Carveouts in healthcare safety net reform risk empowering middlemen

Drug pricing is having one of its moments in Washington and throughout the states. From launching TrumpRx and reforming middleman practices, to implementing Medicare price negotiations, policymakers are trying to show voters they’re serious about reining in drug costs. One unifying theory expressed by all sides is that middlemen — pharmaceutical benefit managers (PBMs), third party administrators (TPAs) and the like — have sopped significant profit out of all corners of our health system. Despite efforts to keep more dollars in Americans’ pockets, efforts to reform a little-known federal safety-net program prove how challenging it is to turn good intentions into good policy.

Created by Congress to help vulnerable patients access their medicines, the 340B Drug Pricing Program requires pharmaceutical manufacturers to provide outpatient drugs at steep discounts to qualifying hospitals and clinics serving a certain percentage of low-income or uninsured patients. In return, those providers are expected to use savings from drug discounts to help vulnerable patients afford medicines. However, there are no requirements to ensure 340B savings support patients and limited visibility into how funds are spent. In 2024, participating covered entities purchased $81.4 billion in outpatient drugs through 340B, making it the nation’s second-largest drug purchasing program. As 340B’s footprint has expanded, so too has a complex ecosystem of for-profit intermediaries, including PBMs and TPAs.

Federal and state policymakers are considering reforms aimed at improving 340B accountability, including a federal pilot program that would shift from the current opaque model to a more transparent rebate model. While that might strengthen oversight, it would have to apply consistently across all covered entities to avoid exacerbating existing abuses of the 340B program. If certain providers are carved out of a rebate model, the proposal risks driving even more 340B dollars away from patients in need and into the pockets of health system middlemen.

The fee structures tied to TPAs and PBMs create uneven financial incentives across 340B provider types. Grantees are often smaller, safety-net providers, yet pay a median of 23% of their gross 340B revenue to intermediaries, compared to roughly 8% paid by hospitals. This disparity creates a clear incentive for intermediaries to favor grantee arrangements – where they can extract a larger share of 340B savings – when possible. A Minnesota Department of Health report found that, in some cases, grantees paid more in fees to TPAs than they generated in 340B revenue . What was supposed to be a safety net for patients becomes a financial drain on providers.

New analysis from Health Capital Group shows how the 340B program’s structure enables health system middlemen to capture a growing share of savings from drug discounts. PBMs and TPAs play a central role in how prescriptions are processed through 340B. These are not small actors: PBMs and other intermediaries are large, vertically integrated corporations already under intense scrutiny from policymakers and regulators for their outsized control over Americans’ access to medicines. Though not the intended beneficiaries of 340B savings, these for-profit middlemen siphon revenue out of the program and away from patients.

Our analysis of claims data from 5.5 million patients finds that 71% of patients who visit a grantee provider also receive care from a 340B hospital. When these “overlapping” patients fill prescriptions at contract pharmacies each prescription must be attributed to a single covered entity.

Because intermediaries earn more from grantee arrangements, there are incentives to shift attribution toward those providers, particularly if policy changes make such shifts easier or more advantageous.

States are considering contract pharmacy mandates that apply only to grantees — leaving prescriptions assigned to grantees rather than hospitals when patients have relationships across multiple providers. Because for-profit intermediaries generally earn much higher fees on grantee-affiliated prescriptions, these policies create a strong incentive to shift those assignments away from hospitals whose contract pharmacy relationships will be significantly limited and toward grantee channels where compensation is highest.

We estimate that shifting attribution for all overlapping patients from hospitals to grantees would triple middlemen profits from grantees to $5.6 billion annually. Beyond grantee-only contract pharmacy mandates, other reforms that treat grantees differently from hospitals could also reduce hospitals’ resistance to attribution shifts, particularly among hospitals that are affiliated with outpatient clinics. For example, under a rebate model that excludes grantees, hospitals may prefer to shift prescriptions to affiliated grantees to avoid rebate requirements and retain upfront discounts, reinforcing the very financial dynamics policymakers are seeking to address.

The goal of 340B is to help safety-net providers serve vulnerable patients. Carving out grantees from the proposed 340B rebate model pilot — or advancing grantee-only contract pharmacy mandates — does not serve to protect safety-net providers and their patients. Instead, it exposes them to greater exploitation by middlemen in pursuit of profit.

Neal Masia is an adjunct professor of business and economics at Columbia University, co-founder and CEO of EntityRisk and a consultant and advisor to a variety of healthcare companies.