What it means
When a business chooses to fund its own employee health benefits or workers' compensation, it is described as self-insured. It carries the financial risk of claims, but it rarely has the expertise to process them.
A third-party claims administrator steps in to run the process while the business keeps the financial risk. The administrator typically verifies coverage, collects evidence, assesses the claim against the policy terms and authorises payment.
It may also negotiate with medical providers, arrange investigations and handle disputes. Many administrators also provide reporting so the employer can see claim trends.
Insurers also use these firms. A small insurer might outsource claims handling in a region where it has few staff, or for a specialist class of cover.
The insurer remains responsible to the policyholder, but the administrator carries out the day-to-day work. Fees are usually charged per claim, per policyholder per month or as a percentage of premiums.
For a self-insured employer, these administration fees are a cost on top of the claims themselves. The employer needs to compare the fee with the cost of doing the work in-house.
The key issue for a finance team is control. An administrator controls how generously or tightly claims are handled, which directly affects the money the employer pays out.
Clear service agreements, regular audits and reporting on claim cost, speed and disputes help keep the arrangement honest. Regulation is another consideration, because administrators handling health or insurance claims are often licensed and must protect personal data.
The employer should check the firm's licences, its data security practices and its record with similar clients. Contracts should also say who owns the claims data if the relationship ends.
In practice
Real-world examples.
Example
A mid-sized manufacturer self-insures its workers' compensation. It hires an administrator to investigate injuries, manage medical bills and handle return-to-work plans. The administrator reports monthly so the finance team can track costs against budget.
Example
A regional insurer launches a new travel policy but has no claims team for overseas medical emergencies. It contracts with an administrator that has a global network of hospitals. Claims are handled in the traveller's local time zone and language.
Example
A school district funds its own employee health plan and appoints an administrator to process claims. Staff members use the administrator's helpline to check coverage. The district receives quarterly reports and uses them to adjust benefits at renewal.
Formula
Calculation
Total cost of a self-insured plan = Claims paid + Administrator fees + Stop-loss insurance premiums
Suppose a company with 200 employees self-insures its health benefits. Claims paid over the year total $1,400,000. The administrator charges a fee of $35 per employee per month, so fees are 200 x 35 x 12 = $84,000. Stop-loss insurance, which caps the employer's exposure to very large claims, costs $120,000. Total cost = 1,400,000 + 84,000 + 120,000 = $1,604,000, or 1,604,000 / 200 = $8,020 per employee.Case study
Seen in the real world.
Greenfield Logistics is an illustrative, fictional company with 400 employees that moved from a fully insured health plan to a self-insured one to cut costs. It hired a third-party claims administrator to run the plan and bought stop-loss cover for large claims.
In the first year, claims came in lower than the premiums it used to pay, and the company saved about $150,000 after paying the administrator's fees. The finance manager used the administrator's reports to spot that a small number of high-cost claims drove a large share of spending.
The illustrative lesson was that the arrangement gave the company both savings and visibility, but it also brought volatility. The finance team built a reserve to cover a bad year and negotiated a cap on the administrator's annual fee increases. In the second year, one employee's treatment generated a very large claim, and the stop-loss policy reimbursed the amount above the agreed limit. Without that cover, the year's result would have swung from a saving to a loss.
Watch out
Common mistakes.
- Assuming the administrator carries the insurance risk, when in a self-insured plan the employer still pays the claims.
- Choosing an administrator on the lowest fee alone, ignoring claims accuracy, speed and service quality.
- Failing to audit the administrator, which can allow overpayments or errors to go unnoticed.
Questions
People also ask.
What does a TPA do?
It processes and manages claims on behalf of an insurer or self-insured employer, including checking coverage and authorising payments.
Is a TPA the same as an insurer?
No, an insurer takes on the risk and pays claims from premiums, while a TPA provides administrative services for a fee.
How is a TPA paid?
Usually through a fixed fee per claim or per member per month, sometimes a percentage of premiums. Fees based on a percentage of claims can create a poor incentive, so many employers prefer a fixed fee.
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