Third party administrators (TPA) are third party agencies/organizations to whom the task of claims processing of insurance receipts or employee benefits (health care etc) of a firm is handed over. Simply put, a TPA acts as the outsourced administrator for a firm especially with regard to insurance. The firm is the employer who will undertake the risk and insure the employees and not the TPA.
Often, TPA acts as intermediaries between a firm, insurance policy holders and the insurance companies and often as a part of insurance companies. Companies may call upon TPA to manage claims processing or its member functions also. For e.g., let us suppose, a company ABC has decided for a self-funded healthcare plan for its employees. It may choose a TPA to manage the administrative work to help finance the cost of health care plans for the employees.
Hence, by outsourcing the work, it may lower the bureaucratic costs of setting up a separate division for the same. Insurance Regulatory Development Authority (IRDA) has a strict policy norm by which it selects the TPA.