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The true measure of TPA value is not simply what it costs to administer a claim, but how effectively that claim is managed.
Third-party administrators (TPAs) face increasing demands to manage complex claims while controlling administrative costs. Insurers and self-insured organizations also expect greater transparency and stronger claims outcomes.
Although claim frequency has declined in some insurance lines, rising severity, litigation expenses, and technology investments continue to challenge claims administration.
A 2026 HFS Research/Xceedance survey of 302 P&C insurance leaders highlights the disconnect: 82% prioritize cost per claim over outcomes when selecting TPAs, yet 76% would pay more for better claims results.1 The findings suggest that administrative fees alone are an incomplete measure of TPA value.
Key Takeaways
- Claims complexity increases administrative demands. Higher severity and litigation expenses place greater demands on TPA resources and oversight.
- TPA value extends beyond administrative fees. Claims quality, litigation management, and total costs are essential measures of performance.
- Independent oversight strengthens accountability. Claims audits, reserve reviews, and legal expense assessments can identify avoidable costs and improve outcomes.
Rising Claim Severity Adds Complexity
Declining claim frequency does not necessarily mean lower claims administration costs. Recent workers' compensation data show that medical and indemnity severity continue to rise even as lost-time claim frequency falls.2 Higher-severity claims can require more intensive adjustment, medical management, reserving, and specialist support.
Litigation adds to these demands. A higher litigation rate can mean greater adjuster involvement, defense counsel coordination, reserve reviews, and settlement evaluations.3 For TPAs operating under fixed-fee or per-claim arrangements, the additional work can affect the economics of individual accounts. Table 1 summarizes several industry trends influencing TPA workloads, expenses, and client expectations.
| Industry pressure | Industry evidence | TPA implication |
|---|---|---|
| Claim severity | 2025 medical and indemnity lost-time severity each increased 4%.2 | Greater demands from higher-value and complex claims |
| Litigation activity | Sedgwick indemnity litigation rate increased from 13.1% to 14.2%.3 | More defense counsel coordination and oversight |
| Technology expectations | 98% rank AI and automation among their top three TPA selection criteria.1 | Investment requirements and need to demonstrate productivity benefits |
Sources: NCCI, Sedgwick and HFS Research/Xceedance.
The Changing Economics of TPA Relationships
TPA pricing arrangements—per-claim, fixed-fee, or hybrid—carry different risks as claim complexity increases. Clear service expectations and contract adjustments can help align fees with administrative demands. Lower TPA fees do not necessarily reduce total claims costs, particularly when litigation expenses, claim duration, and reserve development are considered. HFS Research/Xceedance findings highlight the disconnect: insurers often select TPAs based on cost but judge their continued value on claims quality and performance.
Source: HFS Research and Xceedance, “The Claims Confidence Gap: Insurers Hire TPAs on Cost but Fire on Outcomes,” June 25, 2026. Survey of 302 P&C insurance leaders in the United States, Canada, and Bermuda.
Balancing Cost Efficiency and Claims Quality
Managing claims efficiently requires decisions about staffing, adjuster caseloads, litigation oversight, and technology. Reducing administrative expenses may improve short-term costs, but insufficient resources can lead to delayed resolutions, inconsistent reserving, and higher litigation expenses.
AI and automation can reduce routine processing demands and help adjusters focus on complex claims. However, technology investments should be assessed against improvements in file quality, claims resolution, and overall expenses—not simply processing speed.
The priority is directing resources where they can improve claims outcomes while keeping administrative costs under control.
Moving Beyond Administrative Cost per Claim
Administrative cost per claim is a useful metric, but it can obscure differences in claim complexity and performance. Litigated liability claims, for example, require more resources than routine claims. Lower administrative expenses also offer little value if reserving, litigation oversight, or file quality deteriorates. A comprehensive TPA performance evaluation should consider:
- Reserve adequacy: Timely, supportable reserves reflecting claim developments.
- Litigation management: Oversight of legal costs, counsel performance, and settlements.
- Claim duration: Resolution times appropriate to claim complexity and jurisdiction.
- Claims leakage: Avoidable expenses resulting from weak controls.
- File quality: Consistent investigation, documentation, and supervision.
- Administrative efficiency: Staffing and expenses appropriate to claims workloads.
These measures should be considered together. Faster claim closure, for example, is not necessarily beneficial if it leads to inappropriate settlements or unresolved coverage issues.
How Alan Gray Can Help
Alan Gray helps insurers, captives, and self-insured organizations evaluate TPA performance through independent claims audits, reserve reviews, and legal expense management. Our auditors and reviewers average more than 25 years of claims experience, combining technology with hands-on file reviews and experienced judgment.
TPA audits examine reserve adequacy, settlement authority compliance, claims handling practices, and expense management across P&C lines. Every file within the agreed scope is reviewed to identify potential deficiencies and opportunities for improvement.
Alan Gray's attorney-led legal bill audits, billing guideline development, and panel counsel reviews work alongside SIMS, our legal e-billing platform. These services provide visibility into attorney rates, staffing, and billing practices while identifying potentially excessive or non-compliant charges.
To discuss an independent TPA performance review, claims audit, or legal spend assessment, contact Alan Gray at info@alangray.com.
Related Reading
Sources and References
- HFS Research and Xceedance. The Claims Confidence Gap: Insurers Hire TPAs on Cost but Fire on Outcomes. June 25, 2026. View Source
- National Council on Compensation Insurance. 2026 State of the Line Report. May 12, 2026. View Source
- Sedgwick. State of the Line: 2025 Year-End Workers' Compensation. March 2026. View Source
- U.S. Bureau of Labor Statistics. Occupational Outlook Handbook: Claims Adjusters, Appraisers, Examiners, and Investigators. View Source
