Who Touches the Money: TPA, Stop Loss Carrier, Reinsurer, Employer, and Broker

Five parties have financial relationships in a level funded arrangement. Each is compensated differently, bears different risk, and operates under different incentives. The employer cannot evaluate a level funded plan, at enrollment or at renewal, without understanding who is paid, how, and from which pool of money. The financial relationships also reveal conflicts of interest that affect plan administration, renewal pricing, surplus treatment, and the quality of advice the employer receives. Following the money through all five parties is not an exercise in suspicion. It is a minimum standard for informed purchasing.

The Employer

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The employer’s financial position is the simplest to describe and the most consequential to understand. The employer pays the total monthly amount, which as LFP-01.01 established splits into claims fund, stop loss premium, and administrative fee. Beyond the monthly payment, the employer pays PCORI fees, an annual per-member assessment paid to the IRS to fund the Patient-Centered Outcomes Research Institute. The PCORI fee is modest on a per-member basis but is a compliance obligation that applies to self-funded plans and that the employer may not anticipate if their prior experience is fully insured, where the carrier handles the payment. The employer may also pay COBRA administration costs if not bundled into the administrative fee, and may incur additional vendor costs for services not included in the TPA’s standard package: pharmacy benefit management if carved out, telemedicine platforms, wellness programs, disease management services. The total cost of the level funded arrangement is the sum of all of these, not just the monthly payment that appears on the invoice.

The employer receives claims payment for covered benefits, stop loss protection against catastrophic and aggregate claims, claims data and utilization reporting, and surplus return depending on contract terms. The employer bears fiduciary responsibility under ERISA for the plan and the plan assets. The employer carries claims risk below the stop loss attachment points. The employer carries deficit liability depending on contract terms. The employer carries renewal risk. The renewal risk is specific: the stop loss carrier may increase premiums substantially, apply lasers to high-cost members, or decline to renew the group entirely. The employer’s financial exposure is bounded by the aggregate stop loss on the upside and by the contract’s deficit treatment on the downside, but within those bounds, the employer carries genuine risk that a fully insured employer does not.

The Department of Labor’s guidance on employer fiduciary responsibility under ERISA establishes that the employer, as plan sponsor, owes duties of loyalty and prudence to plan participants (29 U.S.C. § 1104). Most small employers sponsoring level funded plans do not understand they have accepted this responsibility. They treat the plan as a benefits purchase, not as a fiduciary obligation. The fiduciary standard requires the employer to act in the interest of plan participants when making decisions about the plan, including decisions about TPA selection, stop loss carrier selection, plan design, and claims fund management. LFP-03.04 examines fiduciary obligations in detail.

The TPA

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The TPA’s revenue comes from multiple streams, not all of which are visible to the employer.

The administrative fee PMPM is the primary and disclosed revenue source. It compensates the TPA for claims adjudication, network access, compliance administration, member services, and reporting. The fee is fixed per member per month and does not fluctuate with claims. This structure means the TPA earns the same revenue in a year with catastrophic claims as in a year with minimal claims. The TPA’s financial incentive is account retention: keeping the employer as a client so the administrative fee continues. Claims management, while operationally important, does not directly affect the TPA’s revenue.

Network access margin is a less visible revenue source. The TPA provides access to PPO networks through rental agreements with network organizations such as Aetna’s network rental program, PHCS/Multiplan, or First Health. The TPA may earn a margin on the network discount, meaning the discount passed through to the employer’s plan is smaller than the discount the TPA negotiated. The employer sees the percentage discount off billed charges but may not see the TPA’s margin within that discount.

Pharmacy rebate retention is another revenue source that varies by arrangement. If the TPA manages the PBM relationship, whether through Express Scripts, CVS Caremark, Elixir, or a smaller specialty PBM, the TPA may retain a portion of manufacturer rebates that flow through the PBM. In a pass-through arrangement, 100 percent of rebates flow to the plan. In a spread arrangement, the TPA or PBM retains a portion. The employer may not know which arrangement governs their plan, and the difference in net pharmacy cost can be substantial.

The TPA’s conflicts of interest follow from its position as both operator and financial participant. The TPA holds employer money in the claims fund and decides how to spend it through claims adjudication. The fiduciary responsibility for the plan belongs to the employer, but the operational control belongs to the TPA. This separation of responsibility and control is a governance gap that ERISA’s fiduciary framework does not cleanly resolve for level funded arrangements. The TPA also maintains relationships with stop loss carriers, and the TPA’s recommendation of a specific stop loss carrier may be influenced by the TPA’s financial relationship with that carrier rather than the employer’s best interest. LFP-05.01 through LFP-05.06 examine TPA operations and quality variation in depth.

The Stop Loss Carrier

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The stop loss carrier collects premium through the employer’s monthly payment and bears the risk of specific and aggregate claims exceeding the attachment points. The carrier also earns investment income on premium reserves during the policy year. The carrier profits when claims stay below attachment points: the premium is earned and no claims are paid. The carrier loses when claims exceed attachment points, requiring reimbursement that may exceed the premium collected for that group.

The major stop loss carriers serving the level funded market include Sun Life, Voya Financial, Symetra, HM Insurance Group (a Highmark Health subsidiary), Tokio Marine HCC, and the carrier-affiliated stop loss operations of UnitedHealthcare and Cigna. Each prices differently, sets different attachment point floors, and applies different underwriting standards. Sun Life and Voya are among the largest independent stop loss carriers by premium volume. Symetra and HM Insurance Group have historically served the small group segment aggressively. Tokio Marine HCC brings reinsurance capacity that allows it to price competitively on larger and more complex groups. The employer typically does not select the stop loss carrier directly. The TPA or the broker selects based on pricing, relationships, and underwriting appetite for the specific group.

The stop loss carrier’s primary risk management tool is underwriting. At initial enrollment and at each renewal, the carrier evaluates the group’s demographics, claims history (if available), and known health conditions. The carrier sets attachment points, prices premium, and applies lasers based on this evaluation. The underwriting is health-status-based, which is the fundamental distinction from ACA community rating in the fully insured market.

The laser is the stop loss carrier’s most consequential underwriting tool. If the carrier identifies a member with a known high-cost condition, such as ongoing cancer treatment, an organ transplant, hemophilia, or a high-cost specialty drug regimen, the carrier may apply a laser: a member-specific attachment point set at or above the known annual cost of that member’s care. A member with $180,000 in expected annual claims may receive a laser at $200,000 or higher, meaning the employer bears 100 percent of that member’s claims up to the laser amount with no stop loss reimbursement. The laser effectively excludes the member from meaningful stop loss protection. For a small group, a single laser on a high-cost member can make the plan economically unviable because the employer cannot absorb the full cost of the member’s care. Lasers are disclosed at renewal. The employer must decide whether to accept the laser, seek alternative stop loss coverage that does not laser the member, or exit the level funded arrangement. LFP-02.03 examines laser mechanics and the employer’s options in detail.

The Reinsurer

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Behind the stop loss carrier, frequently invisible to the employer and the broker, stands the reinsurer. Stop loss carriers transfer a portion of their risk to reinsurers through reinsurance treaties. The reinsurance market affects stop loss pricing and availability in ways the employer cannot see and the broker may not track.

When reinsurers tighten capacity, which occurs after catastrophic loss events, capital market disruptions, or periods of adverse stop loss claims experience across the industry, stop loss premiums increase across the market. The increase affects all groups, regardless of their individual claims experience. An employer with a perfect claims year can receive a stop loss premium increase at renewal because the reinsurance market hardened. The employer and the broker may not understand why the increase occurred because the reinsurance layer is opaque.

Reinsurance market data from AM Best, Guy Carpenter, Gallagher Re, and Aon tracks capacity, pricing trends, and loss ratios in the stop loss reinsurance market. These reports are available to industry participants but are not typically shared with employers or included in broker renewal presentations. The reinsurance layer is a structural feature of the stop loss market that affects every level funded employer’s economics without appearing in any document the employer signs. The employer has no contractual relationship with the reinsurer, no visibility into reinsurance terms, and no recourse if reinsurance market conditions drive up their stop loss premium. This is not a market failure. It is the normal operation of a layered insurance market. But it is a source of pricing volatility that the employer should understand and that the broker should be able to explain at renewal.

The Broker

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The broker occupies a position of influence that is disproportionate to their risk exposure, which is zero. The broker recommends the level funded product, the TPA, and the stop loss carrier. The broker may be the only party who evaluates multiple options on the employer’s behalf. The broker’s recommendation determines where the employer’s money goes.

Broker compensation takes multiple forms. Commission is the primary form: a percentage of total premium or a flat PMPM amount, paid by the employer through the monthly payment. Override commissions are additional compensation paid by the stop loss carrier or TPA based on the broker’s total volume, persistency (how many groups renew), or production targets. Bonus arrangements from carriers or TPAs reward brokers for placing a minimum number of groups or a minimum premium volume within a specified period. Consulting fees, charged directly to the employer, may supplement or replace commission.

The Consolidated Appropriations Act of 2021 requires brokers to disclose all direct and indirect compensation to the employer, including commissions, overrides, and bonuses. Compliance with this requirement is uneven. Some brokers provide complete disclosure proactively. Some provide minimal disclosure that technically satisfies the requirement but does not enable the employer to understand the broker’s total compensation or the conflicts it creates. Some do not disclose at all. DOL enforcement activity on the CAA broker disclosure provisions has been limited through the first years of the requirement.

The conflicts are structural. A broker earning override commissions from a specific stop loss carrier has a financial incentive to place groups with that carrier regardless of whether the carrier offers the best terms for the employer. A broker earning higher commissions on level funded than on fully insured has a financial incentive to recommend level funded regardless of the employer’s fit for the product. The conflicts do not mean the broker is acting in bad faith. They mean the employer should understand the broker’s compensation before evaluating the broker’s recommendation. LFP-14.01 through LFP-14.03 examine broker economics and the advisory position in detail.