A Third Party Administrator (TPA) is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as “outsourcing” the administration of the claims processing, since the TPA is performing a task traditionally handled by the company providing the insurance or the company itself. The TPA may also be hired if a company is self-insured. In that case, the TPA will not only handle claims from the common pool of money for that purpose, it will also coordinate payment of catastrophic illness premiums and other details of the insurance program.
An insurance company may also use a TPA to manage its claims processing, provider networks, utilization review, or membership functions. Third party administrators also handle many aspects of other employee benefit plans such as the processing of retirement plans and flexible spending accounts. Many employee benefit plans have highly technical aspects and difficult administration that can make using a specialized entity such as a TPA more cost effective than doing the same processing in house.
Outsourcing such important tasks to TPA’s carries a huge risk to companies. A SSAE 16 audit provides transparency around the TPA’s internal controls. In fact, many companies will not even consider outsourcing to a TPA who does not have a SSAE 16.