You’ve maybe heard that big businesses are turning to third party administrators (TPA) for insurance. If you have been thinking about a TPA, be sure to learn about the pros and cons of self-insuring.
Unlike insurance brokers that act on behalf of your business, a TPA acts on behalf of the insurance company. Businesses hire TPAs to administer claims, collect premiums, handle enrollment, and carry out other activities related to claims and benefit plans (retirement plans, flexible spending accounts, etc.).
TPAs function differently from insurance brokerages. A broker helps businesses identify risks and offers a plan to mitigate them. Meanwhile, TPAs let your business calculate risks and its budget based upon anticipated coverage.
Brokers generally deal with an array of competing policies and benefits, exclusions, and costs. TPAs, conversely, work with a single provider, representing their services.
TPAs emerged for a reason. Under some circumstances, they do provide inexpensive benefits.
Self-insurance with a TPA may cut costs by paying claims directly to healthcare providers, covering high risks with stop-loss insurance. Large companies with big budgets may have the financial leeway to cover claims with a TPA. Companies with many young, healthy employees may benefit from the TPA, as long as claims stay infrequent, inexpensive, and within predicted limits.
Self-insuring through a TPA allows control over benefit plan design and costs. It can save more than 7% on state mandates and premium taxes.
Lax TPA regulation allows them greater flexibility in plan offerings. They may be able to offer specific self-insurance plans that more heavily regulated brokerage cannot offer.
TPAs also have downside. Ensure that you understand the cons before committing.
Most businesses look to TPAs for savings. However, some companies that switch to them find their costs skyrocketing.
Businesses with older employees or frequent, unpredictable, or expensive claims can find self-insurance costs unmanageable. High-risk employees can result in …
While an insurance broker acts on your behalf, providing benefit advice, TPAs work on behalf of the insurer. TPA’s will likely round numbers in its favor, rather than yours.
The TPA can cuts costs by shifting risk to your business, and the government regulates TPAs less than insurance brokers. When problems arise every TPA has its own way of handling them.
When the red tape falls on you, can your cash buffer cover overtime or extra staff if your TPA does not come through?
Insurance brokers offer coverage to minimize your business’s risks. Using a TPA is like taking your life savings to the casino. You’re betting that your employees will always have an “average” year of health claims. If the odds go against you, you can lose big time.
Self-insuring can reduce expenses for some companies, but it can also lead to disaster and create risks for your employees. Carefully evaluate the pros and cons of any insurance plan that you decide upon.