A third-party administrator is an organization that processes insurance
claims or certain aspects of employee benefit plans for a separate entity.
This can be viewed as "outsourcing" the administration of the claims processing,
since the TPA is performing a task traditionally handled by the company
providing the insurance or the company itself. Often, in the case of insurance
claims, a TPA handles the claims processing for an employer that
self-insures its employees. Thus, the employer is acting as an insurance
company and underwrites the risk. The risk of loss remains with the employer,
and not with the TPA. An insurance company may also use a TPA to manage its
claims processing, provider networks, utilization review, or membership
functions. While some third-party administrators may operate as units of
insurance companies, they are often independent.
Third-party administrators also handle many aspects of other employee benefit
plans such as the processing of retirement plans and flexible spending
accounts. Many employee benefit plans have highly technical aspects and
difficult administration that can make using a specialized entity such as a TPA
more cost effective than doing the same processing in house.
Health care Third-party administrators are prominent
players in the Health care industry and have the expertise and capability to
administer all or a portion of the claims process. They are normally
contracted by a health insurer or self-insuring companies to administer
services, including claims administration, premium collection,
enrollment and other administrative activities. A hospital or provider
organization desiring to set up its own health plan will often outsource certain
responsibilities to a TPA. For example, an employer may choose to
help finance the health care costs of its employees by contracting with a TPA
to administer many aspects of a self-funded health care plan.
Commercial general liability This term is also now commonly used in
commercial general liability policies or so called "casualty" business. In these
instances, the liability policies are written with a large self-insured
retention that operates somewhat like a deductible, but rather than being paid
at the end of a claim (when a loss payment is made to a claimant, the money
is paid up front by the insured for costs, expenses, attorney fees etc. as
the claim moves forward. If there is a settlement or verdict within the SIR,
then that is also paid by the insured up to the limit of the SIR, before the
insurer steps in and pays its portion. The TPA acts like a claims adjuster for
the insurance company and sometimes works in conjunction with the inside
insurance company claims adjuster or an outside claims investigator as well as
the defense counsel. The defense counsel in some situations is selected by the
TPA. The point is that the larger the SIR, the more responsibility the TPA has
over the control of the way the claim is handled and ultimately resolved. Some
self-insured retentions are in the millions of dollars and the TPAs are
large multinational non-insurance entities that handle all the claims. In
contrast, some self-insureds choose not to outsource claims handling to a TPA,
preferring instead to handle all claims in house. This is known as
self-administration. Retirement plans
Retirement plans such as a 401(k) are often partly managed by an investment
company. Instead of handling all the plan contributions by employees,
distributions to employees, and other aspects of plan processing, the
investment company may contract with a third-party administrator to handle much
of the administrative work and only handle the remaining investment work.
If a retirement plan is managed by an accounting or investment company, then
that accounting or investment company is not legally able to perform the required
ERISA audit as applicable. A typical TPA handles more than 401k,
but may also handle: New Comparability/Cross-tested
Profit Sharing Plans Traditional & Integrated
Age-Weighted 403(b) Plans
Cash Balance Plans Multi-Employer Plans
References External links
Healthcare Crisis Glossary Michigan statutory definition