What Is a TPA in Health Insurance and What Do They Do?

Third-Party Administrators (TPAs) play a significant role in health insurance, though their functions are often not widely understood. This article clarifies the concept of TPAs and explains their responsibilities within health benefits.

Understanding Third-Party Administrators

A Third-Party Administrator (TPA) is an independent business organization that provides administrative services for health plans. These entities specialize in handling the day-to-day operations associated with health benefits, acting as a service provider rather than an insurer. They operate distinctly from insurance carriers, as a TPA does not assume the financial risk for claims or underwrite insurance policies. TPAs are sometimes referred to as Administrative Services Only (ASO) entities. Many states require TPAs to be licensed, with periodic renewals, reinforcing their regulated status in the industry.

How TPAs Function in Health Plans

TPAs integrate into a health plan structure by acting as a crucial intermediary, facilitating the flow of information and services among the employer (or plan sponsor), employees (plan members), and healthcare providers.

When an employer chooses to offer a health plan, the TPA steps in to manage its operational aspects. This arrangement allows the employer to maintain financial oversight while outsourcing the complex administrative duties.

In a self-funded model, the employer directly pays for employee healthcare claims, retaining the financial risk. The TPA then manages the daily operations, such as processing claims submitted by healthcare providers for services rendered to plan members, verifying coverage, processing payments, and handling member inquiries.

Key Services Offered by TPAs

One of their primary functions is claims processing and adjudication. This involves receiving medical bills from providers, verifying member eligibility, determining if services are covered under the plan, and then processing payments according to the plan’s provisions.

TPAs often maintain relationships with healthcare provider networks, offering plan members access to a wide range of medical professionals and facilities.

Beyond claims, TPAs handle customer service, addressing inquiries from plan members regarding their benefits, eligibility, or claims status.

They also manage enrollment and eligibility, ensuring that new employees are properly added to the plan and that existing members’ information is up-to-date.

Other services include billing and premium collection, data reporting and analytics to help employers understand plan performance, and ensuring compliance with various federal regulations like ERISA.

Self-Funded Health Plans and TPAs

Third-Party Administrators are most commonly utilized with self-funded health plans. In a self-funded plan, an employer directly assumes the financial responsibility for their employees’ healthcare costs, paying claims from their own funds instead of a fixed premium to an insurance company.

This contrasts with fully-insured plans, where an insurer bears the financial risk. Approximately 65% of covered employees in the U.S. are enrolled in self-funded plans.

Employers opt for self-funding to gain greater control and potentially reduce costs. However, managing a self-funded plan involves a significant administrative burden, including claims processing, network negotiations, and member support.

TPAs provide the administrative expertise and infrastructure many employers lack in-house. They allow employers to benefit from cost savings and flexibility without building a complex benefits administration department.