What Is a Third-Party Administrator (TPA)?
A third-party administrator is a company that provides operational services such as claims processing and employee benefits management under contract to another company. Insurance companies and self-insured companies often outsource their claims processing to third parties. Such companies are often referred to as third-party claims administrators.
- Health insurance companies often outsource their claims operations to third-party administrators.
- Liability insurance claims are typically handled by third-party claims administrators.
- The role of third-party administrators is growing to include many other day-to-day operational services.
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Understanding Third-Party Administrators (TPAs)
The use of third-party administrators is becoming common in many businesses, and the range of tasks they're undertaking is growing. They have distinct roles in the health insurance industry, commercial liability insurance, and in investment company operations. Some third-party firms are moving into areas such as forensic accounting services, workers' compensation audits, and emergency response planning.
Third-party claims administrators are commonly used by health insurance providers who outsource many of their administrative functions. Claims administration, premium billing, customer enrollment, and other day-to-day operations are often handled this way.
A hospital or a health provider organization that sets up its own health plan will often outsource the administrative responsibilities to a third party. A company that opts to self-fund its employee health insurance plan typically contracts with a third-party claims administrator to run the program.
The compound annual growth rate of third-party administrators in the U.S. insurance industry is projected to be 6.3% from 2021 through 2030. Market size was measured at $280.69 billion in 2020 and is anticipated to reach $514.98 billion by 2030. The key factor weighing down this industry is high competition. Low volatility in revenue is the key positive.
Some third-party claims administrators are multinational giants that handle claims for large corporations.
Types of Third-Party Administrators
The types of programs outsourced to third parties have expanded and may include the processing of employee retirement plans and flexible spending accounts.
Commercial Liability Insurance
Third-party claims administrators for commercial liability insurance providers act much like claims adjusters. They may work in conjunction with the insurance company's internal claims adjuster as well as outside claims investigators and defense counsel. The third-party claims administrator might even choose the defense counsel.
Some third-party claims administrators are large multinational non-insurance entities. These giants in the industry generally handle the claims of large corporations.
The largest third-party claims administrators by revenue in January 2022 were Sedgwick Claims Mgt., UMR Inc., and Crawford & Co.
Retirement Plan Administration
Third-party claims administrators may manage employee retirement programs such as 401(k) plans. The company is often owned or managed in part by an investment company in such cases. The investment company handles the money management and the third-party administrator handles the day-to-day account operations and customer care functions.
Some third-party administrators have grown into multinational corporations, but there are also individual administrators who have gained TPA certification and who work as independent contractors. TPAs must have a deep knowledge of the rules and regulations of the services they're responsible for administering.
How Many U.S. Workers Have Insurance Plans That Are Administered by Third Parties?
The Society of Professional Benefit Administrators indicates that about 60% of American workers are enrolled in plans that are managed and administered by TPAs. And this doesn't include federal employees.
Do TPAs Have to Be Licensed?
Each state has its own regulations regarding the certification and licensing of TPAs. Some states require that TPAs file copies of their agreements with insurance companies to the state insurance department.
What Are Some Common Complaints About Third-Party Administrators?
The Georgetown University Center on Health Insurance Reforms reports on three common problems with some TPAs. They're not always open with employers regarding the prices that their health plans pay for care. Congress attempted to address this problem in the Consolidated Appropriations Act of 2021, but there have still been some violations.
TPAs have also been charged with hiding administration fees and using questionable tactics to collect alleged overpayments. But these complaints largely center on insurance companies that act as TPAs.
The Bottom Line
Third-party administrators handle claims operations for health insurance companies who elect to use their services. Some insurance companies act as TPAs as well. The field is growing.
It can be a convenient solution for employers because many of them don't have the resources to handle the intricacies of a health plan themselves. You can ask your employer if it uses a TPA and request contact information if you have any questions or concerns about your plan.