California Life and Health Insurance Practice Exam

Which of the following best defines a third-party administrator?

1. An internal claims processor for the employer

2. A government agency managing health claims

3. An outside organization that processes claims for an employer's self-funded group plan

4. A health insurance agent representing the employer

The correct answer is: An outside organization that processes claims for an employer's self-funded group plan

A third-party administrator is specifically defined as an outside organization that processes claims for an employer's self-funded group plan. This function is crucial in managing the administrative aspects of employee benefit plans, especially for employers who choose to self-fund their health care benefits instead of purchasing traditional insurance. These administrators handle various tasks, including processing claims, maintaining records, and ensuring compliance with regulatory requirements. By utilizing a third-party administrator, employers can focus on their core business operations while outsourcing the complexities of benefits administration to specialized entities that have the expertise and resources to manage these functions efficiently. The other options describe different roles and entities, such as internal claims processors, government agencies, or health insurance agents, which do not capture the essence of what a third-party administrator does in the context of employee benefits.