Abstract
The 1992 340B drug discount program lowers drug costs and provides a source of revenue for safety-net providers by entitling them to discounts on drugs for all patients, including those with insurance. As 340B has grown so has the administrative complexity of the program, creating a market for third-party administrators (TPAs) to manage both formal and informal requirements in exchange for fees. Although TPAs are playing an important role in the 340B ecosystem, the TPA market is poorly understood, along several dimensions including its size, specialization, competitiveness, and scope of services offered. In this brief report, we report the results of original market research on TPA firms to address unanswered questions and identify gaps in knowledge. We identify 48 TPA firms, including 8 owned by private equity firms, 2 owned by software companies, and 6 owned by a variety of vertically integrated health care stakeholders such as pharmacies, pharmaceutical benefit managers, and pharmaceutical wholesalers. We identified 7 services offered by TPAs including patient discount cards (13), enrollment (31), auditing (45), revenue capture (42), referral management (9), inventory management (19), and 340B ESP assistance (9). Our results suggest that TPAs are involved in many diverse functions related to 340B.
340B Program background
The 340B drug discount program is designed to lower drug costs and increase drug profits for safety-net providers, called “covered entities,” by entitling them to discounts on drugs for all patients, including those with insurance. The size of these discounts is approximately 50% off Medicare's reimbursement for many drugs.1 Profits generated from billing insurers for discounted drugs, recently valued at almost $50 billion,2 are intended to enhance safety-net care by “reaching more eligible patients and providing more comprehensive services.”3 Discounted drugs can be distributed to patients via affiliated clinics and pharmacies called “child sites” or unaffiliated community pharmacies with short-term contracts to dispense 340B drugs called “contract pharmacies.”4
The program has grown along several dimensions since its inception in 1992. Although originally limited to federal grantees (such as Federally Qualified Health Centers) and Disproportionate Share Hospitals, the Affordable Care Act added 6 additional categories of eligible hospitals, and today, 2750 hospitals are enrolled in the program.5 The Health Resources and Services Administration (HRSA), which regulates the program, also expanded 340B by eliminating limits on the number of off-campus sites through which discounted drugs could be dispensed.6 Before 2010, participants without an in-house pharmacy could contract with 1 contract pharmacy. In 2010, HRSA issued guidance eliminating this cap, leading to a significant expansion of the number of contract pharmacies.7 As of June 7th, 2023, the total number of unique child sites and the total number of unique contract pharmacies has reached over 73 000 according to HRSA's Office of Pharmacy Affairs Daily Covered Entity and Contract Pharmacy reports.5
340B Administrative complexity
While 340B's growth suggests its popularity among participants, participation comes with significant administrative requirements. To receive discounts, eligible participants must enroll in the program and register all drug-dispensing sites with HRSA, certify their eligibility on an annual basis, and maintain auditable records that document compliance with the program's 2 main prohibitions: drug diversion and duplicate discounts. Drug diversion refers to the application of discounts to drugs filled by patients who do not receive health care services from the 340B participant.8 Duplicate discounts refer to the application of discounts to drugs that are also subject to Medicaid drug rebates.9 While this provision does not prevent participants from using 340B discounts on Medicaid patients, states use a variety of reporting requirements to prevent duplicate discounts.10 Although not disallowed by 340B program rules, pharmaceutical manufacturers have increasingly taken action to prevent another form of duplicate discounts: 340B discounts on drugs for which pharmaceutical benefit managed rebates have already been applied.11
The growth of contract pharmacies since 2010 has created additional sources of administrative complexity. First, as the number of contracts with large pharmacy chains has grown, some chains offer12 or even require13 participants to use their administrative software for contract-related transactions. Second, pharmaceutical manufacturers have appealed to the original language of the 340B statute to place limitations on discounts through contract pharmacies,14 effectively limiting which contract pharmacies and which drugs can receive discounts, and several legal rulings since 2020 have supported this decision.15 Finally, in order to avoid paying 340B discounts on drugs for which discounts from a pharmacy benefit manager (PBM+) have already been negotiated and applied, pharmaceutical manufacturers have required program participants to submit claims data to 340B ESPTM—a claims-based algorithm that identifies drugs likely to be subject to both a PBM and 340B discount—in order to receive discounts.16
Third-party administration, defined
Third-party administrators (TPAs) are firms that provide operational services to other firms.17 For example, health insurance TPAs process claims and retirement savings plan TPAs ensure compliance with legal requirements. Increasingly, both types of TPAs take on a variety of other operational tasks. In 340B, increasing administrative complexity has created a market for TPAs to support participants in managing both formal and informal requirements.18 In exchange for these services, TPAs collect fees from participants. It is important to note that, among people who work in the 340B industry, the term “TPA” is commonly used to refer to firms that handle a specific administrative function: billing and inventory management.19 However, similar to the health insurance and retirement savings plan industries, TPAs in the 340B industry offer a range of services. Although the compensation structure for TPAs is not well understood, TPAs are thought to receive fees on a dispensing basis, as a share of the 340B spread, or both.20
From the perspective of the participant, choice in the TPA market may be important as minimizing TPA fees allows the participant to retain as much 340B revenue as possible. Although market-share data were not available to formally assess the competitiveness of the TPA market, several recent lawsuits suggest that the existing market is not perfectly competitive. For example, after a large pharmacy chain purchased a TPA, the New York Attorney General alleged that the chain used its market power in the pharmacy market to “suppress[s] … competition in the TPA market.”13
Although TPAs are playing an important role in the 340B ecosystem, the TPA market is poorly understood along several dimensions, including its size, competitiveness, and scope of services offered. In this brief report, we report the results of original market research on 340B TPA firms to attempt to address unanswered questions and identify gaps in knowledge.
Methods
The goal of this analysis was to identify firms offering TPA services, assess ownership, and categorize the types of services offered. We identified TPA firms through a multistep approach. First, we looked for reports on market research firm websites such as Pitchbook and KLAS and consulted with university business and health care librarians to identify standalone market research reporting firms. Next, we reviewed the list of corporate partners in the 340B Alliance, a group sponsored by the 340B advocacy organization.21 Next we reviewed Trademark records available through the LexisNexis Patent and Trademark Delivery database. Finally, we conducted internet searches through Google to identify any remaining TPA firms we could not identify through other methods. After identifying 62 firms, we limited our analysis to 48 firms that could be verified on Crunchbase, a market research website, which we also used to determine parent companies of each firm. We reviewed individual firm websites to determine TPA type (consulting-based vs software-based) as well as services offered.
Results
TPA market size
As of September 17th, 2023, we identified 48 companies offering TPA services. Twenty-nine firms offered software-based services on a long-term basis to manage specific 340B administrative functions. Nineteen firms offered consulting-based services on either a limited-term or long-term basis advising covered entities about administrative functions. At least 1 of these consulting firms offered private-label administrative services, in which the TPA is hired to staff and run the covered entity's 340B program.
Ownership of TPA firms
To assess competitiveness of the TPA market, one requires information on market shares. However, these data are not systematically collected across firms or reported publicly. In the absence of TPA market shares, we looked at the distribution of ownership and parent company type in the TPA market (Figure 1). Among consulting-based firms, most were not wholly owned by another company (89%) and several were also owned by private equity firms (11%). Among software-based firms, slightly less than half (41%) were not wholly owned by another company. The most common parent type was private equity (24%), followed by vertically integrated pharmacy chains (14%). Other parent companies included software companies (7%), publicly traded revenue cycle management and financial services companies (7%), pharmaceutical wholesalers (3%), and pharmacy benefit managers (3%).
Third-party administrator (TPA) parent company type, 2023. Source: TPA Database, 2023 (n = 48). The figure plots the share of TPA firms falling into 1 of 7 ownership categories based on the parent company type.
Services offered in the TPA market
Our review of TPA websites identified 4 main groups of services offered (Figure 2).
Services by third-party administrator (TPA) parent company type, 2023. Source: TPA Database, 2023 (n = 48). The figure plots the share of TPA firms offering 7 services identified by the research team. Abbreviation: HRSA, Health Resources and Services Administration.
Compliance and auditing
These administrative tasks include ensuring that the covered entity follows all program rules and produces and maintains records to demonstrate compliance with HRSA requirements in the event of an audit. These tasks may also include assisting a covered entity in enrolling in the 340B program. Among consulting-based TPAs, all offered compliance and auditing services, often in the form of record review and mock audits. Most (74%) also offered assistance with enrollment. Among software-based TPAs, we found that most (90%) offered assistance with compliance and auditing.
Although not a formal legal requirement of 340B, many covered entities must comply with new manufacturer restrictions through contract pharmacies. Part of these restrictions included submitting pharmaceutical claims to 340B ESP. Both consulting-based (5%) TPAs and software-based (28%) TPAs offer assistance with submitting claims to 340B ESP.
Inventory management and split-billing
These administrative tasks include assessing and replenishing the supply of 340B drugs across child sites and contract pharmacies as well as maintaining separate billing systems to purchase 340B and non–340B-eligible drugs from manufacturers and drug wholesalers. This was not a service offered by consulting-based TPAs but was offered by two-thirds (66%) of software-based TPAs.
Program optimization and revenue capture
These administrative services include maximizing the revenue potential of 340B discounts, typically through identifying opportunities to identify more 340B-eligible prescribers, new sites for dispensing 340B-eligible drugs, and identifying opportunities to cut costs. Most consulting-based (84%) and software-based (90%) TPAs offered program optimization and revenue capture services, but slightly less than half of software-based firms (45%) also offered “referral management” or “referral capture” services. In referral management, covered entities use a list of prescribers affiliated with the covered entity to maximize the number of patients for which 340B discounts can be claimed at contract pharmacies. For example, a covered entity may be able to use 340B discounts on a patient who has been prescribed drugs by a non–340B provider if the covered entity can make the case that it is responsible for the patient's overall care.22
Patient access
Although not required by HRSA, covered entities may choose to lower the out-of-pocket costs of drugs for certain patient groups, such as the uninsured or insured patients that fall below a certain federal poverty level. For contract pharmacy arrangements, in which a nonaffiliated pharmacy acts as the point of sale, information on which patients should receive discounts may sometimes be given directly to the pharmacy. However, a common method of extended discounts to indigent patients is through patient discount cards.23 Slightly less than half of software-based TPAs (41%) offer such cards.
Discussion
Our analysis suggests that there are numerous companies offering TPA services, with a diverse ownership profile. Among the approximately one-third of TPAs that are owned by another company, owners included private equity and vertically integrated health care stakeholders such as large pharmacy chains and pharmacy benefit managers.
The range of services offered by TPAs also suggests the range of administrative tasks that are part of participating in the program. Participants must meet the legal requirements of the program, manage relationships with external partners (pharmacies, drug wholesalers, manufacturers, patients), regulatory agencies (HRSA), and internal customers (operations and strategy). It must also be noted that, although TPA services interface with covered entities, covered entities are not always the principal in TPA contracts—several TPA firms specialize in helping pharmacies handle administrative tasks involving 340B-covered entities. Furthermore, some TPAs, especially those owned by health care stakeholders, may be limited in the services they offer because they focus on a particular aspect of the 340B industry.
Our analysis has several limitations which must be mentioned. First, the 340B program is complex and often difficult to understand without deep industry knowledge. Therefore, the results reported in this brief report may be subject to error. Second, we lack information on the actual services provided by firms, or their quality. We are only able to assess whether the firm advertises the service. Future research should consider secret qualitative interview methods to determine what services TPA firms offer. Third, we are unable to assess market concentration and therefore the competitiveness of the TPA market. Fourth, we are able to observe ownership at a point in time: September 2023. However, many TPAs we identified were either recently acquired or acquired other TPAs themselves. This suggests the potential for increasing consolidation in the market for 340B TPAs.
Conclusion
Although it began with 3 parties—covered entities, HRSA, and manufacturers—the number of parties now in the 340B space has grown to include group purchasing organizations,24 retail,25 and specialty pharmacies,26 and also TPAs. Greater transparency for all parties is desired for better functioning of the 340B program. At least 1 state is pursuing greater transparency for 340B participants; however, TPA fees are unlikely to be included in these transparency efforts.27 Nevertheless, the growing role of TPAs warrants additional attention from health policy researchers, policymakers, and journalists. Information on the size of the market in terms of revenues, the market share of individual TPAs, TPA compensation structure, and the evolution of these measures over time is critical for understanding program functioning.
Supplementary material
Supplementary material is available at Health Affairs Scholar online.
Notes
Author notes
Conflicts of interest Please see ICMJE form(s) for author conflicts of interest. These have been provided as supplementary materials.
