By Karen Handorf, Christine H. Monahan, and Kennah Watts
Pharmacy benefit managers (PBMs) have received significant attention from the White House, members of Congress, federal regulators, and state lawmakers, as well as the media, for exploitative, cost increasing practices. Yet, most employer health care dollars are spent on medical care where another type of corporate middlemen—third-party administrators owned by large insurance companies (TPAs)—operates. In contrast to PBMs, corporate TPA practices remain underscrutinized relative to their importance in the health care system.
While TPAs claim to lower medical costs––similar to PBMs’ assertions that they reduce drug costs––allegations made in litigation suggest this is not often the case. Other lawsuits and investigations raise concerns that TPAs are imposing hidden fees, benefiting from their own form of spread pricing, and otherwise prioritizing their own financial interests over their health plan clients when negotiating contracts and administering claims. Despite provisions in the Consolidated Appropriations Act of 2021 intending to allow employer plans to “look under the hood” at their health care claims data and compensation TPAs and other service providers receive, TPAs continue to obstruct employer efforts to monitor health plan spending and quality of care.
As Americans across the country demand health care price relief, TPAs warrant the same level of attention policy makers have been giving PBMs. Based on the growing anecdotal evidence of abuses and increasing profits for the TPA business lines of the nation’s largest insurers, examining these TPAs’ practices could enable policy makers to pursue reforms that help lower out-of-pocket costs, slow premium growth, and increase wages for workers.
Why Do Employers Contract With TPAs?
Nearly two-thirds of covered workers receive their insurance benefit from a self-funded health plan. Self-funded plans pay employee health care benefits directly, with funds from the plan sponsor (usually the employer) and employee premium contributions. Despite growing interest in direct-contracting models, particularly for services such as primary care, self-funded employers generally do not have the expertise or resources necessary to self-administer all of their employees’ medical claims, negotiate reimbursement rates with providers, or create provider networks. Employers attempting to negotiate directly with medical providers also can be stymied by anticompetitive agreements between health systems and insurers that prohibit network providers from directly contracting with employers. As a result, self-funded employers, guided by health insurance brokers and benefit consultants, typically contract with TPAs for their expertise, for access to the TPAs’ provider network rates, and for claims administration. But to be clear, the health care spending risk is born by the plan sponsor and employees, not by the TPA.
What Concerns Do TPA Contracts Raise?
A self-funded employer signs an administrative service agreement (ASA) when they first engage the TPA and again at contract renewal. Under the ASA, the TPA primarily charges the plan sponsor a per-employee-per-month fee for its services. The ASA may require the self-funded employer to establish and fund a bank account under the TPA’s control from which the TPA withdraws assets to pay benefit claims and pay itself fees. The ASA also gives the TPA broad authority to administer claims in accordance with plan documents, including the authority to reprice medical claims and collect provider overpayments. The ASA, however, generally does not provide the plan sponsor with the terms of the reimbursement agreement between the TPA and its network providers, nor a clear payment methodology for non-network claims, nor a detailed delineation of the TPA’s administrative practices, including the use of third parties to reprice claims. Like PBMs, TPAs consider their contracts with providers and other third parties to be proprietary and rarely disclose these agreements to self-funded employers. It is “proprietary” documents such as these, however, that determine how much health plans and plan members must pay and how that money is allocated among providers, the TPA, and other intermediaries.
The Illusion Of Negotiated Rates
TPAs historically kept their network provider negotiated rates secret, but this practice ended with implementation of the transparency in coverage regulations––federal rules that require plans to disclose their cost information for in-network rates and out-of-network allowed amounts. But what self-funded plan sponsors are coming to understand, as they compare their TPAs’ posted negotiated rates to their own hard-fought claims data, is that their ASAs may not require TPAs to pay network providers the negotiated rate.
For example, as a Connecticut Bricklayers union found, ASAs may allow TPAs to pay a provider more than the billed charge. One reason this may happen is revenue guarantees, in which the TPA promises to pay certain network providers a minimum amount of revenue per year, regardless of the amount the provider billed for actual services performed. The TPA can opt to tap self-funded plan assets, rather than its company’s own fully insured plan reserves, to meet these guarantees. (Court records show insurance companies similarly leverage self-funded plan assets to the benefit of their fully insured business lines in a practice called cross-plan offsetting.) Lawmakers and stakeholders have called out PBMs for similar pricing gamesmanship for retaining discretion to define and modify drug pricing terms and schedules to their own advantage.
Even when claims are paid based on the negotiated rate, plan sponsors may have cause to question whether they are getting a good deal. The insurance companies that own TPAs increasingly own physician groups and hospitals. UnitedHealth, for example, is the largest employer of physicians nationwide (through its fully owned division, Optum Health), while also covering tens of millions of self- and fully insured lives. Similar to how PBMs increase profits by steering participants to affiliated pharmacies, TPAs increase their parent company profits and drive up plan costs by steering participants to affiliated physicians and hospitals who they often pay considerably more than non-affiliated network providers. Insurance companies also negotiate lower prices for their fully insured products, in which they bear the financial risk for claims, than for the self-funded plans they administer as TPAs. This may be explained both by differences in network size and company financial incentives.
The Disappearance Of Usual, Customary, And Reasonable Rates For Out-Of-Network Care
Most ASAs today are vague on payment methodology for out-of-network providers. ASAs used to promise payment of “usual, customary, and reasonable” (UCR) rates when a negotiated rate did not apply. This concept offered a general benchmark for all stakeholders, including employers and plan members, as to what a plan would contribute for out-of-network care. When New York State investigators accused UnitedHealth of fraudulently determining UCR rates through use of its in-house database, Ingenix, UnitedHealth agreed to pay $50 million to fund a nonprofit claims database called FAIR Health to serve as a benchmark for UCR. Despite availability of this independent database, TPAs are replacing UCR and FAIR Health rates with inscrutable generalities. For example, one ASA contract states that the TPA would price out-of-network claims through “a mix of out-of-network programs that offer varying degrees of discounts, consumer advocacy, and cost controls.” Plans and plan members alike can no longer predict what the plan will pay.
Instead of reference to a benchmark, it is common for TPAs to use “repricers” for non-network claims, which often require providers to accept significant underpayments for claims if they want to be paid at all. (Whether a provider’s acceptance of these payments comes with balance billing protections for plan members varies.) The TPA and the repricer then collect from the employer a potentially substantial fee in “shared savings,” as high as 50 percent of the difference between the provider’s billed charge and ultimate payment. Through these programs, TPAs have adopted their own form of PBM “spread pricing.” Unlike PBMs TPAs and repricers only take a portion of the spread on medical claims, but the approach similarly allows the companies to profit from high provider list prices and incentivizes them to significantly lowball reimbursement.
TPAs argue that repricing saves plans money, even as the “shared savings fee” can sometimes be a multiple of the provider reimbursement amount. Self-funded employers may not know how much they are actually paying the provider and how much is the administrative fee, while plan members (employees and their dependents) may face significant financial liability to the extent balance billing protections are not negotiated during the repricing process. More research is needed to determine whether this “shared savings” approach to paying for out-of-network care is preferable to alternatives such as a return to UCR, more novel reference-based pricing models, or regulatory interventions such as out-of-network price caps, considering both total spending and patient financial exposure.
Claims Payment Gaming
TPA contracts often offer plan sponsors a flurry of other “savings” programs as part of their claims adjudication systems, sometimes for extra fees. These programs can mask misaligned incentives from which TPAs can profit. Perhaps most concerning is TPAs’ discretion over when and how closely to engage in prepayment claims review processes, combined with fee-based overpayment recovery programs. As one lawsuit has alleged, TPAs can increase their “savings” fees by initially allowing improper payments to be made and then collecting recovery fees when correcting the errors post-payment. Employers are unlikely to even recognize that the pre-payment bill review role they expect their TPA to perform is not happening consistently or at all.
Itemized bill review is a specific type of pre-payment review that TPAs use to look for billing errors and overcharges for hospital stays. Some common errors are duplicate charges for the same procedure, upcoding, and using multiple procedure codes for a single procedure. But lawsuits allege at least one major TPA maintains a “skip list” of providers to whom they do not apply such oversight, unbeknownst to plan sponsors. The TPA can, however, collect fees from plan sponsors if they later identify and recover overpayments to these providers after paying claims.
The financial incentives are reversed when TPAs adjudicate the claims of providers owned or affiliated with their parent company. Lax pre-treatment authorization and post-treatment review of these providers’ claims increase the overall revenue of the TPA’s parent at the expense of employers who must pay whatever the affiliated provider bills.
How Can Policy Makers Intervene?
The key to understanding how TPA business models work and how they generate profits requires looking under the hood at their agreements with health care providers and other third-party intermediaries. Congress and regulators are best positioned to require TPAs to produce such documents and give testimony that will help them evaluate whether reform is needed and craft appropriate remedying legislation or regulation. Employers have limited bargaining power to demand access to the claims data and fee disclosures that the Consolidated Appropriations Act of 2021 and the Employee Retirement Income Security Act (ERISA) of 1974 require they obtain, but do not explicitly require TPAs to provide. Self-funded employers have even less bargaining power to demand access to or changes in the TPAs’ third-party agreements that dictate how their plan money is being spent, and plan and participant lawsuits challenging TPA practices have encountered procedural barriers.
The public is becoming increasingly aware of corporate abuses in the insurance industry and requesting public officials take action. Insurance practices not only increase costs but directly affect employees’ access to promised benefits. Employers’ health costs in 2025 are expected to increase by 5.8 percent, the third straight year with an increase of at least 5.0 percent. Increased costs siphon away money that could otherwise be used to reduce employee cost sharing, increase take-home pay, provide additional benefits, or be used for business development. Congressional and regulatory action could improve transparency into, and understanding of, TPA practices so that neither employers nor policy makers are left in the dark as to how employer and worker health care dollars are being spent and to assist them in their cost containment efforts.
Karen Handorf, Christine H. Monahan, and Kennah Watts “Third-Party Administrators – The Middlemen Of Self-Funded Health Insurance” May 16, 2025, https://www.healthaffairs.org/content/forefront/third-party-administrators-middlemen-self-funded-health-insurance. Copyright © 2025 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.
