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Updated on December 4, 2023
A third-party administrator (TPA) in health care is an external vendor that offers administrative services, and often consultation, for health insurance plans. From an employment perspective, TPAs use their industry expertise to assist employers in making the best operational and financial decisions regarding their health insurance offerings.
The Society of Professional Benefit Administrators says, “Most plans administered by TPAs involve some degree of self-funding (a.k.a. self-insurance).” That said, “Some TPAs administer fully-insured plans on behalf of insurance companies.”
When employers opt to finance their health insurance plans independently, these plans are called “self-funded” or “self-insured.” Under this option, the employer bears all responsibilities and risks associated with delivering health insurance to their workforce. Not only does the employer fund the plan, but they also pay employee medical claims out of their own revenue.
This contrasts with a fully-insured plan, which involves buying health insurance from an insurance company, instead of self-funding the plan. Here, the employer remits a fixed premium to the insurer. In return, the insurance company assumes the financial liability of the coverage, which includes settling medical claims.
Due to the complex nature of overseeing the claims process, companies with self-funded plans often turn to a third-party administrator. Nonetheless, TPAs offer various services that can benefit both self-insured and fully-insured employers.
“Most employers with a group health plan work with a TPA because managing the plan is a complex process. Part of the TPA’s job is to act as a go-between you and your employees.”
— Paul Foery, OnPay's Vice President of Insurance
TPAs may offer different services, but some of the more common ones include:
Before hiring a TPA, it’s important to ensure they fulfill your specific needs. For example, you should verify if the TPA meets the state licensing requirements. (In most states, TPAs need to be licensed or registered.) It’s also vital to determine whether the TPA has the expertise and resources to offer top-notch benefits administration tailored to your company.
“We were struggling to manage the various benefit programs we offer, so we partnered with a third party administrator. The TPA not only administers our group health plan but also addresses employee questions about their health insurance.”
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