Do I need a third-party administrator (TPA)?

As a small employer, you likely manage many tasks to keep your organization running smoothly. Do you have the added burden of administering your organization's health benefit? if so, this can be an unwelcome addition to your never-ending to-do list.

That's why many small employers—particularly those that offer self-funded plans—look for solutions to help carry the load. One option is to outsource your benefits administration to a third-party administrator (TPA).

If you've never worked with a TPA before, this article will explain what they do and how much they cost. We’ll also cover whether it makes sense to use TPA if you offer a health reimbursement arrangement (HRA) as your health benefit.

In this blog post, you’ll learn the following:

• How third-party administrators (TPAs) handle insurance claims and employee benefit plan services.
• What core and non-core services TPAs offer to support self-insured health plans.
• Which factors to consider when deciding between TPAs and administrative services only providers (ASOs).

What is a third-party administrator (TPA)?

A TPA is an organization or individual that processes insurance claims and other aspects of an employee benefit plan for a separate entity. Insurance companies often outsource their claims operations to TPAs. Employers with self-funded health plans frequently use them as well. When either of these entities leverages a TPA to perform a task traditionally handled by the insurance company or employer, this is known as “outsourcing.”

An employer offering a self-funded or level-funded insurance plan can use a TPA to handle its employees' insurance claims. The employer still acts as an insurance company and underwrites the risk. So, the risk of loss remains with the plan sponsor—not with the TPA.

What does a third-party administrator do?

TPAs perform various services that they categorize as core or non-core. Core TPA services are those every employer uses, such as claims processing and enrollment. Non-core services, like medical management and mental health administration, are supplemental. TPAs charge for these services separately.

TPAs supporting self-insured health plans can also provide administrative services that would otherwise rest on an organization's human resources and finance teams. A TPA may also fulfill annual reporting requirements.

Because a TPA can handle a wide range of health plan needs, they tailor each TPA-administered plan to fit the needs of the plan sponsor and their specific workforce.

Some of the most common operational services a typical TPA might provide are:

• Claims adjudication
• Record keeping
• Health benefits reporting and analytics
• Supporting stop-loss insurance coverage
• Managed care
• Medical provider services, including access to healthcare networks and consolidating payments
• COBRA
• Mental health administrations
• Return to work programs
• Renewal application
• Customer service for plan members

When it comes to administering an HRA, TPAs will often:

• Provide applicable documents for employee benefit plans
• Accept and substantiate reimbursement requests
• Disburse money to employees from an organization's account

TPAs can charge for and provide more than four thousand possible combinations of products and supplemental services. Claims adjudication services have various service lengths, ranging from a year to the life of a claim.

How much does a third-party administrator cost?

Forecasting the costs and pricing of comprehensive services can be challenging. All TPAs have different pricing systems with a menu of personalized services available, each with a different price. This includes insurance services shared among several related firms and/or outsourced to specialists.

This can make shopping around for the right TPA service like comparing apples and oranges. The savings from a low-cost TPA can be swiftly wiped out with one mishandled claim. At the same time, the highest-priced TPA may not guarantee top-quality service or be the best fit for your organization.

TPAs have other business interests, too. For example, they can push employees to choose certain policies because they'll earn a commission on the sale. This means they may recommend policies that aren't best for your employees.

Before entering into a contract with a TPA, your organization should:

• Get a clear description of the services they offer
• Get an overview of fees or charges for TPA services (like any potential filing fee or renewal fee that may arise)
• Receive contact information for client references
• Obtain a summary of TPA licensure status within the state or states of operation for the health plan

What's the difference between a third-party administrator and an administrative services only provider?

When considering getting administrative help for your self-insured or level-funded plan, you'll likely encounter administrative services only (ASO) providers in addition to TPAs. Before you choose one or the other, you should know how they both operate within the health insurance industry.

Both service providers can provide support for a self- or level-funded plan. However, they do have their differences:

• A TPA may operate independently of health insurance companies, offering greater flexibility in plan design and healthcare provider networks.
• An ASO is typically a subsidiary of a health insurance company, which may limit your company's provider network options to those the insurer allows.

While TPAs and ASOs may perform similar functions, the independent management of some TPAs versus the ASO as a subsidiary of a health insurer can make a difference in a plan's network options. With a TPA, companies can often gain more health coverage, funding, and reimbursement options.

What's the difference between a third-party administrator and a health insurance company?

In a group health insurance context, the insurer managing a fully-insured health plan provides coverage and handles many administrative tasks. This includes claims operations and Employee Retirement Income Security Act (ERISA) compliance.

With a self-funded health plan, the company pays for actual employee healthcare costs through a fund, a model that can provide cost-saving opportunities. Instead of providing health insurance or employee benefit plans, a TPA helps coordinate reporting from outside vendors and offers administrative services to support the self-funded health plan.

Do I have to use a third-party administrator for HRAs?

While HRAs are a type of self-funded health benefit, they function much differently than a self-funded group policy. They’re not as complex. They also don’t come with annual rate hikes or have steep participation rates that many small employers can’t meet.

However, there are some compliance considerations that can be difficult to understand. This is why some employers may consider a TPA if they offer an HRA.

When it comes to administering an HRA, TPAs will often:

• Provide applicable documents for employee benefit plans
• Accept and substantiate reimbursement requests
• Disburse money to employees from an organization's account

However, many TPAs require you to pre-fund an account with each employee's annual allowance. This is a large sum of money to pay upfront, and administrators often invest these funds and collect the interest for themselves.

If you're wary of relinquishing control of your health benefit to a TPA, know that outsourcing isn't your only option. In many cases, you can use administration software. If your organization offers an HRA, utilizing PeopleKeep's benefits administration software is an excellent alternative.

That's why we handle the most time-consuming tasks, like preparing and updating legal documents, reviewing employee reimbursement requests, and even sending you a weekly email report with any reimbursements you need to approve. That way, you stay in complete control without worrying about the fine print.

You and your employees will have access to our award-winning customer support team every step of the way. So whether you have questions about administering your HRA, how to reimburse your employees, or whether or not an expense qualifies, we're here to help.

Finally, while TPAs often require an up-front investment, our HRA software administration allows you to pay as you go for a simple monthly fee and no long-term commitments.

Conclusion

Outsourcing administration of your self-funded or level-funded health plans to a TPA can be a tempting option, but it comes with more up-front costs, a less direct line of support for your employees, and loss of control of your benefit.

If you are considering an HRA for your health benefit and want the independence of administering it on your own but want a time-saving tool to handle the more tedious tasks, contact us at PeopleKeep to get started.

This article was originally published on December 9, 2012. It was last updated on August 22, 2024.