Employers have a choice in managing their employee health care benefit plans: They can pay an insurance carrier to pay the claims and handle all of the details, or they can pay the claims and take on more of the administrative tasks themselves, with help from a third party administrator (TPA). Hometown Health manages both types of plans and can offer some insight into whether a self-funded, TPA plan is right for you.
A third party administrator is a firm hired by an employer to handle claims processing, pay providers and manage other functions related to the operation of health insurance. The TPA is not the policyholder or the insurer.
Employers who contract with a TPA are self -funded, or self-insured, that is, the employer assumes the financial risk for providing employees' health care benefits. Typically, a self-funded employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay claims as they are incurred.
To protect against catastrophic claims, the self-funded employer may have stop-loss insurance purchased through a specific carrier. This coverage is a form of reinsurance, in which another insurer agrees to pay claims above a specified amount. This stop-loss insurance might be paid on individual claims or for the total medical expenses of the employer, depending on the policy purchased.
A fully insured employer pays a fixed premium to an insurance carrier in advance. In return the insurer provides coverage for a schedule of benefits and then pays claims basedon that schedule of benefits. The insurance carrier assumes the financial risk of paying claims for the use of health care services.
The total premium that a fully insured employer pays includes the actual insurance premium, state premium tax, and the insurance carrier's administration expenses.
A TPA's primary responsibility most commonly involves processing claims accurately and promptly. The TPA processes the claims for the employer to pay. In most programs the claims are funded on a weekly schedule with other charges, such as the TPA fees to be paid monthly.
Some TPAs can offer a full range of insurance services all under one roof. Otherwise an employer might need to contract with other TPAs if the employer wants services such as:
* Medical management, which includes authorizing care, verifying that requested services are medically necessary and providing case management for patients in the hospital. These and other cost-containment programs are especially important in helping the self-funded employer manage the amount of medical claims incurred.
* Producing explanation of benefits documents and other communication with covered participants.
* A network of contracted physicians and other health care providers.
The self-funded employer has a much more hands-on role in day-to-day benefit administration than with a fully insured plan. While this means added responsibility and effort, it enables the employer to provide oversight and direction to the third-party administrator and to help develop and update the plan documents that define the health coverage.
Fully insured plans are governed by the state, and the insurance carrier bears the responsibility for complying with health insurance rules and regulations. By being self-funded, the employer takes responsibility for complying with the federal law that governs self-funded plans, the Employee Retirement Income Security Act of 1974 (ERISA). Its medical benefit sections define minimum standards for benefit plan administration, including subjects such as eligibility; informing members regularly about their benefits; fiduciary responsibility and defining some benefits that the employer must provide.
The chief advantage for a self-funded employer is the value of not prepaying for coverage; instead the employer pays the TPA monthly, for example, after the TPA has processed claims. By paying only after claims are incurred, the employer can retain and earn interest on the claims reserve funds. With a fully insured plan, the employer pays into the insurer's reserve fund, and the insurer earns the interest.
Having a TPA relationship also can reduce administrative costs compared with a fully insured plan because the employer does not pay premium tax.
A large employer group can be "experience rated." With experience rating, employers pay different premiums based on differences in their demographics, past health care utilization, medical status, and other factors.
A TPA relationship often makes sense for a large employer with the cash flow adequate to meet the obligation of paying medical claims. While this does not rule out a self-funded arrangement for small employers, it can make that option challenging for them. The employer also must be willing to take on the additional administrative tasks.
If a TPA relationship makes sense for your business, you should look for a firm that offers:
* In-depth experience with and thorough knowledge of ERISA and other federal laws.
* An effective system for transactions. The system and employees using it can help ensure that claims are paid appropriately and according to the contract, following industry protocols.
* High-quality, efficient customer services that helps keep your employees satisfied with their coverage.
*Cost-containment measures and services.
An employer should be sure to ask for client references and talk with those other clients about their experience with the TPA.
Operating as a self-funded employer group involves more complications but has advantages. I strongly recommend that any employer consult a broker to help you decide whether to go the self-funded route and then to advise you on implementing and managing a self-funded program. If you do not have a broker, seek out one who specializes in self-funded programs. Then you can proceed with finding a third party administrator to help you meet your needs.
Ty Windfeldt is vice president of Reno-based Hometown Health.
