As a small employer, you likely manage many tasks to keep your organization running smoothly. If you have the added burden of administering your organization’s health benefit, 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 like a health reimbursement arrangement (HRA)—look for solutions to help carry the load. One option is to outsource the administration of your benefits to a third-party administrator (TPA).
If you’ve never worked with a TPA before, this article will fill you in on what they do, how much they cost, and provide an alternative solution that will help you administer your health benefit on your own.
What is a third-party administrator (TPA)?
A TPA is an organization or individual that processes insurance claims or certain aspects of an employee benefit plan, like an HRA, for a separate entity. Insurance companies and employers with self-funded health plans frequently use TPAs. 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.”
If an employer that offers a self-funded insurance plan uses a TPA to handle its employees’ insurance claims, the employer still acts as an insurance company and underwrites the risk. The risk of loss remains with the employer—not with the TPA.
What does a third-party administrator do?
TPAs perform a variety of services that are either categorized 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 and separately charged.
TPAs supporting self-insured health plans can also support administrative services that would typically otherwise rest on an organization’s human resources and finance teams. A TPA may also fulfill annual reporting requirements, providing a better understanding of medical care expenses.
Because a TPA can typically handle a wide range of health plan needs, you can often choose customized services to meet your needs.
Some of the most common insurance services a typical TPA might provide are:
- Claims adjudication
- Health benefits reporting and analytics
- Supporting stop-loss insurance coverage
- Managed care
- Medical provider services, including access to healthcare networks and consolidating payments
- 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
There are more than four thousand possible combinations of products and supplemental services that TPAs charge for and provide. Claims adjudication services have various service lengths, ranging from 12 months to the life of a claim.
How much does a third-party administrator cost?
TPAs generally have difficulty forecasting the costs and pricing of their services. All TPAs have different pricing systems with a menu of services available, each with a different price, including 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 reimbursement, while the highest-priced TPA may not guarantee top-quality service or be the best fit for your organization.
What’s more, if you offer an HRA, 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.
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 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-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 TPA 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, such as 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?
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 or employee stipends, utilizing PeopleKeep’s benefits administration software is an excellent alternative.
HRA compliance can be difficult to understand. That’s why we handle the most time-consuming tasks, like preparing and updating legal documents, reviewing reimbursements, 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.
In addition, 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.
Outsourcing administration of your self-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 prefer the independence of administering your HRA 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 July 7, 2023.