The insurance industry is intricate and multifaceted, and often benefits from the support of specialized entities, such as third-party administrators (TPAs), to help manage various operational aspects. Discover more about the cost savings of using a TPA and what functions they could provide your organization.
What Is a Third-Party Administrator (TPA)?
A TPA is an independent organization that provides specialized services to insurance companies and self-insured entities. They have become indispensable partners by helping their clients manage daily administrative operations for insurance plans or specific products and processes, completing tasks such as:
- Processing and Administering Claims
- Estimating and Adjusting Losses
- Enrolling Customers and Issuing Invoices
- Issuing Policies
- Collecting Premiums
- Monitoring Compliance with Federal and State Regulations
Outsourcing functions to these third-party administrators allows insurance companies to focus on their core competencies, such as underwriting and risk management, while ensuring that other operational elements are efficiently handled.
If TPAs are part of your evolving organization, it is imperative to adopt a robust and successful oversight program, which requires ongoing monitoring and attention from multiple functions. Insurance companies must work to build strong relationships with their TPA partners and cultivate an environment of transparency while striving to produce efficient and timely results.
How Do Third-Party Administrators Work?
In most TPA outsourcing arrangements, the insurance company continues to maintain ultimate primary responsibility for the services performed and adhere to corporate policies and processes, as well as state and federal guidelines. Therefore, having a robust and holistic approach to managing TPAs is extremely important. When overseeing these outsourced functions, effective monitoring controls to evaluate non-compliance risk, regulatory compliance requirements and processing integrity should be prioritized.
Typical Functions of Third-Party Administrators in the Insurance Industry
As mentioned above, TPAs can offer the following services:
Claims Management
TPAs play a crucial role in the claims process, acting as intermediaries between the insurer and the insured by reporting, logging and tracking claim information, assessing claimant damages, verifying documentation, determining coverage, setting case reserves and facilitating payment disbursement, among other processes.
TPAs often utilize their own claims systems or integrate or co-source claims entry and tracking with insurance entities in order to provide efficiencies, absorb variances in resources needs and expedite the claims reporting and payment process, ensuring accuracy and regulatory compliance.
Customer Service
With a focus on enhancing customer experience, TPAs can manage policyholder inquiries, provide information on coverage and benefits, and address grievances to help maintain policyholder satisfaction and loyalty.
Risk Assessment and Fraud Detection
By leveraging advanced data analytics and technology, TPAs can assist insurers in evaluating risk profiles and identifying potentially fraudulent activities to help reduce financial losses and maintain insurance portfolio integrity.
Regulatory Compliance
TPAs help insurance companies stay compliant with state and federal regulations, thereby avoiding legal pitfalls and ensuring smooth operations, by preparing and administering premium tax returns, performing payroll audits for premium adjustments (workers compensation programs), performing routine OFAC screenings, and outsourcing state agency and insurance licensing programs and tracking, among other tasks.
Cost Management
By optimizing processes and employing economies of scale, TPAs can reduce administrative costs for insurers, leading to increased financial performance for insurance companies.
Key Considerations When Employing Third-Party Administrators
If you are considering employing a TPA or already have relationships in place, consider the following elements to ensure that they are meeting your business’s operational and regulatory needs.
Operational Oversight
Insurers should establish clear performance metrics to ensure that TPAs meet the expected service quality. Review how service level standards are monitored, how oversight and internal controls are managed, how trust is established in daily operations, and the information available to monitor TPA performance and adhere to quality standards.
Risk Exposure and Mitigation
Insurers should assess if they recognize potential TPA risk exposures and consider how those risks are managed over time. Review how often management meets to evaluate TPA services. Given the sensitive nature of insurance data, TPAs must have robust cybersecurity measures in place to protect against breaches and unauthorized access, as well as to hire (background checks), retain and reassign specific resources to each insurer while maintaining quality and consistency of processing.
Financial Reporting
Monitor the financial strength of your TPA, how they cultivate transparency in the relationship and how their systems are structured and monitored. Additionally, consider how their systems are integrated with your information management systems.
Regulatory Compliance
Conduct regular audits to validate activity and ensure that your TPA is meeting regulatory and state compliance requirements.
Reliability of Information
TPAs should completely and accurately process information on your behalf. Consider how a TPA’s services impact your financials and reporting accuracy, as well as what controls are in place to ensure their information can be relied on. TPAs should obtain and share a related SOC 1 report annually from an independent certified public accountant (CPA) firm that attests to the design and operating effectiveness of controls. This report will give clients assurance on the reliability of services and information processed and provided by the TPA.
Information Security
Determine how your critical data and information is maintained and secured against unauthorized access, use and reproduction. This will include identifying the reliability of the information and security programs the TPA uses to protect your data and the data of your insureds. You will want to know if your data is maintained “on-shore,” properly secured with required notifications provided if stored, or accessed “off-shore.”
TPAs should obtain and share a related SOC 2 Type 2 report annually from an independent CPA firm that attests to the operating effectiveness of controls to give clients assurance surrounding the security of data shared with the TPA.
Benefits of Partnering With Third-Party Administrators
While outsourcing business functions can come with risks, hiring a TPA can also come with advantages:
- Scalability and Flexibility: TPAs provide scalable solutions that can be tailored to the specific needs of an insurance company. This flexibility allows insurers to adapt to market changes without overhauling their internal operations.
- Access to Expertise and Technology: TPAs bring specialized knowledge and cutting-edge technology. Their expertise in claims management, customer service and regulatory compliance can significantly enhance operational efficiency and service quality.
- Enhanced Focus on Core Business: By outsourcing administrative functions to TPAs, insurance companies can concentrate on their primary business activities, such as product development and risk assessment, thereby driving growth and innovation.
Insurance Third-Party Administrators: Frequently Asked Questions
Like a TPA, an Administrative Services Only (ASO) provider can offer a health insurance company outsourced operational functions, but there a few differences between the two. An ASO is typically part of a larger insurance company while a TPA is an independent organization. ASOs also focus on standard services for a fixed fee while TPAs provide more customizable offerings, flexible pricing and collaborate more closely with their clients.
It depends on the state, but most TPAs will need to be licensed or comply with other regulations in order to do business. Currently, 46 states have a licensing process in place for insurance third-party administrators.
There are many reasons to hire a third-party administrator. They can provide a wide range of administrative tasks and help free up staff to focus on more specialized activities. Typically, TPAs are most used by companies with self-funded health plans, businesses with complex employee benefits plans and organizations with limited HR resources.
How Cherry Bekaert Can Help
By leveraging the resources of TPAs, insurance companies can navigate the complexities of the industry and regulatory environment with greater agility and focus. As the demand for personalized and efficient outsourcing or third-party processing services grow, the role of TPAs is set to become even more critical, creating increased importance of a strong and robust vendor management and oversight program by insurance entities.
Our Risk & Accounting Advisory team provides full-range advisory and consulting services. Our TPA and vendor management program assessments offer in-depth analysis and can:
- Perform a risk assessment that outlines action items for a successful TPA management and oversight program.
- Design and roadmap TPA oversight solutions and assist in the implementation of vendor management programs.
- Provide guidance and assistance to insurers who are considering outsourcing functions to TPAs.
- Evaluate the internal TPA management and oversight program currently in place and recommend enhancement opportunities.
- Perform ongoing assessments and outsourcing solutions for required audit engagements, including review of TPA operations and controls assessment.
- Assess applicable IT systems and controls for TPAs, including evaluation of third-party vendors, system controls, cybersecurity readiness and security programs in place to ensure data integrity and security.
We aim to understand your business and assess the implemented TPA program. Our team of experienced professionals provides practical solutions that allow you to optimize the benefits of utilizing TPAs, while demonstrating the overall conceptual soundness to management and regulators alike. For more information on how we can help or to learn more, reach out to your Cherry Bekaert advisor or our Risk & Accounting Advisory team.
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