Selecting a Third Party Administrator

By William Rusteberg

With the growing suggestion that the BUCAs are inflexible third party administrators unwilling and unable to administer Reference Based Pricing plans and other strategies in the market today, more brokers are seeking new partnerships with independent third party administrators (TPA). An independent TPA can offer much more than a traditional carrier model.

Selection of a third party administrator (TPA) is crucial to the success of a self-funded plan. Criteria usually revolve around several factors including compatibility. Corporate philosophies of the employer and TPA should harmonize.

The role of a third party administrator is to adjudicate and process benefits, provide billing and recordkeeping services and provide support and auxiliary services where possible and appropriate.  Selecting a TPA based on cost is not a good idea since such action will only result in confusion with plan administration. In addition, fees paid to a TPA represent a very small percentage of overall plan spend.

Unbundling of plan components can be of vital importance to the overall management of a self-funded employee welfare plan subject to ERISA. The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. Competitive procurement of plan administration, stop loss insurance, audit services and additional plan components, separately, enables a plan sponsor to fulfill their fiduciary duties in the broadest possible terms. Plan sponsors can achieve more plan efficiency, lower costs and more control.

The role of the TPA can be one of general manager upon which the plan sponsor delegates authority to sub-contract with vendors such as managed care networks, pharmacy benefit management, subrogation and other services important to the operation of the plan. Or, the plan sponsor can reserve the role of general manager to ensure the ability to “plug and play” the various components that are important to the operation of the plan. Plan sponsors who take this approach generally rely on an independent experienced advisor.