Tips for selecting a third-party administrator


Your manager has asked you to do research on hiring a third-party administrator (TPA) to process employees’ health plan claims. When selecting a TPA, what factors should an employer evaluate?


When selecting a TPA, an employer should keep in mind that it is hiring a whole firm, not one person. But because the employer's relationship with the TPA is based heavily on trust, cooperation and partnership, an important factor for future success is that the employer and main contact at the TPA have a solid working relationship. Just as in selecting an attorney, accountant or other business consultant, the employer's goal should be to match the employer's needs with the TPA's offerings.

Specifically, employers should consider these five factors:

  1. Cost. Can the TPA help the employer to minimize both claim costs and administrative costs? TPAs have been pioneers in reducing claim costs and in developing efficient plan design, and TPAs typically cost less in administration than insurance companies or self-administration. Employers should be sure, however, to review more than the TPA fee in making such a selection. Employers should understand all services the TPA would provide and know the costs of each.
  2. Flexibility in plan design and service. Third-party administration is a service industry, and the client's wish should be the TPA's command (within the limits of law, common sense and any extra costs incurred). Normally, an employer should be able to reach a professional at the TPA firm who can answer its question, solve its problem, or begin the appropriate research within minutes. The interaction between the employer and the TPA should not be a distant and impersonal relationship.
  3. Legal compliance. This issue should be the most important area of consideration because it represents the employer's biggest liability. Each year, there are about 1,500 new laws, regulations and official opinions issued by about 150 different governmental entities regarding employee benefit plans. TPAs started 30 years ago with the specific goal of being highly informed on how to guide clients through the legal maze. As a result, TPAs spend about 40 percent of their time on government compliance for client plans, a cost that should be factored in when pricing the TPA's services. Potential administrators should also be queried as to how they stay up to date on new laws, regulations and opinions, and what role the TPA will play in ensuring that the employer complies fully with all government requirements.
  4. Hardware, software, personnel, capacity and experience. Does the TPA have the ability to handle the needs of the employer in question? The employer should ask such questions as: How fast does the TPA pay claims? What is its error rate? The employer also should walk through the operation, if possible, and should ask whether the TPA has other clients of similar size and needs. If so, meet with those employers or discuss these issues with those clients over the phone.
  5. Performance guarantees. Employers may want to ask a TPA about some form of performance guarantee based on speed and accuracy of processing claims. A performance guarantee includes either an incentive if performance standards are met or a penalty if the standards are not met. Note that some employers have found performance guarantees for turnaround time to be counter productive—the TPA may sacrifice accuracy for timeliness.

Source: Aspen Health Insurance Answer Book

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