Inside Big Health Insurers' Side Hustle

September 23, 2021

Photo courtesy of Sandy Peters

America’s largest health insurance companies moonlight as obscure middlemen, managing billions in health care spending for many of the country’s biggest employers. What could go wrong?

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The Basics: Who Are Third-Party Administrators (TPAs)?

Nearly all large U.S. employers that offer workers health insurance do so through what’s known as self-insuring or self-funding, effectively acting as their own health insurer and directly bearing the financial risk of covering employees’ health care. Large employers favor this approach because it can save money, provide more control over benefit design and exempt them from most state insurance regulations.

While these large employers are willing to accept the financial risk of running their own health plans, most have little interest or expertise in the day-to-day work required to administer health plans. So employers outsource those responsibilities, such as processing medical claims and managing provider networks, to intermediaries known as third-party administrators (TPAs).

There are many companies offering these administrative services, but the bulk of big employers rely on just a handful of America’s largest health insurance companies to meet their TPA needs. “The large insurance companies like Aetna, Cigna, UnitedHealthcare … all love to act as a third-party administrator. It’s safer than being in the insurance business,” said Ken Janda, a 40-year insurance industry veteran and an adjunct professor at the University of Houston College of Medicine.

Exact revenue numbers are not publicly available, but Tradeoffs’ own estimates using quarterly 10-Q financial statements and typical industry fees suggest Aetna, Cigna and UnitedHealthcare combined to make more than $20 billion in 2020 on TPA services (also known as “administrative services only” or ASO contracts).

For these big insurers, their TPA contracts cover more lives than any other single type of coverage they offer — including Medicare, Medicaid and traditional commercial insurance plans.

Three pie charts showing the total number of lives covered by Aetna, United and Cigna and how those lives breakdown by contract type

It's Complicated: The Relationship Between Employers and TPAs

Employers can reap several benefits from outsourcing the administration of their health plans to insurance companies. Unlike employers, insurers already have expertise in managing benefits, processing claims and putting together provider networks. However, there are some risks and challenges that come with entrusting billions of dollars and millions of people’s health benefits to outside companies.

Mixed Incentives

Sometimes large insurance companies' other obligations — for example, to maximize their own profits or maintain strong provider relationships — can be in direct conflict with the best interests of a particular employer client. TPAs typically get paid a flat fee, which can also incentivize them to skimp on costs and sell employers additional services to generate more revenue.

Obscure Operations

Running a big employer health plan can require TPAs to process hundreds of millions of medical claims per year and contract with a large number of vendors and partners. TPAs keep many of those contracts confidential, and sometimes even prohibit employers from accessing their own claims data. These challenges make it difficult for even the most attentive employer to know exactly where their money is going.

Limited Regulation

A federal law known as ERISA exempts private self-funded plans from nearly all state insurance regulations. The U.S. Department of Labor is responsible for regulating these plans, but they only have about 400 investigators, and each one is responsible for overseeing roughly 12,500 plans (including pension and other types of benefits plans). Historically, those investigators have focused on scrutinizing the actions of employers, not the TPAs or other vendors they hire.

Legal Exposure

ERISA also holds private self-funded plans liable for fulfilling a rigorous set of fiduciary responsibilities. Essentially, employers are legally obligated to guard against waste, abuse and neglect in their self-funded plans. By outsourcing many of those duties to a third party, employers can risk falling short of fulfilling their fiduciary duties.

Potential Solutions

While some employers have no qualms with their current TPA arrangements, others have raised concerns. Potential tools for minimizing the risks and challenges of relying so heavily on third-party entities include:

New Kinds of Contracts

Some employers are cutting their own deals directly with providers, minimizing the role of the insurer and moving away from fee-based contracts that can make waste harder to catch. Other employers are pursuing partnerships with alternative TPA start-ups that promise more transparency and fewer conflicts of interest compared to the large insurer incumbents.

Increase Scrutiny

Many employers delegate the management of health benefits to their human resources department, whose primary objective is to keep employees happy. Some experts advise involving finance and legal team members who are more equipped to assess the contractual terms and financial performance of TPAs.

More Regulation

Employers typically resist additional regulation of self-funded plans. However, some are embracing new price transparency rules that require hospitals and insurers to disclose at least some data on the deals they cut. The rules kicked in for hospitals this year, though many have resisted complying, and similar rules begin for insurers, including self-funded plans, next summer. Some experts are hopeful they will help employers better assess the value their TPAs are providing.

Legal Action

Some employers are heading to court over what they see as wasteful or abusive practices by the large insurance companies acting as their TPAs. Aetna recently lost a federal appeals court decision over a billing scheme, and Blue Cross Blue Shield of Massachusetts is currently trying to dismiss a case led by a large union health plan accusing the insurer of misusing their funds.

This episode is part of a series on health care prices supported in part by West Health.

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Episode Resources

Research and Reporting on Self-Funded Employer Plans and Third-Party Administrators:

Opportunities for State Employee Health Plans to Drive Improvements in Affordability (Sabrina Corlette, Maanasa Kona and Megan Houston; Georgetown Center on Health Insurance Reforms; 6/2021)

Group Health Plans Report (U.S. Department of Labor, 1/2021)

2020 Employer Health Benefits Survey (KFF, 10/8/2020)

What Happens When a Health Plan Has No Limits? An Acupuncturist Earns $677 a Session. (Marshall Allen, ProPublica, 12/19/2019)

We Asked Prosecutors if Health Insurance Companies Care About Fraud. They Laughed at Us. (Marshall Allen, ProPublica, 9/10/2019)

The Big Five Health Insurers’ Membership And Revenue Trends: Implications For Public Policy (Cathy Schoen and Sara R. Collins, Health Affairs, 12/4/2017)

Episode Credits


Christin Deacon, JD, Senior Vice President, 4C Health Solutions; former Assistant Director, Division of Pension & Benefits, New Jersey Department of Treasury

Brian Hufford, JD, Partner, Zuckerman Spaeder LLP

Ken Janda, JD, Founder, Wild Blue Health Solutions; Adjunct Professor, University of Houston College of Medicine 

Sandy Peters, retiree

The Tradeoffs theme song was composed by Ty Citerman, with additional music this episode by Blue Dot Sessions.

This episode was reported and produced by Leslie Walker, edited by Cate Cahan and mixed by Andrew Parrella.

Additional thanks to:

Marilyn Bartlett, Erin Fuse Brown, Amy Monahan, Suzanne Delbanco, Julianne McGarry, Mark Flores, Julie Stone, Chris Whaley, Jeff Levin-Scherz, Sabrina Corlette, Nell Peyser, Martin Daniel, Daniel Bird, Chris Skisak, Dawn Cornelis, Stephen Carrabba, Paul Wann, the Tradeoffs Advisory Board and our stellar staff!