When an employer contracts a third-party administrator (TPA) to help choose the right company insurance plan, the TPA will often strongly recommend that the employer select a self-funding option. This means that a company will essentially act as its own insurance carrier and is responsible for claims and benefits that its employees make.
In some cases, especially for businesses that are quite large, this is a feasible option. Any risk that employee benefits could pose to a company's finances can be mitigated with stop-loss insurance that prevents a business from having to pay out too much money for claims and benefits.
However, TPAs are often more eager than they should be when recommending self-funding. The main reason for this is that such a situation actually results in the TPAs getting paid twice. First, they are paid a "per employee per month" (PEPM) fee for every worker they help to insure. They also receive a commission from the insurance companies that they help to purchase stop-loss insurance from, often at around 15 to 20 percent.
Plans like these are not always cost-effective for employers, yet third-party administrators suggest them often. A benefits administration service is a safer choice for companies that want to know every side of the story before committing to an insurance and benefits plan.
