Written September 4, 2017 by Active Past President Fred Hunt
I have written these State of the TPA Industry & Forecasts for 37 years. They have had an (astoundingly to me) accuracy rate well in the 90% range for predictions. These forecasts are totally candid, and were originally intended only for SPBA members. However, from the very start, SPBA members felt they should be open to anyone. So, old & new forecasts are on the SPBA public website, and they are carefully read by outside owners of TPAs & investors, current & potential clients, brokers, researchers, etc. The candor of SPBA in everything has increased the understanding & respect for TPAs (and helped vendors & others from making embarrassing…or even illegal…assumptions or proposals).
Note: Because of the outside readers as well new members of the SPBA family, you will find a lot of background history provided. Don’t skim over the history! TPAs, the employee benefits marketplace, and the environment truly are a case of knowing history, bringing great clarity and makes for readers becoming knowledgeable forecasters of the future. Also, see all of the pieces on the public portion of the website, SPBATPA.org, to have the total context of what is in this forecast. One last hint: The most frequent question by people who have read candid pieces from SPBA is “Did you really mean what you wrote??” The answer is “Yes”. Reliable candor is a keynote of SPBA.
The past, as valuable prologue of the future:
The State of the TPA industry is very good, despite the upheaval facing the health & insurance issues today, not to mention ever-shifting government compliance requirements. The secret of 37 years of consistent success is that the “product” TPAs provide is very customized service with no “selfish” vested interest. TPAs help employers & plans examine the wants & needs and characteristics of the workers who will participate in the plan…while also keeping an eye on how to make it the most cost-efficient use of benefit monies and maximum transparency.
The personalized design of each plan & services (as differentiated from insurance company & other benefit offerings which have standard ready-made offerings) is a key advantage of self-funding (a.k.a. self-insurance), and the reason that self-funding is, by far, the dominant form of employee health benefits. It also offers “the biggest bang for the buck” for the wants & needs types of coverage for each employer or type of employment.
Careful fiduciary attention to allocation of plan assets + transparency is not just because TPAs are good people. Most plans administered by TPAs are subject to the ERISA law, which was designed as the ultimate consumer protection law, and requires levels of transparency & fiduciary duty that exceed normal business & insurance law requirements. Caution: Many outsiders, even, attorneys do not know this difference and often think up deals or arrangements that might be legal in other circumstances, but could lead to civil and/or criminal (jail) charges for ERISA plans. So, listen to cautions from TPAs, and go to the SPBA website at SPBATPA.org and read everything…especially ERISA Fiduciary, which, purposely, has several mentions of ERISA fiduciary to explained from various perspectives.
TPAs have also been successful because they are flexible in adapting the ideas, needs, wants and new initiatives client plan-sponsors and workers may raise. The big news today is that I predict that the TPA industry is on the eve of a major growth expansion. That’s a good thing, and TPAs are well positioned.
Change can be scary, so let me give perspective from SPBA’s history. Prior to 1980, about 99% of the market & work of TPAs were collectively-bargained pension plans, with the TPAs working with both union & management trustees of the plans. At the time, health insurance (“welfare”) was a cheap side offering of employee benefits.
A number of trends came together. Health prices & coverage started to cost more & more, and employers took notice and felt a lack of control & choice for their workers. Meanwhile, Uncle Sam started undercutting traditional Defined-Benefit pension plans (DB) in favor of Defined-Contribution (DC). This appealed to employers who didn’t want the lingering liability of the saved-up funds in DB plans. The biggest driver of change was that Uncle Sam had not liked the huge amounts of money in pension plans that was “revenue loss” (the Uncle Sam term for anything they can’t tax). Ironically, as often happens with government policy, 401(k) was intended as a small special use provision, but has become the most common form of retirement saving. Since the administration of most Defined Contribution (DC) plans can be done by the bank or investment entity, the role of TPAs was dramatically cut.
So, for all these reasons, starting about 1981, there was massive growth of employers seeking custom-designed health benefit plans. Large employers were comfortable and preferred being their own “insurer” via self-funding. Hundreds of new TPAs were created to fill this new market, and TPAs were creative in adding more choice, features & efficiencies, and the advent of Stop-Loss (which plays a re-insurance type of role for self-funding), smaller & smaller employers could confidently use the trend of self-funded health coverage plans. The original TPA market for collectively-bargained jointly-administered pension plans continues in SPBA, but the growth boom was single employers (which also included state & county government employee plans, employees of religious entities and some other types of groups). That, and expansions thereof, have been the major segment of the TPA industry for the past 35 years.
Increasingly, over the past 25 years, health care costs and mandated benefits bring increased government compliance requirements. Also, constant legislative regulatory efforts to “reform” health care & coverage have driven up the cost & compliance headaches for employers. It has long been said that “Only a fool is his own lawyer.” The expertise & experience needed to provide day-to-day administration of an employee health plan are so complex that it takes firms that spend 24/7, plus the perspective of working with many clients to cross-check what govt. says, since govt. guidance is often not clear. This is why SPBA has a long record & key priority of working closely with the officials who interpret & write the regulations & decisions. It is a win-win, because SPBA members are the broadest & biggest representation of employers & plans in every size, segment & type of plan + geographical region (explained later). Thus, there is a lot of candid constructive brain-storming which gives SPBA TPAs deeper insight into the intent & expectation of govt. regulation.
TODAY & TOMORROW:
National Health Insurance (a.k.a. Single Payer, Medicare-for-all, etc.) or a tweaked Obamacare, or health coverage in a much more individualized format (such as HSAs) are being heavily lobbied. It’s also not clear whether any new reform program would be mandated for everyone or only for those without employer or other coverage. That does not mean there will be action soon. Some of the ideas have been floated unsuccessfully for 25 years or more. However, it muddies the forecast of the future of health benefits.
A cloud on the horizon to watch & try to quell
With the 2018 Congressional elections already in the forefront of Congressional minds + potential 2020 Presidential hopefuls wanting visibility & purpose, the stage is being set for parties to grab onto some idea that makes them look busy, involved & seeking solutions. A trend seems to be evolving from both Dem & Repub + libs & conservs to shift existing programs (and/or) existing & new powers to states, perhaps in a single-payer format, such as “Medicare-for-all”. Why would Congressmen be willing to give up all or some powers that attract big donors??? Because…they have learned what we have known; that health coverage/cost/payment is a can’t-win political hot potato. So, they solemnly say they want to put the very personal issue of health care “closer to the people” at the state level. Both parties can also rationalize how it embodies their core belief in the role govt should have. Also, as a bonus, with elections approaching, this might well play out (such as by shifting ACA subsidies to a grants-to-states format) as a bipartisan act (which campaign managers see as irresistible to voters).
The risk is that this could cause chaos in the employee benefits system. Self-Funding (aka Self-Insurance) is, by far, the largest form of employee benefits…vocabulary generates different estimates, but 75+% seems to be the most common statistic (even among top insurance companies book of business). ERISA (Employee Retirement Income Security Act ’74) is the main regulatory law of Self-Funded plans. Congress in 1974 realized that different employers & types of workers & industries want or need certain specific kinds of coverage. (Remember, at the time, most self-funded plans were plans sponsored by specific unions for their type of worker situations, so customized coverage was a key value sought for workers.) So, ERISA (a federal law) has a pre-emption of state (insurance) laws. So, workers in a plan can be from many states and have uniform coverage. Alas, you may think, “Aha!!…ERISA preempts any laws or regulations states…with new encouragement from Congress…might try to impose on workers and/or employers in their states. Probably not so! If states are formally given new authority by Congress, the new state rules/laws would technically be implemented under federal authority, and ERISA does not preempt other federal laws!
So, here is the headache (potentially fatal) I see as a possibility if Congress goes to a state-centric health benefits system:
Under a federal grants-to-states or any state-financing arrangement, the state officials will prudently want to avoid the bad-risk anti-selection (low enrollment & mainly older & sicker) losses that starved ACA Exchanges. So, (from that perspective, but not thinking of the impact on employers & workers), states might well mandate that everyone…and/or every employer/plan in the state must sign up with the state system. This would make current plans unworkable, and perhaps be the tilting factor to the trend forecast a few paragraphs below. I remember when interstate trucks had 10-20-30 license places spread around the front of the truck…one for each state whose boundary they might cross…and fees & requirements of each state.
I think it is only natural to assume that states would continue their current trend with state-regulated insurance policies loaded-up with mandated benefits. (I’ve heard the estimate of over 1,200 variations around the country currently.) If nothing else, how would an employer or plan meet various equality requirements if your employee Joe in NY gets one set of benefits & Mary in NJ a different set (and probably different cost/values)??
Even “what state” raises a slew of questions. Several years ago, SPBA was helping a Congressman with a piece of legislation to avoid this problem, and he asked the Congressional Research Service (CRS) what % of employers had multi-state employee benefit responsibilities. I was astonished that they said 81% had out-of-state people on their plan. (It’s not just big employers. Our tiny office has 3 states and maybe an out-of-state dependent student.) Today, with remote workers, etc. etc. that % would be higher. Remember, many of the largest cities & employment centers are on or within commuting of state boundaries. Also, branch offices & workers around the country + retirees + dependents (many now become “citizens” of their college state) + “ACA children” under 26 with their careers living elsewhere, etc. So, the CRS high % does make sense. (Don’t get hung up on statistics. The point is that the issues being mentioned impact far more Americans than anyone would think.)
Will the same questions arise as have bedeviled jurisdictions, workers & employers about commuter taxes add to the confusion for employers & what coverage plans(s) they must be in? So, the key questions will be if states, that go towards universal coverage via a state plan, grandfather existing coverage, or will there be a demand or tax for coverage that would make an employer plan duplicative for workers or employers? This kind of real-world factor is not on the radar of politicians, so employers & employee benefit professionals…and workers who would be impacted…must explain it early & often to Congressional + state officials & candidates.
The big new forecasted market & role for TPAs
My big forecast for change over the next few years is a significant expansion/change of the role of TPAs. Fortunately, the new role is perfectly suited to the style of TPAs, with highly personalized hands-on service as a key factor. The new TPA market would also survive and/or replace any massive “reform” of health care.
Repeated surveys find that workers most-desired employee benefits are “well-being” services and coordination of things in the workers’ life. What kinds of things? Wellness, whole-physical-health programs, niche solutions such as diabetes/diet/etc. management programs, assist with student loan repayment, pet insurance, pension management (such as 401k), stress reduction, improved eating habits, pensions, work-schedule management, etc.. Also, services such as a personal online platform to combine & better understand & use their benefits offerings. For example, 401(k) is popular on the most-wanted list…. but the new workforce also want the employer benefit plan to help understand & manage the 401(k) and other benefits. This may seem laughable or ridiculous nannying, but this is the new world & level of expectation. For example, people now seek cars that tell them when they are wandering from the lane, need to make a turn, hands-free parking, map directions, automatic stopping, and even total self-driving. Every aspect of your life is now overseen & guided. It is the new expected norm. So, “well-being” benefits are “I need the employer benefit plan to coordinate my life for me.”
A major adjustment (for better or worse) of such a change will be how the cost & funding is treated. What about the tax treatment and requirements for both worker & employer…plus legal/tax issues such as non-discrimination equal for all workers or some such?? Will the money for the well-being services & management benefits be treated like current money/services the employee receives for benefits? Uncle Sam will be eyeing ways to reduce (untaxed) “revenue loss”.
These are not insurmountable, and might well be easier than today’s govt compliance. My point here is simply to recognize that the surveys are consistently finding that this is what the rising workforce wants. A key factor to keep in mind when forecasting the near-future of employee benefits is that employers (who are the needed players to sponsor employee benefit plans) are getting fed up with the constant new initiatives in health reform. Plus employers will be on the front lines of hearing from the new generation…who are already the largest, most competitive, and fastest-rising segment of the employment pool. Also, while this might seem like a new-age list of preferences, the surveys show that older respondents are not far behind in expressing support for many of them. So, the intent of this heads-up of a significant shift/expansion is to re-emphasize listening to what your customers may already be wishing for or will soon be asking. TPAs have succeeded by being ahead of trends, not left in the dust.
Be aware of vocabulary confusion:
SPBA is candid about statistics & vocabulary, and was selected to head a govt. advisory committee for the top number-crunching agencies of govt. The experts in & out of govt. routinely come up with vastly different numbers for the same thing. This became the shortest govt. advisory committee in history. We explained that every number has a built-in 1,000% distortion factor, and everyone suddenly “got it” The distortion is usually not because people lie. It is because most of the basic terms being counted have vastly different meanings & uses. For example, “one life” or “cost per life” seems very clear. However, it may be one soul (TPAs sometimes use the term “bellybutton” to clarify a single soul). Or “one life” is also often used to describe the worker, the spouse and several children. Similarly words like “insurance” (slang usage vs legal definition), “employer”, # of “plans”, etc. etc. have multiple uses/meanings.
Also, the data collection & compilation process has multiple opportunities for vocabulary distortion. For example, the data request is sent to the CEO or Sr. official who may have one understanding of the vocabulary terms being counted. It is then forwarded to whoever collects statistics in the employer or plan. They provide or count based on their understanding of the terms. Or, often, they simply provide whatever numbers they already have handy…though it may mean that it covers different things (apples & oranges). That draft response then may go back “upstairs”, who may tweak or add spin. It then goes into the processing of whomever (such as Uncle Sam) is compiling the overall study, who apply their vocabulary assumptions. It is a recipe for misleading outcomes. Meanwhile many studies have pre-set parameters which skew who gets polled, and what is included & not included. (For example, the widely-quoted Congressional Budget Office…CBO…is legally limited to consider what they are told to consider. So, if a Congressman asks what the cost of health care will be, but to assume that cancer is cured tomorrow, the result will be a forecasted big drop in health cost, because cancer is not included.) So, protect your credibility, and use statistics as possible guidance, not gospel.
“TPA” is also a vocabulary confusion term. There is no official or legal definition of “TPA”. So, when people ask how many TPAs there are, the honest answer is pick any number between about 200 and a few thousand…. defending on vocabulary (much like how many “consultants” are there). Below is an informal guide. These are my handy descriptive “Fredisms”, not legal terms for the broad categories:
>Comprehensive Service TPAs: These are firms which provide, or arrange for, a comprehensive array of services in the clients’ types of plans. This is not to say that each firm provides every possible service to every type of employee benefit plan or employer. It just means that they provide comprehensive services in their selected types of clients (much like law firms & medical practices). This is about 200+ firms. These are generally considered the “true” TPA industry in terms of the huge number of people covered*and legal compliance. (*Keeping in mind the statistics warnings above, but for general guidance, as many as 50+% of US workers in non-federal-govt coverage employer health plans are administered in these TPA plans.)
Virtually all of these TPAs are members of SPBA. Also, since TPA connotes multiple clients (as differentiated from an in-house administration arrangement), SPBA requires multiple clients in order to meet member eligibility as a TPA. For serious researchers, the SPBA Membership Directory is available on the SPBA website at SPBATPA.org for $900. The layout and chart showing every firm, $$ range, what kinds of clients, what services & geography & contact info makes all of the above description instantly understandable.
> Specialty TPAs: These “TPAs” provide admin services, but usually limited to one or a few items, such as 401(k), or dental, etc. Most govt. compliance does not apply, as it does to broad health & pension plans. There are a few hundred of these firms, but a guess is hard, since many insurance agents handles these.
>Minimal TPAs: These are firms that provide TPA services, but it is a minimal part of their overall business. For example, a law firm down the hall from our office had a client with 4 people in a retiree benefit plan. The law firm provided the legal filings and when there were any claims. So, legally, they were a TPA for those 4 people. Software and other such firms sometimes take on some clients as they design or as ongoing insight. So, yes, they may be legally “TPAs”, but the law firm & others certainly would not say “we’re TPA a TPA firm”.
>ASOs: Prior to the 1980’s boom described earlier, insurers tended to bad-mouth self-funding & TPAs. Soon, insurers were losing clients rapidly. They decided “if we can’t beat ‘em, join them”. However, how do you suddenly offer a service & product you previously disparaged?? The answer was to create a new term, Administrative Services Only (ASO). It is a marketing term, not used in the applicable federal laws. ASO is basically a TPA of self-funded plans. The difference I have noticed is that ASOs are usually psychologically closer to their insurer parent, and tend to get services such as legal & compliance from the parent. (ASOs need to remember that insurer lawyers are experts in insurance law, but laws for self-funding, such as ERISA, are quite different, with different regulators.) Many SPBA TPAs are owned by insurers, and even have ASO sister firms, but most insurers have wisely let the TPA preserve their independent personalized style.
>TPAs-of-convenience: “TPA” must be a prestigious thing to have on a corporate resume, because lots of firms seem to add it willy-nilly. We occasionally get calls from them, and they tell us they are the biggest, fastest, best etc. etc. TPA. In such cases, I casually ask how they are handling the latest fiduciary requirements or other responsibilities any true TPA must meet. The reaction is usually dead silence, then like seeing a train go from full speed ahead to panic reverse. They stammer frantically, “No!! No!!, we’re not a TPA!!!” and they backpedal all their bragging of the moment before.
So, the net summary is that SPBA’s TPA industry is in fine shape, on top of their game, and prepared for the future in both the inevitable chaos of whatever “reform” is proposed or imposed…plus a whole new range of services & markets. The length of this is to be like a nautical chart that shows you the things that can wreck your journey. Again, members & non-members alike should go to SPBATPA.org. The feature to help you pick the applicable articles sometimes is too narrow, so I recommend that your see every article in each of the categories.
Fred Hunt, SPBA Past President