Choosing & Evaluating TPA Services

From: SPBA President Fred Hunt

Dear Friends,

I am often asked about evaluating the performance of a TPA. There is no handy formula or measure. There are no industry norms nor guidelines because it is such a personalized business that there are no comparables. First of all, from a legal standpoint, a TPA does only as much or as little as delegated by the client in the service contract, so each is a custom arrangement. From the practical perspective, things like the level & speed of cooperation from the client (such as notifying about new workers, dependents, terminations, etc.)...not to mention the type of employment & plan (union, non-union, big, small, locations, design of plan, etc. etc.) all impact the "efficiency". There is also the extremely important issue that in employee benefits, there is often no "right" or provably correct way to do things, because huge segments of the law lack final comprehensive compliance guidance, and most government agencies judge situations on a case-by-case basis. Thus measuring "accuracy" is very subjective. On the other hand, TPAs model themselves on the toughest-ever consumer protection....which can impose both civil and criminal (jail time) penalties for transgressions. ERISA's fiduciary responsibility is inspected & enforced by the U.S. Department of Labor.

For the same reasons (unclear government compliance guidance and strict fiduciary duty) another seemingly-logical measurement...speed of processing...also backfires. As one employer/client (who happened to be a hospital) called to sheepishly apologize, "I guess what I was asking is like asking how fast our doctors do exploratory surgery. Being careful is the most important factor."

Frankly, from a financial & liability point of view, I find that government compliance is the area that holds the greatest potential for risk. Most of the government penalties are designed to cripple an employer for even innocent or unknowing goofs. Therefore, my question in evaluating a TPA would be where the TPA gets their government compliance information and how do they go about coordinating with the client to implement what they can.

At the risk of sounding like bragging, expertise in government compliance is an area in which SPBA TPAs have earned great respect. SPBA TPA firms have had exposure to the best and widest array of input & exchange about government compliance. Because about 2/3 of all U.S. employee benefit plans use some form of TPA (and 5/6 of that market are clients of SPBA member TPAs)...and because TPA client plans cover every size & format of employment, government legislative & regulatory policy shapers brainstorm with us about options & interpretations for the "real world". It is not fool-proof, and government often changes its mind. However, it is the best resource available on these topics that cover tax law, labor law, and a host of social issues. (For example when a recent major law was passed, and the three regulatory agencies were required to create expert "public input" advisory groups, all three agencies chose only SPBA.) Therefore, I'd say that the most important part of evaluating a TPA would be the open-ended question asking your TPA to tell you about their government compliance sources of information and procedures for keeping you up to date (recognizing that it is always a case-by-case strategy, so you won't get a precise answer).

Let me also alert you to check whether the entity knows the correct areas of law. For example, insurance law is very different from ERISA & employee benefits law (so different that some normal insurance practices can be criminal offenses under ERISA). Similarly, people who know health & medical law must show that they also know employee benefit law. Employee benefits encompasses many specialties, so, for example, even a tax attorney may be unaware of labor or social law implications of an issue and vice versa.

Is the TPA's style & operation a "comfortable fit" for the client plan? Unlike relations with an insurance company or HMO, which comprises just paying the premium, a TPA is an ongoing partner with the employer/plan to see how the constant flow of new government requirements can be accommodated, and decide how the plan wishes to implement provisions and make interpretations to keep all sides happy. Just like any other business partnership, there should be comfort and trust.

Is bigger better? The key to TPA success has always been personalized service. Often a small firm is perfect for that need. Other times a larger firm has the capacity to provide personalized service. So, as noted above, "comfortable fit" is the answer to the size question. Don't lock yourself into only considering a TPA of a certain size.

Comparing costs: Here again, each TPA has a different pricing system ...ranging from one-fee covers all administrative services....to a menu of services available, each with a price...to services shared among several related firms and/or outsourced to specialists. So, prices quoted by two or more TPAs may be apples & oranges. The "higher" fee may be cheaper. Take the time to truly compare what you'd be getting. Be sure to buy the level of professionalism you need. ERISA helps you. The Department of Labor audits TPA fees to be sure that they are cost-efficient for clients, so Uncle Sam protects you from rip-offs.

I hope that these hints help. Remember that each TPA firm is unique, and they are also very innovative. So, brainstorm candidly with a TPA about what you really hope to achieve with the benefit plan. The TPA's experience working with other client plans will probably produce some additional successful techniques & ideas. Communication is the best way to explore the value of a TPA to you.

Sincerely,

Frederick D. Hunt, Jr. - President