Does a Texas city have to take competitive bids to hire a third party administrator for its insurance plan?

Texas AG Opinion JM-1038: Is a Third Party Administrator a "Professional" Exempt From Bidding?

Plain-English summary

Texas cities generally have to take competitive bids before signing contracts above a certain size. There is an exception, though, for "personal or professional services," the idea being that you do not shop for a surgeon or a lawyer by lowest bid. An El Paso County official asked the Attorney General a question that sits right on the edge of that exception: when a city hires a "third party administrator" (a TPA, the company that processes claims and runs the paperwork for an insurance or benefits plan), is that a professional service the city can hire without bidding?

The Attorney General did not give a yes or no, and explained why it could not. The label "professional services" is not defined by a bright line. Courts have described it as work that is predominantly mental or intellectual rather than physical, and it reaches well past the old trio of lawyers, physicians, and theologians to any field that demands special knowledge and a high order of skill. But "third party administrator" is a statutory category defined very broadly. Under the Insurance Code, a TPA is anyone who is paid to perform basically any insurance-related administrative or management function, which could be as simple as clerical claims processing or as demanding as sophisticated plan design. So the same job title can describe wildly different work.

That is what makes it a question of fact rather than a question of law. Whether a particular TPA contract is for professional services depends on what the city actually hired the TPA to do, and the Attorney General's office does not resolve fact questions in the opinion process. The opinion pointed out that even the one case said to be directly on point, a Louisiana decision holding a TPA's health-plan services were not professional services, turned on the specific terms of that city's contract. It also noted that a separate Texas statute dealing with deferred-compensation plans mentions TPAs without giving them any professional-services exception, a hint that the Legislature thought at least some TPA contracts could sensibly be put out for bid.

The practical takeaway for a city was to look at the actual scope of work in the specific contract, not the job title, and to remember (from a related opinion the AG cited) that buying the insurance itself is a different transaction that does have to be competitively bid.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Chapter 252 of the Local Government Code and the Insurance Code provisions on third party administrators have been amended since 1989, and article 6252-3b and former article 2368a have been recodified. Anyone facing a present-day question about whether a particular contract is exempt from municipal competitive bidding should consult the current statutes and analyze the specific contract rather than rely on this 1989 analysis.

Who this opinion affected (as of 1989)

Cities and their purchasing officials: The opinion told them there is no blanket rule for TPA contracts; they had to look at the specific services in each contract to decide whether the professional-services exception applied.

Third party administrators bidding for city business: The opinion meant a TPA could not assume its contracts were automatically exempt from competitive bidding based on its status.

Taxpayers and watchdogs: The opinion reinforced that the competitive-bidding exception is narrow and fact-specific, and that buying insurance itself must still go to bid.

Common questions

Does a city have to competitively bid a third party administrator contract?
It depends. The AG concluded whether a TPA's services fall within the professional-services exception in section 252.022(a)(4) is a question of fact turning on the specific services contracted for, so there is no general answer.

Why couldn't the Attorney General just say yes or no?
Because it is a fact question. The AG concluded the definition of a TPA is broad enough to cover both simple clerical work and complex expert work, and the opinion process cannot resolve questions of fact.

Does the city still have to bid the insurance itself?
Yes. The AG noted, citing Attorney General Opinion MW-494 (1982), that a contract for the purchase of insurance is subject to competitive-bidding requirements.

Background and statutory framework

The El Paso County Attorney asked whether a TPA's services are "professional services" under Local Government Code section 252.022(a)(4), which provides that chapter 252's requirement that certain municipal contracts be competitively bid does not apply to a procurement for personal or professional services. The AG concluded the answer depends on the particular services a municipality contracts with a TPA to perform, making it a question of fact the opinion process cannot resolve.

TPAs must obtain and maintain a certificate of authority from the commissioner of insurance to operate in Texas. Insurance Code article 21.07-5, section 2(3)(A), defines an "administrator" or "third party administrator" broadly as a person who receives compensation for performing any service, function, duty, or activity respecting insurance or alternatives to insurance in any administrative or management capacity, including claims or expense review, underwriting, administration, and management. The AG observed this definition is very broad and could include services ranging from simple clerical ones to complex ones requiring high levels of expertise.

The AG drew on Attorney General Opinion JM-940 (1988), which had noted that courts have not adopted a universal definition of "professional services," but that several cases suggest it comprehends labor and skill that is predominantly mental or intellectual rather than physical or manual (Maryland Casualty Co. v. Crazy Water Co., 160 S.W.2d 102 (Tex. Civ. App.—Eastland 1942, no writ)), and that it no longer includes only lawyers, physicians, or theologians but also members of disciplines requiring special knowledge, a high order of learning, skill, and intelligence (Attorney General Opinion MW-344 (1981); Black's Law Dictionary 1089-90 (5th ed. 1979)). JM-940 had concluded that the services of a construction management consultant, as described, were within the professional-services exception to the competitive-bidding requirements of Education Code section 21.901.

A brief pointed to Council of City of New Orleans v. Morial, 390 So. 2d 1361 (La. Ct. App. 1980), as the only case directly on point, which held that a TPA's services for the city's health plan were not professional services under an exception to the city charter's competitive-bidding requirements; but that court considered the specific terms of the city's contract with the TPA. The AG also noted that besides article 21.07-5, the only other statutory reference to TPAs is V.T.C.S. article 6252-3b, which authorizes deferred-compensation plans for public employees and requires soliciting bids, directing the comptroller to consider bids from companies selling through a TPA or otherwise (section 3B(b)); the absence of a professional-services exception there suggested the Legislature considered that public contracts involving TPA services, at least for deferred-compensation plans, could efficiently be subjected to competitive bidding.

The AG reiterated it could not rule whether TPA services generally are professional services, because that characterization depends in the first instance on the specific TPA services under a specific contract. In a footnote comparing a contract for supervision of county road construction, the AG quoted Gulf Bitulithic Co. v. Nueces Co., 11 S.W.2d 305 (Tex. Comm'n App. 1928, judgm't adopted), on the danger of requiring skilled-supervision contracts to go to the lowest bidder. Another footnote noted that Attorney General Opinion MW-494 (1982), addressing former article 2368a, concluded contracts for the purchase of insurance by counties must be competitively bid, and the AG saw no reason the same conclusion would not apply to insurance purchases by municipalities under chapter 252.

Citations

Cases:

• Maryland Casualty Co. v. Crazy Water Co., 160 S.W.2d 102 (Tex. Civ. App.—Eastland 1942, no writ) (professional services are predominantly mental or intellectual)
• Council of City of New Orleans v. Morial, 390 So. 2d 1361 (La. Ct. App. 1980) (TPA health-plan services not professional services on that contract's terms)
• Gulf Bitulithic Co. v. Nueces Co., 11 S.W.2d 305 (Tex. Comm'n App. 1928, judgm't adopted) (skilled-supervision contracts and lowest-bidder rules)

Statutory authority:

• Local Gov't Code § 252.022(a)(4) (professional-services exception); ch. 252 (municipal competitive bidding)
• Insurance Code art. 21.07-5, § 2(3)(A) (definition of third party administrator)
• V.T.C.S. art. 6252-3b, § 3B(b) (deferred-compensation plans; TPAs); Internal Revenue Code § 401(k)
• Former V.T.C.S. art. 2368a (county competitive bidding)
• Education Code § 21.901 (school construction contracts)

Prior Attorney General opinions:

• Attorney General Opinion JM-940 (1988) (scope of "professional services")
• Attorney General Opinion MW-344 (1981) (definition of "profession")
• Attorney General Opinion MW-494 (1982) (insurance purchases must be competitively bid)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1038
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1038.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; garbled case names have been corrected against the cited reporters; the linked PDF is authoritative.

THE ATTORNEY GENERAL OF TEXAS

April 7, 1989

Honorable Joe Lucas
El Paso County Attorney
Room 201, City-County Building
El Paso, Texas 79901

Opinion No. JM-1038

Re: Whether a third party administrator of an insurance contract is a "professional" for purposes of exemption from competitive bidding (RQ-1552)

Dear Mr. Lucas:

You ask whether the services of a "third party administrator" (TPA) are "professional services" within the meaning of Local Government Code, section 252.022(a)(4). That provision provides that the requirement of chapter 252 that contracts by municipalities requiring expenditures in certain amounts be made on competitive bids, does not apply to an expenditure for "a procurement for personal or professional services." Having researched your question, we conclude that whether the services of a TPA are professional services under chapter 252 depends on the particular services which a municipality contracts with a TPA to perform, and that your question is thus a question of fact. We are unable in the opinion process to determine questions of fact.

As pointed out in the brief accompanying your request, TPA's are required by Texas law to obtain and maintain a "certificate of authority" issued by the commissioner of insurance in order to operate in Texas. Section 2(3)(A) of Insurance Code article 21.07-5 provides:

"Administrator" or "third party administrator" or "TPA" means a person who receives any form of administrative or service fee, consideration, payment, premium, reimbursement, or compensation for performing or providing any service, function, or duty, or activity respecting insurance or alternatives to insurance in any administrative or management capacity, including but not limited to claims or expense review, underwriting, administration, and management, under a contract or other agreement to be performed in this state or with respect to risks located or partially located in this state or on behalf of persons in this state for:

(i) any plan;

(ii) any insurance carrier; or

(iii) any person that self insures.

Clearly, the definition of a TPA as a person "performing [any] service, function, or duty, or activity respecting insurance or alternatives to insurance in any administrative or management capacity" (emphasis added) is very broad, and could include services ranging from simple clerical ones to complex ones requiring high levels of expertise.

In Attorney General Opinion JM-940 (1988) we noted with respect to the scope of the term "professional services" in a competitive bidding requirement exception:

The courts have not adopted a universal definition of the term; however, several cases suggest that it comprehends labor and skill that is "predominately mental or intellectual, rather than physical or manual." Maryland Casualty Co. v. Crazy Water Co., 160 S.W.2d 102 (Tex. Civ. App. - Eastland 1942, no writ). It no longer includes only the services of lawyers, physicians, or theologians, but also those members of disciplines requiring special knowledge or attainment and a high order of learning, skill, and intelligence. See Attorney General Opinion MW-344 (1981); Black's Law Dictionary 1089-90 (5th ed. 1979) (definition of "profession").

Attorney General Opinion JM-940 concluded that the services of a construction management consultant, as described in the request, were within the "professional services" exception to the competitive bidding requirements of Education Code section 21.901, relating to contracts for the construction, maintenance, repair, or renovation of school buildings.

A brief submitted in connection with your request points to Council of City of New Orleans v. Morial, 390 So. 2d 1361 (La. Ct. App. 1980), as "the only case directly on point." That case held that the services of a TPA in connection with the city's health plan were not "professional services" under an exception to the city charter's competitive bidding requirements. Notably, however, the Louisiana court considered in its opinion the specific terms of the contract between the city and the TPA for the latter's services.

In addition to Insurance Code article 21.07-5, we find one other reference to TPA's in the Texas statutes. Article 6252-3b, V.T.C.S., authorizes the establishment of deferred compensation plans for public employees, and requires the solicitation of bids prior to the adoption of a particular plan. Section 3B(b) of that article directs the comptroller, when soliciting bids for plans authorized under section 401(k) of the Internal Revenue Code, to "consider bids from companies requiring the use of their own agents to sell their products as well as companies selling their products through a third party administrator or otherwise" (emphasis added). There is no professional services exception provided for in article 6252-3b to the competitive bidding requirements of that article, an indication, we think, that the legislature considered that public contracts involving the services of TPA's, at least in connection with the deferred compensation plans authorized by article 6252-3b, could efficiently and economically be subjected to competitive bidding requirements.[1]

To reiterate, however, we cannot rule whether the services of TPA's generally are "professional services" under the competitive bidding requirement exception in Local Government Code section 252.022(a)(4). Again, we think the characterization of such services as professional or not depends in the first instance on the specific TPA services to be provided under a specific contract.[2]

SUMMARY

Whether the services of a third party administrator are professional services within the meaning of the competitive bidding requirement exception in section 252.022(a)(4) of the Local Government Code is a question of fact, and depends on the particular services to be provided under a specific contract.

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by William Walker
Assistant Attorney General

Footnotes

1. See Gulf Bitulithic Co. v. Nueces Co., 11 S.W.2d 305 (Tex. Comm'n App. 1928, judgm't adopted), considering applicability of competitive bidding requirements to a county contract for supervision of county road construction: "To hold that contracts for the supervision of work done directly by the county must be let to the lowest bidder would result in the county obtaining the least competent supervision, as those possessing the necessary skill, experience, and business judgment to supervise a large construction program in the most efficient and economical manner could not hope to successfully compete with those of lesser skill, experience, or business judgment."

2. Please note, however, that the ruling in Attorney General Opinion MW-494 (1982) indicates that a contract for the purchase of insurance would be subject to the competitive bidding requirements. While specifically not addressing whether the "employment of an insurance consultant would be within the exception for personal or professional services," that opinion concluded that "contracts for the purchase of insurance by counties are required . . . to be submitted to competitive bids." While Attorney General Opinion MW-494 considered the applicability of the competitive bidding requirements of former article 2368a, V.T.C.S., to insurance purchases by counties, we see no reason why the same conclusion would not be reached with respect to insurance purchases by municipalities under the current chapter 252 competitive bidding requirements.