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State of the TPA Industry & Forecast for 2017

Personal candid comments from SPBA Active Past President Fred Hunt

This is my 36th year of writing these.  They are absolutely blunt in order to be useful for members, clients, investors, and others judging the prospects of the TPA industry & market. I am astounded to say that the forecasts have proved to be on-target & accurate well over 90% of the time (with most of the other issues just not reaching fruition).  I normally try to send these in the Fall of the prior year so that members & clients can use it in their planning when many are doing plan renewal discussions & new plans.  So, this would have been a Fall 2016 report.  However, as we all know, we were waiting to see the outcome of the elections.  Now waiting to see the make-up & direction of the new Administration, and then (for however long it takes) how the policies + repeal/replace of ACA and other issues will evolve.  Brace yourself for exciting times!  Like everything from SPBA, this is candid, but non-partisan & non-political.

The consistent good news over the 36 years (and today) is that the state of the TPA industry & market (and SPBA) gets stronger & stronger.   Barring some unforeseen upheaval such as mandatory national health insurance imposed on everyone (the broadly-used term “single-payer”), the forecast remains for stronger & stronger.

Speaking of upheaval, I am writing this at a time of great angst, with everyone in the media and public either envisioning imminent doomsday in every aspect of American life (Mrs. Obama calls it “loss of hope” …. or conversely…. people who are excited about overly-optimistic expectations (such as total disappearance of all 424 parts of ACA + all regs disappear + insurance & health costs plummeting).  I have lived amid political over-despair and/or over-expectation all my life.  From that and from historical examples, I can tell you that both fears & happy-talk will pan out as far less than expected.  So, the best advice is that famous English saying, “Stay calm & Carry on.”

Important:  To understand the future of the TPA industry & market…and (importantly) to be able to forecast accurately with perspective as things evolve, you need to know the background.  When I came to SPBA, the association & TPAs as a definable industry were ridiculed to “go belly-up within 90 days”, so we’ve exceeded that forecast by 36 years in ways our SPBA Founders never dared dream possible.  Why would I quit a good job for such a dead-end as SPBA TPAs??  SPBA’s Founders were incredibly wise & inspirational.  They set the customs that are so different from other associations, and those have made us so successful.  For example, at the time, I was head of govt. relations for a major association in the benefits arena.  There was a major issue, and 99% of the associations, unions, etc. were adamantly against it.  However, we kept running into Agency & Congressional offices who would refer to (and had obviously been impressed by) a white paper by some little unknown group called SPBA.  On the way back to my office, I pompously stopped by this little unknown organization.  I was amazed, the CEO was leaving (even he thought it was going to be dead in 90 days “from lack of money and lack of member involvement”).  I fell in love, and the rest is history.   By the way, in a couple of months, SPBA’s white paper & follow-up on that issue won the issue that had had 99% opposition. ;-)  SPBA consistently continues that kind of track record for what we call, “shaping history”.

SPBA Boards have remained incredibly wise ever sinceSPBA does not have muscle & money to throw around, so we’d be like an invisible flea on an elephant if we tried to pursue traditional lobbying.  However, we have the unbeatable advantage of actively-involved members who are real-world hands-on experts in every aspect of employee benefit plans.  TPAs are independent (like hiring an independent CPA), so they give both the client plan (and SPBA to share with govt. policy-makers) an unbiased view.  An estimated 75% or more of the US workforce not in federal plans are in plans of the type TPAs administer (including the insurance company term for their TPA services, ASO).  SPBA also offers a unique perspective even the biggest associations cannot match.  Client plans of SPBA members include plans & workers in every size & format of employment + every industry & type of work + nationwideSo, the key is that tiny SPBA is actually the unique source of hands-on insight for the biggest & broadest group of the US population.   SPBA also points out the inherent misleading fallacies of most statistics, and SPBA was asked to be the expert for a Federal working group of the top Federal statistical agencies to see why their own findings so often yield vastly different outcomes.  (Sorry, variations of vocabulary meanings are the culprit, and there’s no solution for that, so we “failed” in that goal for Uncle Sam.)

Just like SPBA’s style of convincing with direct real-world expertise with no “spin”, SPBA further enhances its credibility by staying “under the radar” + non-partisan & “non-political”.  That shows that SPBA is conveying facts, we’re not ego-building or grandstanding for ourselves or some political cause.  It works!  Every year there are at least as many changes, things made more workable, or that “fade away” because of SPBAs low-key (but intense) styleFor example, in 2010, the State of the TPA Industry would have been an obituary, because Obamacare originally would have included TPAs & self-funded plans under all the insurance company rules.  It would have been an unworkable square peg in a round hole.  At one of our typical SPBA meetings in 2009, we had the key people coordinating what ACA would be.  About 90 minutes in active very candid constructive discussion with about 400 SPBA obviously-knowledgeable SPBA member attendees, and the drafters of ACA realized that the insurance company rules would kill the health coverage source for the majority of Americans.  So…instead of a death notice, subsequent State of the Industry reports have been optimistic about ever stronger role for TPAs & Self-Funding (not to say that all the other rags & micro-management of the past 8 years haven’t been an avalanche of headaches).

Self-Funding is the main marketplace for TPAs & Stop-Loss.  (It is also sometimes called Self-Insurance, but I avoid that because it leads to confusion with fully-insured.  It can also lead to unnecessary panic & anger among workers who think it means the employer will make them pay all their own medical costs.) 

Vocabulary clarification re ASO & TPA:  When Self-Funding began to boom in the 1980’s, and customers flocked to TPAs from fully-insured policies, insurers wisely began an “if you can’t beat’me, join ‘me” strategy to offer TPA services for self-funding, and called it Administrative Services Only…ASO.  Legally, it is the same functions & laws.  The difference I have noticed is a cultural one, even with TPAs that may be owned or related to insurers.  Entities that call themselves TPAs focus intensively on ever-shifting government compliance rags etc., and frequent personalized interaction with personalized plan design etc. of client plans & sponsors.  (One TPA described it, “We’re compliance nerds who are good at holding clients’ hands through the process.”)  That close personalized approach is usually not practical for a large insurance company.  Also, I notice that entities that use the term ASO tend to think of themselves as the insurance company (though applicable laws, and thus the thought process, are different for self-funding).   So, think of TPAs & ASO as siblings with different personalities.  If the insurance industry should decide that the health insurance market in the US is no longer profitable or practical (a consideration first seriously raised to me by top insurance company officials in 2008, and things have not gone well for health insurance companies since), I assume that orphaned ASO would meld with their TPA corporate siblings who are already SPBA members, or join SPBA as new separate entities.  This is all hypothesis for now, but should be on your radar as a possibility.

Though one of our early SPBA members had been doing Self-Funding as early as 1933, the Taft Hartley law of 1945 gave structure via the Employee Retirement Income Security Act (ERISA), which was designed to be….and remains today…the ultimate consumer-protection law with fiduciary responsibility that exceeds normal business law and insurance law (a fact that reformers never seem to know when they naively want to “create” & impose consumer protection…aright).

Plan size:  Early Self-funded plans, and thus the market was deemed to be only “prudent” for employee groups of at least 5,000.  The “safe” size dropped quickly over the yearly years to 2,500, then 1,000, then 500, then 250, then 100, and expertise of Stop-Loss (same function as what insurance companies call re-insurance as backstop if they have excess losses) and some impressive technology & other services gearing specifically to serve the TPA industry, self-funding applicability is becoming practical for even smaller groups.  (As noted in the caveat below, size is not the key factor.) SPBA embraces Stop-Loss & Service Partners geared to serving TPAs.  This not only maximizes the teamwork in smoothly selecting & providing services to client plans & employers…but also broadens the information for the whole association’s efforts to represent the industry.

 Caveat:  Though TPAs do Self-funded plans as their business, they are the quickest to warn & dissuade from using Self-Funding in inappropriate situations.  Self-Funded plan sponsors should be financially stable good cash-flow entities, with a mix of old/young healthy, etc. participants to make the plan actuarially feasible.  This applies to any shared-risk arrangement (note the ACA Exchanges actuarial weakness and thus unsustainable losses by those insurers).  It’s just universal common sense.  The nice part is that TPAs have shown tremendous professionalism in advising plan sponsors prudently.  The moral of this story is that Self-Funding, is, by far, the largest form of health coverage in employee benefits (which is over 177 million Americans, including 75 million Millennials, who are now the largest & fastest-rising segment of US employment).  TPAs (and insurer-twin ASO) administer almost all of these Self-Funded plans.

Other advantages for past & continued future TPA success:  Government regulation has been dubbed the #1 bane to every type of business & function in the US.  Employee benefits is probably the head of that line, since so many agencies & laws apply to various parts of the work.  However, TPAs have immediate hands-on familiarity + (important) ongoing close candid communication & cooperation with the client plans. (This is also why SPBA has been able to warn regulators & policy-makers that hundreds of government ideas would trigger far more problems that they might solve, and those ideas have evaporated or been greatly eased.)  So, my State of the TPA Industry & Forecast as we enter 2017 is that constant up-close hands-on insight + background of what the govt. is thinking makes TPAs an ever-more popular & needed source of employee benefits plan administration.

Fred Hunt – SPBA Active Past President