What is a TPA in insurance?
A third-party administrator, or TPA, is a company that carries out administrative work, most often claims handling, for an insurer, a self-insured employer, a captive or another party that carries insurance risk. The TPA works under contract for a fee. It does not insure the risk, and it does not pay claims from its own money.
What a TPA does
Depending on the line of business and the contract, a TPA may:
- take in, investigate, adjust and pay claims from funds provided by the party carrying the risk
- manage eligibility and enrollment for benefit plans
- collect premiums or contributions
- produce loss runs and other reports, including reports to stop-loss carriers or reinsurers
- provide cost-containment services such as bill review
State law often defines a TPA by these activities. The NAIC model law on third-party administrators describes an administrator as a person who collects charges or premiums, or adjusts or settles claims, in connection with life, annuity, health, stop-loss or workers' compensation coverage, and it excludes, among others, insurers handling their own business and employers administering their own plans. States adopt such rules differently, so whether a TPA needs a license depends on the state and the line.
TPA, insurer, broker and plan sponsor
| Role | What it does | Carries the insured risk? |
|---|---|---|
| Insurer | Issues the policy and pays covered claims | Yes |
| Third-party administrator | Administers claims and services under contract | No |
| Broker or agent | Places coverage and advises the buyer | No |
| Plan sponsor of a self-funded health plan | Funds the plan and holds the sponsor’s duties | Yes, for the self-funded layer |
| Captive | Insures its owners’ risks | Yes, within its retention |
Under the NAIC model, an insurer that uses a TPA remains responsible for the TPA's acts, and the TPA must work under a written agreement with the party it serves. For an employer health plan governed by ERISA, the plan administrator is the person the plan documents name, or the plan sponsor if no one is named; a TPA hired to process claims is a contractor to the plan, and the employer keeps its duties as plan sponsor.
Claims administration in different settings
- Self-funded health plans: processing medical and pharmacy claims, network access and eligibility, coordinated with stop-loss cover.
- Workers' compensation: handling claims under state law for insurers and self-insured employers. Some states set conditions on claims administration for self-insurers; California, for example, requires new private self-insured employers to use a licensed TPA for their first three years.
- Liability and property: adjusting claims for captives, risk retention groups, insurers and organizations with large retentions.
These are different businesses, and many TPAs specialize in one or two of them.
What to ask before appointing a TPA
- Which lines and states are you licensed or experienced in?
- Who owns the claims data, and how can we access it during and after the contract?
- What service standards will you commit to, and how are they reported?
- How are claim funds held and reconciled?
- How are fees set, and which costs are billed separately?
- How do you report to our stop-loss carrier, reinsurer or regulator?
Make sure the written agreement answers each of these.
Finding a TPA
To compare administrators by line and service, browse third-party administrator companies. For how a TPA fits into employer health self-funding, see self-funded health plan solutions.
Educational information only; not insurance, legal, tax, actuarial or regulatory advice.