.2026.89882

Takeaway Points

Previous research has shown that 340B contract pharmacy growth is inversely related to uninsured rates. We linked data on 340B contract pharmacies to payer-specific insurance enrollment data at the county level to test whether contract pharmacy growth is related to enrollment rates for specific payer types. We found the following:

• County-level Medicare and Medicaid drug coverage are positively correlated with contract pharmacy growth.
• Contract pharmacy growth is concentrated in counties in states where Medicaid agencies allow the use of contract pharmacy compared with states where the use of contract pharmacy is not allowed by Medicaid agencies.
• County-level uninsured and commercial drug coverage were negatively correlated with contract pharmacy growth.

The 340B Drug Pricing Program provides discounts on outpatient drugs to hospitals and clinics that provide safety-net care (covered entities). Covered entities include core safety-net clinics funded by federal Public Health Service Act grants as well as public and nonprofit hospitals, which qualify based on their meeting 1 of 5 eligibility categories based on hospital type.¹ 340B discounts reduce the costs associated with dispensing drugs for free or at reduced costs to uninsured or underinsured patients. They also can generate a subsidy to help fund safety-net care when covered entities bill insurers for discounted drugs. (This subsidy is called 340B savings by covered entities or 340B revenue by government agencies.^2,3) 340B-discounted drugs can be administered by clinicians in clinics owned or affiliated with the covered entity or dispensed by pharmacists working in pharmacies owned by or affiliated through short-term contracts with covered entities, called contract pharmacies.

The 340B program is the second largest drug purchasing program in the country, outspent only by Medicare Part D.^4,5 In 2023, it accounted for $66 billion in spending, or approximately 16% of all drug purchases in the US.⁶ This represents spending on 340B drugs at discounted prices; if valued at list prices, these drugs would cost $124 billion, generating an approximate total subsidy to covered entities participating in 340B of $58 billion.⁷ Data from Minnesota’s recent covered entity report show that in 2023, Minnesota covered entities accepted $1.5 billion in payments for 340B-discounted drugs that were purchased for $730 million, suggesting that the discounts are approximately 50% of insurer reimbursements for these drugs.⁸

The program has grown significantly since it was created in 1992, when approximately 850 public health service clinics and 100 public hospitals participated.⁹ The Affordable Care Act expanded hospital eligibility for the 340B program to include a wider variety of hospitals and their offsite clinics, called child sites. As a result, more than 2600 hospitals participate in 340B, representing just over half of all community hospitals in the US and two-thirds of nonprofit and public hospitals.^10-12 In contrast, the number of public health service clinics participating in the program has grown relatively little.¹² Spending on 340B drugs grew 19% annually from 2010 to 2021 (from $6 billion to $44 billion, respectively), and more than 80% of this spending can be attributed to participating hospitals and their affiliated clinics.³

In addition to the number of organizations participating, 340B’s growth has been further driven by the increase in contract pharmacies. Although covered entities were historically allowed 1 contract pharmacy site, in 2010, the agency that regulates 340B—the Health Resources and Services Administration (HRSA)—issued guidance permitting covered entities to establish an unlimited number of contract pharmacy relationships.¹³ After this rule, the number of contracts between pharmacies and covered entities rose from approximately 4400 in 2010 to 42,000 in 2017 to more than 75,000 in 2022.¹⁴ Many of these contracts are operated at local retail pharmacies; by 2022, more than one-third of the pharmacies in the US were contract pharmacies, most of which were operated by either Walgreens or CVS.¹⁵

A growing body of evidence shows that in response to incentives generated by the design of the 340B program, covered entities tend to establish contract pharmacies in locations that maximize the revenue generated by dispensing 340B drugs.^16-19 This follows trends of hospitals that have joined 340B in the past decade: They tend to serve wealthier patients with high rates of insurance coverage, maximizing the difference between discounted prices and insurer reimbursement.¹⁷ Contract pharmacies are located in disproportionately White, non-Hispanic, and English-speaking communities,²⁰ and they are increasingly located farther away from the covered entity with which they contract.¹⁴ Consistent with maximizing the value of the subsidy, covered entities appear to avoid establishing contract pharmacies in communities with high uninsured and poverty rates.^18,19,21

Although contract pharmacies tend to be established in markets with more insured patients, it is unknown whether this finding varies across insurer types given documented differences in reimbursements between payers. Although Medicare Part D and Medicaid plans reimburse pharmacies at roughly the same rates, commercial payers tend to reimburse pharmacies at anywhere from 150% to 340% of the Medicare payment limit for prescription drugs.^22,23 Furthermore, many states prohibit covered entities from dispensing 340B-discounted drugs to Medicaid patients through contract pharmacies or prohibit covered entities from using 340B-discounted drugs for Medicaid patients altogether. In this analysis, we assessed the association between county-level pharmaceutical insurance penetration by payer and contract pharmacy growth between 2010 and 2021.

METHODS

Our analytic data set was created by linking the following: (1) a list of contract pharmacy relationships from the HRSA’s Office of Pharmacy Affairs Contract Pharmacy Daily Report, (2) a list of all retail pharmacies in the US from the National Council for Prescription Drug Programs’ DataQ database, and (3) county-level enrollments in drug coverage by payer type from Clarivate’s Managed Market Surveyor data. We limited our data set to counties in micropolitan or metropolitan areas.

To create our dependent variable—the share of retail pharmacies with at least 1 contract—we linked the retail pharmacy name from each contract in the HRSA data to its unique National Provider Identifier (from DataQ) using name and address in a geographically constrained partial text (“fuzzy”) matching procedure. This procedure allowed us to link more than 99% of contracts to retail pharmacy locations.¹⁴ Using county-level identifiers in DataQ, we summed the number of pharmacies in each county with at least 1 contract and divided it by the total number of retail pharmacies located in the county. Retail pharmacies were defined using the National Council for Prescription Drug Programs’ primary-type code identifier.¹⁴

To create our independent variables—payer-specific enrollment shares for each county—we summed enrolled lives in each payer type in each county and divided it by total enrolled lives in the county from Managed Market Surveyor data. These data describe insurance coverage for health care services (including prescription drugs) at the county level, representing 335 million lives in more than 3000 counties.²⁴ These data are routinely used by industry to understand coverage trends. We limited our data to pharmaceutical coverage, which Clarivate defines as drug-specific coverage, or medical coverage that included drugs.²⁴ Payer types included commercial, Medicare (including Medicare Part D plans offered by commercial payers), Medicaid (including Medicaid managed care offered by commercial payers), and uninsured from 2010 to 2021. Uninsured describes people with either no medical insurance or medical insurance that does not offer a prescription drug benefit. Because states differ in whether they allow drugs paid through the Medicaid program to be dispensed through contract pharmacies, we constructed 2 measures of the Medicaid coverage share: the share of Medicaid covered lives in states that allow contract pharmacies and the share in states that do not allow contract pharmacies. We relied on reports from the 340B Prime Vendor Program for information on whether states allow contract pharmacies in Medicaid.²⁵

We linked our dependent and independent variables at the county-year level and supplemented our data with the following additional measures: the total number of retail pharmacies (from DataQ), county population information (from Managed Market Surveyor), and the total number of covered entities located in the county (from the HRSA Office of Pharmacy Affairs Daily Covered Entity Report).²⁶

We present simple ordinary least squares estimates of the association between the contract pharmacy share of total retail pharmacies and each payer-specific coverage share. We estimated this relationship separately for each type of payer. We then present the same estimates while controlling for state-specific, nonlinear, secular trends (state-year fixed effects); time-invariant differences between counties (county fixed effects); and time-varying number of pharmacies, covered entities, and population. SEs were clustered at the county level (n = 17,577).

RESULTS

On average, the share of retail pharmacies in the county with at least one 340B contract increased between 2010 and 2021 (from 1.5% to 43.7%). Over the same time period, both the uninsured (17.2% to 11.9%) and commercially insured (68.5% to 48.3%) payer enrollment shares decreased while the Medicare (9.9% to 16.4%) and Medicaid shares increased, with the Medicaid share in states that allowed contract pharmacy increasing slightly more (4.4% to 18.9%) than in states that prohibited contract pharmacy (4.4% to 16.4%) (Figure 1).

In ordinary least squares regressions with enrollment share only, the share of retail pharmacies with at least 1 contract was positively associated with the Medicare enrollment share (1.715; SE = 0.011) and with the Medicaid enrollment share in states that did (0.419; SE = 0.051) and did not (0.441; SE = 0.046) allow contract pharmacies (Figure 2). However, the share of retail pharmacies in a county with at least 1 contract was negatively associated with the share of county population with no coverage (uninsured coverage share) (–1.327; SE = 0.072) and with the commercial enrollment share (–0.665; SE = 0.034). Adjusting for the time-invariant and time-varying factors listed previously, there was no statistically significant association between the Medicare enrollment share or the Medicaid enrollment share in states with a contract pharmacy prohibition and the share of retail pharmacies in a county with at least 1 contract. However, the Medicaid enrollment share in states where contract pharmacies were allowed was positively associated with the share of retail pharmacies in a county with at least 1 contract (0.227; SE = 0.101). In our adjusted models, the uninsured coverage share was not associated with the share of retail pharmacies in the county with at least 1 contract; however, the association with commercial share remained negative (–0.206; SE = 0.064).

DISCUSSION

Our results suggest that covered entities may locate contract pharmacies in communities where the difference between insurer reimbursements and 340B-discounted drug prices is significant. It should be noted that locating contract pharmacies in counties with attractive payer mix is not prohibited by the program.¹

Increases in the share of community pharmacies that serve as 340B contract pharmacies were most strongly related to Medicare coverage, followed by Medicaid and commercial coverage. Because many contract pharmacy relationships are between pharmacies and Disproportionate Share Hospitals, these results likely reflect Disproportionate Share Hospital behavior. These hospitals qualify for 340B based on providing a minimum proportion of inpatient days to Medicaid and low-income Medicare patients. Our results suggest that markets with high proportions of Medicare patients attract contract pharmacies because Medicare Part D plans often reimburse pharmacies at rates higher than the 340B discount. However, the proliferation of contract pharmacies may have unintended consequences for access to preferred pharmacies for Medicare patients. Quasi-experimental evidence shows that increases in 340B participation lead to increased Medicare Part D premiums as a result of these increased drug prices.²⁷ Furthermore, an Office of the Inspector General report of rebate contracts found that approximately half of Medicare Part D contracts exempted manufacturers from paying out rebates for 340B drugs.²⁸ The loss of rebates may encourage Part D plans to steer patients away from pharmacies with contracts.

Non-Medicare commercial pharmaceutical insurers may also be sensitive to the same issues as Medicare plans with respect to contract pharmacies. Commercial insurers likely face the same incentives to avoid contract pharmacies because they receive reduced rebates on 340B drugs.^29,30 However, no studies to date have linked 340B contract pharmacy to commercial premiums or pharmacy network restrictions.

Our Medicaid results also suggest that markets where Medicaid does not allow the use of contract pharmacies may be unattractive to covered entities. The 340B program prohibits duplicate discounts, meaning a 340B discount cannot be applied to a drug for which a Medicaid agency claims a manufacturer rebate. Preventing covered entities from dispensing 340B-discounted medications to Medicaid patients at contract pharmacies is a way of preserving rebates for the state and prohibiting the generation of a 340B subsidy for the covered entity.³¹ We note, however, that in states that allow Medicaid programs to purchase 340B drugs, covered entities can charge Medicaid managed care programs market prices for 340B drugs.³² As such, Medicaid reimbursements through managed care programs can be dependably higher than 340B discounts in many US states. For example, Minnesota’s recent Covered Entity Report showed that 340B covered entities generated approximately $90 million on drugs dispensed through the Medicaid program in 2023.⁸ The average Medicaid 340B profit was $93 per fill.⁸ In summary, markets with Medicaid beneficiaries may be attractive to covered entities in states that allow Medicaid managed care programs to purchase 340B drugs for their patients.

Taken together, our findings demonstrate quantitative relationships between contract pharmacy penetration at the county level among retail pharmacies and county-level pharmaceutical coverage shares. Our results had several limitations, including that we were limited to an analysis at the county level, which may not appropriately approximate pharmacy markets. Also, our data did not contain information on preferred pharmacy networks, which are used in both Medicare and commercial plans. Nevertheless, the results suggest that the subsidies generated from dispensing 340B drugs to patients with differing forms of coverage could motivate the contracting behavior of covered entities. 

Acknowledgments

The authors thank JP Bruno, PhD, of Cornerstone Research, for research assistance.

Author Affiliations: Division of Health Policy and Management, University of Minnesota School of Public Health (SN, CM), Minneapolis, MN.

Source of Funding: This research was supported by a grant from Arnold Ventures.

Author Disclosures: The authors are employed by the University of Minnesota, which operates a hospital and a federally qualified health center that participate in 340B.

Authorship Information: Concept and design (SN, CM); acquisition of data (SN); analysis and interpretation of data (SN, CM); drafting of the manuscript (SN, CM); critical revision of the manuscript for important intellectual content (SN); statistical analysis (SN, CM); obtaining funding (SN); administrative, technical, or logistic support (SN, CM); and supervision (SN).

Address Correspondence to: Sayeh Nikpay, PhD, MPH, University of Minnesota School of Public Health, 516 Delaware St SE, PWB 15-211, Minneapolis, MN 55455. Email: snikpay@umn.edu.

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