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:: Third Party Administrators

While many employers desire the flexibility and other advantages of self funding their group health plans, few are prepared to administer their own plan. Thus, the self-funded health plan industry could not function without the third party administrator (“TPA”). Among other things, the TPA pays claims, arranges the PPO networks, sets up the prescription drug card program, arranges the utilization review and brokers the stop loss insurance.

In most states, third party adminstrators must be licensed. An example of such requirements may be found here.

The duties of the TPA will be set forth in a contract with the employer. This administrative services agreement will provide the basic mechanism for funding of claims, provision of ancillary services, such as utilization review, stop loss insurance, etc. and fees.

Insurance companies may also perform the function of a TPA. In such situations, the insurance company operates under an administrative services arrangement such that the employer bears the actual claims risk. These arrangements, sometimes referred to as “administrative services only” or ASO contracts, can look very much like a fully insured plan to the casual observer since the claims paying entity is an insurance company. They are not insured plans, however, and the consequence has important ramifications, most important of which is the preemption of state insurance laws.

In addition to the administrative services agreement, the other document describing the role of the TPA is the plan document. This document will primarly address issues of eligibility, claims review and benefits payable, but it will also identify the plan sponsor, the plan administrator and the claims administrator. The terms used to describe these roles can vary, but one important distinction should be noted.

The term “claims administrator” must not be confused with the term “plan administrator“. Under ERISA, the term “administrator” means:

(i) the person specifically so designated by the terms of the instrument under which the plan is operated;

(ii) if an administrator is not so designated, the plan sponsor; or

(iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.

Since plan administrators are fiduciaries, most TPA’s will provide in the administrative agreement that the employer functions as the “plan administrator” and describe the TPA’s role as that of a “claims administrator”. Does this mean that the TPA is not a plan fiduciary? Not necessarily.

Since ERISA contains a functional definition of fiduciary, a TPA will only avoid fiduciary status to the extent it performs nondiscretionary, ministerial duties for the plan. Thus, the answer to the question must be resolved on a case by case basis after review of the facts, with precedent on the issue going both ways depending on which facts are emphasized. See, e.g., Briscoe v. Fine, 444 F.3d 478 (6th Cir. 2006)

The Society of Benefit Plan Administrators provides a good source of general information on the role of TPA’s in the administration of self funded group health plans.

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  1. [...] Experience with the parties involved in the plan administration constitutes a very helpful criterion for those with a background in the self-funded health plan market. One may find some indicators here by checking State licensing information and gathering some information on how the entity is licensed and what policy forms they may have on file with the State insurance department.  If claims are paid by a third party administrator (as opposed to an insurance company), and the TPA is licensed as such with the State insurance department, then that is an indication that the plan is self-funded. Yet, insurance companies can also pay claims for self-funded plans through “administrative only” agreements. Thus, you cannot rely on the fact that an insurance company versus a third party administrator is adjudicating claims. You can, however, evaluate the ASO contract to determine if the employer bears the “insurance risk” for claims under the plan or if the administrator assumes the risk. [...]