Insurance companies are very crafty. They attract employers with low premiums and competitive benefits but make it difficult when it comes to paying claims. This leaves employers stressed out and spending so much time filing appeals or seeking legal counsel.
That’s why many employers decide to self-insure. But being self-insured isn’t easy. Between handling claims, following regulations, and dealing with complex provider networks, employers can end up frustrated by the time they finish just one claim. That’s where third-party administrators or TPAs come in.
So, what exactly are these third-party administrators, and are they really necessary? Read on to find out.
What Are Third-Party Administrators?
A third-party administrator, or TPA in short, is a company that takes over the administrative operations of a business. These companies do not provide insurance services. Even a popular name like Sedgwick does not issue insurance policies but will happily handle all claims-related processes until your employees get their deserved compensation.
To get a firm understanding of third-party administrators, we’ll first have to understand the concept of self-funding.
What Is Self-Funding?
Self-funding is an approach to insurance where companies/employers act as their own insurers. Employers can save so much money by funding their own insurance, but they need to manage the risks carefully.
It also means employers must track every penny they spend to maintain profit margins. This introduces the stop-loss notion.
What Is Stop-Loss
Stop-loss is a popular term in asset trading, but what does it have to do with self-funding and insurance? Well, an employer buys stop-loss or excess funding insurance to protect themselves against catastrophic damages that may drain their pockets.
Self-funding employers can only allow a tolerable amount of risk within their budget. They may be unable to cover extreme losses beyond the tolerable amount. Stop-loss insurance is a financial safety net that shields employees from running their budgets.
Most stop-loss insurers use a reimbursement approach to their services. This means employers will cover the full cost of the employees’ claims. Later, the employer will file a claim with the stop-loss insurer for reimbursement of all expenses above the stop-loss or plan’s deductible.
That said, stop-loss insurance providers will only cover employers if:
- The expense claimed is eligible as described in the benefit plan agreement
- The loss experienced is covered in the insurance policy
Types of Third-Party Administrators
Health Plan Administrators (HPAs)
As the name implies, health plan administrators oversee self-funded healthcare plans. They’re hired by employers who choose to pay their employees’ health insurance claims. To avoid the risk of DIYing health insurance, employers hire these TPAs to handle critical administrative tasks that the employer may lack the time or experience to handle, including:
- Claims processing
- Budgeting and cost control
- Compliance and record-keeping
Health Plan Administrators also have strong relationships with multiple carriers. They help employers explore the most viable options for their budgets and specific business niche. Given that 67% of U.S. workers were under a self-funded plan in 2024, HPAs form a significant chunk of the health insurance industry.
Workers’ Compensation TPAs
Workers’ compensation TPAs, on the other hand, deal with workers’ compensation. Not only do they process claims, but they also oversee workers’ contributions to ensure their workers’ comp plans are stable.
Workers’ compensation keeps the claims process fair and ensures compliance with workers’ comp regulations. However, it often comes with a few gray areas, especially in the regulatory aspect.
Employees may exploit these areas to get huge payouts from employers. It’s also worth noting that some states restrict TPA involvement in workers’ compensation programs.
Retirement Plans Administrators
Although employers in the country have no legal obligation to offer retirement plans or 401(k)s, many of them do. This, however, doesn’t mean that handling retirement matters is easy.
For instance, companies must ensure compliance and juggle different investment options, all while managing employee contributions. Retirement plan administrators step into shoulder the burden, handling responsibilities like:
- Ensuring both employee and employer contributions are managed and accounted for effectively
- Making sure employer retirement plans align with IRS and the DOL retirement plan regulations as per the Employee Retirement Income Security Act (ERISA)
- Helping employers find the most suitable investment options for their hard-working employees
- Filing taxes and maintaining clear records on distributions, contributions, and balances
What Are the Benefits of Third-Party Administrators
TPAs are very beneficial for self-funding employers. But how exactly are they helpful, and why have they become so popular over the years? It could be due to the following reasons.:
They Save Time and Money
TPAs can cut your administrative budget quite significantly. One way in which they save money is by pooling employers, where they group members under a single plan and get cheaper rates than employers would get if they entered a plan individually.
They also save employees the hassle of dealing with different providers and tons of paperwork when filing claims.
They Are Flexible
With third-party administrators, employers can customize their plans to suit them best. They can choose specific benefits and add extra ones, like coverage for critical illnesses. Plus, TPAs also allow employers to pair different plan types without paying huge premiums.
They Simplify Claims Processing
Claim processing isn’t easy, especially for businesses with limited human resources. TPAs help take the load off by completely taking over the entire claims process. They can help with everything from initial claim submission and documentation review to negotiation, approval, and final disbursement.
Are Third-Party Administrators Right for You?
Third-party administrators are life savers for many businesses in the country, which explains why the TPA industry is worth a staggering $429.94 billion as of 2024.
Now that you have a firm understanding of what these service providers can offer your company, it’s on you to find the best TPA for your needs and reap the many benefits. Just remember that not all states allow TPAs to manage workers’ comp, but they get the green light for pretty much all other insurance and benefit types.