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What is a third party administrator in health insurance?

A brief overview...
  • Third Party Administrators take care of the process of health insurance claims from another organization
  • Many people view Third Party Administrators as an outsourcing agency that handles tasks normally associated with the company or health insurance providers themselves
  • Companies and organizations that self-insure their employees are the most common users of a Third Party Administrator
  • Typically, the employer underwrites all risks associated with the health insurance policies that are granted to its employees
  • All risk incurred under this scenario is incurred by the employer and not the Third Party Administrator

The health insurance field can be difficult to navigate, and this is particularly true for many companies around the country. It is important to offer health benefits to employees in order to attract the best talent, but it can also be extremely cumbersome to manage all of policies and regulations that go with it.

These are just a few of the basics that can help explain what the role of a third party administrator is within the field of health insurance. It would be beneficial, however, to cover a few of these points in more detail below.

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Why would an employer opt to use a third party administrator?

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There are cases to be made for businesses of all sizes to offer employees their own form of health insurance. With premiums continuing to increase across all sectors of society today, employers are forced to make a decision to either ask their employees to pay a high share of the cost or to self-insure. The concept of self-insurance is nothing new. It is a way of mitigating risk,

The employer is essentially betting that the majority of their employees will remain healthy enough so as to result in a lower overall benefits bill for the organization as a whole.

The money saved on the monthly premiums that would be paid to a traditional HMO is then used to pay for employee medical expenses only as they occur.

Third Party Administrator Services

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Just like with most service oriented organizations in existence today, there are a variety of services offered by third party administrators depending on the needs of each individual client. Here are a few of the more common principles and concepts to keep in mind.

  • There are certain core expenses that every employer using a third party administrator will incur. These include the processing of claims and the enrollment services offered to each employee.
  • There are also services that are not utilized by every employer, so they are offered as a part of a separate service agreement. These are considered to be supplemental services that not every employer will need or desire. Such services include medical management, the administration of mental health benefits, and providing a range of network related services.

The most common types of services that are offered by a third party administrator include the following:

  • Handling of claims
  • Actuarial services
  • Control of losses
  • Managed care and provider services
  • COBRA enrollment
  • Administration of mental health services
  • Going back to work programs

Given the range of core and non-core medical benefits offered by third party administrators, it is estimated that there are more than 4,000 different combinations of products that \ employers that can actually be charged for.

It should also be noted that a third party administrator can offer claims services in the range of 12 months all the way to the life of the claim itself. There are two primary products offered under self-insurance programs: Workers Compensation and General Liability policies.

Expenses Associated With a Third Party Administrator

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As one would expect, there are some costs that are born with the retaining of a third party administrator to handle company health insurance related claims. This will vary depending on the scope of the services being provided to the employer, but there will be costs regardless of whether or not an employee actually makes a claim on his or her medical benefits.

The third party administrator will be responsible for administering the sign-up process and maintaining the liquidity of the program for the entire duration of the term.

It has actually become apparent that most third party administrators have a difficult time forecasting what they should be charging for the products and services that they offer to employers. They are, at the minimum, supposed to provide each client with several different service options to choose from. These include the following:

  • Pricing per claim made
  • Charges for a dedicated office or unit
  • A percentage of each expense incurred
  • A percentage of the actual paid amount

Legally, a third party administrator will typically only do what is asked of them within the service contract that is entered into with each client. As a result, most arrangements between an employer and its third party administrator is entirely custom and unique from any other agreement that is entered into.

Most third party administrators will determine their administrative costs to be a percentage of the revenue that is generated. This is estimated at the current time to be roughly 88 percent of the fees for the products sold. Comparing costs amongst the various third party administrators’ in operation today can be extremely difficult as every situation is different.

In addition, using a third party administrator does carry risk on the part of any employer. Just one claim that is mishandled at any stage in the process can eliminate any of the savings that is realized by self-insuring employees in the first place.

In Conclusion

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Within the world of health insurance, a third party administrator is viewed as a potential way to cut down on the high costs associated with medical benefits offered to employees.

Whether or not it is a viable option for any given employer is an individualized decision based on personal circumstances. Employers must be willing to bear some risk if a high number of claims end up being made.

In the end, a third party administrator is responsible for the enrollment and administration of the policy, eliminating the need to personnel within the human resources department to handle such tasks.

For many employers, this is a major advantage. One just needs to weigh the pros and cons of using a third party administrator in the providing health benefits to its employees before making the switch.

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