What a Third Party Administrator Does on a Self-Funded Plan

What is a self-funded plan, and who carries the risk?

A self-funded plan is a healthcare model where the employer pays employee medical claims directly from its own assets instead of paying fixed premiums to an insurance company. In this setup, the employer acts as the plan sponsor. The employer creates the plan document, funds claims as they occur, and assumes the financial liability.

However, the employer's risk is capped by stop-loss insurance. Stop-loss coverage protects the employer by reimbursing the plan when an individual's claims exceed a specific deductible, or when the group's total claims exceed an aggregate attachment point.

Because the employer's money pays the actual claims, precise self-funded health plan administration is critical. Claims paid incorrectly or outside of plan terms are rarely reimbursable by the stop-loss carrier, meaning the employer absorbs the loss.

Key regulatory facts:

• Self-funded plans sponsored by private employers are federally regulated under the Employee Retirement Income Security Act of 1974 (ERISA).
• ERISA preempts most state insurance laws (29 U.S.C. 1144), allowing employers to operate uniform plans across multiple states.
• Claims and appeals are governed by federal guidelines, specifically ERISA's claims procedure regulation (29 CFR, 2560.503-1).

What a third party administrator does vs. an insurer?

An insurer carries the financial risk and administers the plan, whereas a TPA only administers it. When an employer buys a fully insured plan, the insurer charges a premium, pays the claims out of its own funds, and keeps the profits. When an employer self-funds, there is no insurer acting as a middleman for the claim, meaning a TPA must step in to process and pay it.

A TPA's revenue typically comes from an administrative fee charged per employee per month (PEPM). Because the TPA earns the same fee regardless of whether claim volumes are high or low, its business model relies strictly on administrative efficiency.

An insurer can also act as a TPA through an "administrative services only" (ASO) arrangement. When comparing a traditional TPA vs insurer ASO models, the primary difference is flexibility. An independent TPA can assemble custom networks and vendors, while an ASO carrier limits the employer to its proprietary claims platform.

How does a TPA handle claims adjudication?

Between receiving a medical claim and issuing a payment, a TPA executes a strict sequence of checks. The TPA confirms member eligibility, verifies the service is covered under the plan document, prices the claim, and applies the patient's deductible or coinsurance.

The adjudication process relies on standardized data feeds:

• Eligibility: Employers typically send member data via an X12 834 enrollment file.
• Pricing: Rates are pulled from rented PPO networks, reference-based pricing vendors, or direct contracts.
• Payments: Approved claims generate an electronic remittance advice (X12 835) sent directly to enrolled providers.

If a claim passes all automated checks, it is scheduled for a check run where the TPA requests funding from the employer. If a claim fails a check, it is pended for manual review. Ultimately, the pend queue is where a TPA's cost per claim is set because it requires expensive manual examiner time.

How does plan sponsor fiduciary duty impact the TPA?

A TPA is generally not an ERISA fiduciary when performing standard ministerial functions. According to Department of Labor guidance (29 CFR, 2509.75-8, Q&A D-2), applying eligibility rules, calculating benefits, and processing claims do not automatically make a service provider a fiduciary.

The employer usually remains the named plan sponsor fiduciary duty-holder. A TPA only becomes a fiduciary if it exercises discretionary authority over plan assets or policies.

Most administrative services agreements explicitly state whether the TPA has discretionary authority to decide ambiguous claims. A well-run TPA protects both parties by strictly routing discretionary determinations to the legally designated decision-maker.

What is the TPA's role with stop-loss insurance?

The TPA owes the stop-loss carrier complete transparency. Administrative services agreements usually make the TPA responsible for tracking large claimants and reporting them to the carrier.

The TPA must provide:

• Timely notices when members approach the specific deductible.
• Complete reimbursement records when limits are crossed.
• Accurate paid-claims reports for the aggregate deductible.

Administration and risk collide here. If a TPA pays a claim for an ineligible member, the stop-loss carrier can deny reimbursement. The employer is left with the bill, making the accuracy of TPA claims adjudication the most critical factor in self-funding.

How do TPAs eliminate manual work in complex systems?

A TPA's workflow breaks down wherever a vendor feed, cash-pay plan, or custom network cannot be auto-adjudicated by the core claims platform. These exceptions require examiners to manually re-key data or chase missing information, significantly increasing operational costs.

Many TPAs license their claims platforms rather than building them, meaning system mismatches are common. Daybook Health partners with TPAs to fix these gaps. By mapping out specific workflows, Daybook builds usage-based, custom integrations directly inside the TPA's existing systems.

With Daybook, AI agents carry the volume work alongside the claims system, automatically chasing itemized bills and coordination-of-benefits data. This creates a claims operation that keeps the deciding with its people, allowing human examiners to focus solely on finalizing complex claims while the finance team releases the payment runs.