As insurance companies across sectors — especially health — seek to scale operations, innovate and deliver customer-centric solutions, third-party administrators (TPAs) have become strategic partners. TPAs bring specialized knowledge, advanced technology and operational agility, enabling insurers to focus on core business functions.
Future trends in the insurance third-party administrator market — driven by digital transformation, automation and data analytics — point to even deeper relationships forming between insurers and TPAs. We are also witnessing a rise in collaborative ecosystems where partnerships are built on aligned interests, shared data and seamless technology integration.
While this shift provides numerous benefits, it introduces new challenges, especially around risk management, data security and maintaining effective oversight as relationships become more complex. Insurers should move beyond basic vendor management to treat TPA oversight as a strategic capability, rather than a transactional vendor activity, to ensure both performance and resilience.
Four TPA Partnership Strategies At-a-Glance
To help insurance companies improve oversight management and build stronger TPA relationships, this article explores four essential strategies:
- Selection: Align capabilities to operational needs and risk profile
- Contracting: Convert expectations into enforceable, measurable obligations
- Performance Management and QA: Monitor, audit and continuously improve outcomes
- Relationship Management: Sustain trust, transparency and strategic alignment
These strategies expand upon practical third-party risk management (TPRM) guidance for nearly all organizations that outsource any business functions.
The Strategic Imperative for Enhanced Oversight
When a TPA fails to process claims accurately or mishandles sensitive data, the insurance carrier faces regulatory penalties and reputational fallout. Therefore, the goal of oversight is not merely to monitor a vendor but to extend the insurer’s risk management framework into the partner's operations.
Effective oversight of third-party administrators requires a paradigm shift. It is no longer sufficient to review monthly reports passively. Insurers must adopt a proactive, data-driven approach that anticipates risks before they materialize. This is particularly vital as TPAs increasingly handle complex functions such as utilization review, premium collection and adjudicating high-value claims.
Failure to maintain rigorous oversight can lead to "claims leakage" — the financial loss resulting from overpayment or inefficient processing. Industry estimates often suggest that claims leakage can represent a significant percentage of total claims costs. By implementing a structured oversight framework, insurers can minimize this leakage, maintain compliance with evolving state and federal regulations, and ensure that outsourced operations remain aligned with the insurer’s brand reputation, service quality expectations and regulatory obligations.
Case Study: Quality Concerns and Loss of Oversight
A TPA’s failure to administer timely payment to a beneficiary’s $1.6 million claim resulted in the unavailability of stop-loss insurance and caused a substantial loss to the plan.
Strategic Selection and Due Diligence
The foundation of effective TPA oversight is laid long before a contract is signed. The selection process is one of the most critical controls an insurer exercises and serves as the first line of defense against future operational failures. While cost is always a factor, a "race to the bottom" on price often leads to hidden costs in the form of poor service, compliance violations and increased administrative burden on the insurer.
Insurers have unique requirements, so identifying if a TPA can provide solutions outside of operations should be heavily considered during the selection process. TPAs have resources and constantly evolving capabilities to help insurers meet compliance requirements, including:
- Health Insurance Portability and Accountability Act (HIPAA)
- Employee Retirement Income Security Act (ERISA)
- State Department of Insurance (DOI) requirements
- Systems and Organization Controls (SOC) 1/SOC 2 reports
Assessing Technological and Compliance Maturity
In the modern insurance landscape, a TPA’s technological capabilities are as important as their claims-handling expertise. During the selection phase, insurers must conduct a deep dive into the TPA's tech stack. Does their system integrate seamlessly with your internal platforms via APIs, or will data transfer rely on outdated batch processes?
You must verify their ability to handle data analytics and automation. A TPA that leverages AI for routine claims processing while reserving human expertise for complex cases can often offer superior efficiency and accuracy. Furthermore, evaluate their cybersecurity posture. Request to see their SOC 1 and SOC 2 reports to ensure their internal controls over financial reporting and data privacy meet industry standards.
Beyond technical capabilities, insurers must also evaluate a TPA’s compliance maturity to ensure readiness for evolving regulatory requirements. Ask how the TPA maintains ongoing compliance with HIPAA, ERISA and ACA? What safeguards and monitoring tools protect sensitive data, such as bank accounts, protected health information (PHI) and personally identifiable information (PII)? Are there disaster recovery plans and measures in place? When incidents occur, how quickly are they communicated? These questions help insurers distinguish between TPAs that simply meet baseline requirements and those with a proactive, secure, compatible and well-integrated compliance culture.
Case Study: Data Security Risks
A Global TPA that failed to comply with data regulations was fined for inadequate safeguards of its electronic infrastructure, highlighting incident response gaps.
Evaluating Cultural and Operational Alignment
Operational capability means little if the TPA’s culture conflicts with your own. If your brand differentiates itself on empathy and high-touch customer service, partnering with a TPA that prioritizes speed over quality will create friction.
Selecting a TPA Provider
During due diligence, look beyond the sales pitch. Interview the actual teams who will be managing your account, not just the business development executives. Ask for case studies and references specifically related to scalability. Can they handle a catastrophic event or a sudden surge in enrollment without collapsing ? This phase is about validating that the partner can act as a true extension of your organization.
Plan design, beneficiary needs, specialty programs and administration complexity should drive vendor fit — not the other way around — and insurers should ensure the TPA is sized and structured to serve their population effectively. A strong partner is one that can meet current requirements while adapting alongside the insurer as products, regulations, and service expectations evolve.
Robust Contracting and Service Level Agreements (SLAs)
Once the right partner is selected, the parameters of the relationship must be codified in a robust contract. A vague contract is the enemy of effective oversight. The agreement must explicitly define roles, responsibilities and the key performance indicators (KPIs) by which success will be measured.
Defining Actionable SLAs
SLAs are the heartbeat of performance management. However, many insurers make the mistake of tracking too many metrics or tracking the wrong ones. Effective SLAs should focus on outcomes that impact financial performance and customer satisfaction. Common but critical metrics include:
- Claims Turnaround Time: The percentage of claims processed within a specific timeframe (e.g., 98% within 14 days).
- Financial Accuracy: The percentage of claim dollars paid correctly compared to the total dollars paid.
- Procedural Accuracy: Adherence to the defined workflow and documentation requirements.
- Call Center Metrics: Average speed of answer and first-call resolution rates.
Crucially, these SLAs must be tied to financial penalties or credits (performance guarantees). If the TPA misses a critical target, there should be a tangible consequence. This aligns the TPA’s financial incentives with the insurer’s operational goals.
Clarifying Data Ownership and Exit Strategies
Regulatory compliance oversight requires that the insurer retain ultimate control over its data. The contract must stipulate that all data generated belongs to the insurer and must be accessible in real-time or near-real-time formats.
Additionally, every contract should include a detailed exit strategy or transition plan. If the relationship deteriorates, how will data be transferred? What support is the TPA obligated to provide during the de-conversion process? Addressing these "divorce" scenarios upfront prevents leverage issues down the road and ensures business continuity during a transition.
Securing The Right To Audit
Never sign a TPA contract that does not include a comprehensive "Right to Audit" clause. This clause should grant the insurer (or its designated third-party auditor) access to the TPA’s premises, systems and files to verify compliance with the agreement. This right should be exercisable with reasonable notice and should not be limited to an annual event if suspicious patterns emerge.
Performance Management and QA
Contracting sets the rules, but performance management ensures they are followed. Effective oversight requires moving from reactive auditing to continuous quality assurance (QA). Oversight cannot solely rely on TPA-generated reporting; independent validation is essential for a sound control environment.
Establishing a Tiered Audit Framework
A robust QA strategy involves multiple layers of review:
- Ongoing Monitoring vs. Point-in-Time Assessments: This involves the daily or weekly review of dashboard metrics to spot trends. For example, a sudden spike in claims inventory or a drop in telephone service levels serves as an early warning of broader operational issues.
- Targeted Claims Audits: Rather than random sampling, use data analytics to identify high-risk claims for audit. These might include claims just below authorization limits, duplicate payments, or claims involving specific complex diagnoses or repair types.
- Process Audits: Beyond the file outcomes, audit the process itself. Are adjusters documenting reserves correctly?Are subrogation opportunities being identified and pursued? Are denied claims being handled with the proper regulatory notices?
Conducting Independent Verification
While TPAs have their own internal QA teams, their objectives may differ from yours. Their internal QA often focuses on workflow speed and volume. The insurer’s oversight must focus on financial accuracy and regulatory adherence.
Conducting an annual or semi-annual audit using an independent firm adds a layer of objectivity. These external audits often uncover systemic issues that internal teams might overlook or rationalize. The findings from these audits should feed directly back into the training and protocol adjustments for the TPA staff, creating a continuous feedback loop of improvement.
Managing Loss Funds
For insurers, the TPA often holds the checkbook. Strict oversight of the loss fund accounts is non-negotiable. This involves regular reconciliation of bank accounts, reviewing large checks before release (above a certain threshold), and ensuring that voided checks or recoveries are properly credited back to the account immediately. Financial leakage here is often due to poor accounting hygiene rather than fraud, but the impact on the bottom line is the same.
Active Relationship Management
The final, and often most underestimated, strategy is relationship management. Oversight should not feel adversarial. The most successful insurer-TPA relationships are collaborative partnerships where both parties feel invested in the outcome.
Establishing Governance Structure
Establish a multi-tiered governance structure to manage the relationship effectively:
- Operational Liaison: Designate day-to-day contacts on both sides who handle immediate issues, escalations, and routine inquiries.
- Monthly Performance Reviews: Conduct formal monthly meetings to review SLA performance, discuss open audits and address operational friction points.
- Executive Steering Committee: Quarterly or bi-annual meetings between senior leadership from both organizations. These sessions should move beyond the metrics to discuss strategic direction, market trends, and long-term planning.
Fostering Innovation and Collaboration
A TPA that works with multiple carriers often sees trends emerging across the industry before a single insurer does. Encourage your TPA to bring insights to the table. Ask them: "What are you seeing in the market? How are other clients solving this specific problem?"
Create an environment where the TPA feels safe to admit challenges. If a TPA hides a backlog out of fear of punitive measures, the problem will fester until it becomes a crisis. You mitigate risk much more effectively if they feel they can come to you and say, "We are struggling with this new regulatory requirement, can we brainstorm a solution?"
Driving Continuous Improvement Plans
When performance gaps are identified, the focus should be on remediation. Implement Corrective Action Plans (CAPs) with specific timelines and milestones. A CAP should not just fix the specific error found in an audit but address the root cause — whether it be a software glitch, a training gap or a flawed process. Track these CAPs rigorously until closure.
Future-proofing the Partnership
To improve oversight of third-party administrators, insurers must embrace a holistic approach that integrates rigorous selection, precise contracting, continuous performance validation and strategic relationship management.
As the industry continues to evolve with new technologies and shifting regulatory landscapes, the insurers who succeed will be those who view oversight not as a compliance burden, but as a competitive advantage.
By transforming the TPA relationship from a transactional vendor arrangement into a resilient, transparent partnership, insurance companies can safeguard their financial health, maintain regulatory compliance, and deliver the superior experiences their policyholders expect. The future of insurance operations depends on these interconnected ecosystems, and effective oversight is the glue that holds them together.
How Cherry Bekaert Can Help
As insurers navigate increasing operational complexity and rising expectations around outsourcing, strong governance and well‑structured oversight programs have never been more essential. Cherry Bekaert’s Risk & Cybersecurity and Insurance industry professionals help organizations evaluate, strengthen, and optimize their TPA and vendor management frameworks to enhance performance, compliance and operational resilience. Connect with our professionals to gain strategic insight and practical guidance that supports confident decision‑making and long‑term success.
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