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State of the TPA Industry + Forecast As of December 2000

Dear SPBA Members & Stop-Loss Service Partners,

For 21 years, it has become a tradition for me to give a candid report on how the TPA & benefits industry looks, and forecast for the upcoming year(s). My "expertise" is simply that the SPBA office serves as the central information clearinghouse for the industry (and TPAs themselves tend to be information clearinghouses in their market areas), so my knowledge is simply wisdom from you. The message over the years has been remarkably consistent. Each year it seems like there is some major threat on the verge of wiping out the market & role we have known. Each year, however, TPAs grow and prosper because of innovation, flexibility, adaptability, willingness to give needed types & level of services and a healthy dose of luck that some political juggernauts have missed us). So why is SPBA often accused of being a purveyor of possible gloom & doom during the year to members? It is because it is SPBA's philosophy that you should be alerted and prepared for the worst case scenarios so anything less drastic is actually good news. So, yes, you get a lot of warnings. However, remember that SPBA's overall belief and message is upbeat about the future of the TPA industry. TPAs are winners and survivors. One press observer of TPAs noted, "TPAs have the uncanny ability to turn every lemon into lemonade."

The state of the TPA industry today:
The number of TPAs as well as the amount of business being done by many of them is growing. The growth is actually larger than statistics indicate, because the growth is after making up for "losses" of a number of TPA firm names in mergers and buy-outs. Of course, in counting the size of the industry, a merged or bought firm is not really "lost", since its offices (under whatever name) continue as active players.

Much of the recent growth comes from diversification by HMOs, hospitals, insurers, P&C insurance brokers, banks, and others who see the TPA industry as a valuable survivor role as the health and retirement savings arena continues to evolve. That is an impressive vote of confidence for the future of the TPA industry! Fortunately, these "newcomers" from different industries recognize and respect the role and traditions that have proved so successful for the TPA industry & SPBA.

The parent organizations of the new firms have had the wisdom to recognize that the TPA must act and think independently. The parents are not making the mistake of trying to use the TPA as a stalking horse for their other business interests. Thus, the new TPAs have not raised a problem with DOL fiduciary enforcers or the professional spirit of the industry. Many of the "newcomers" are actually staffed by people who had previous experience in SPBA firms. However, as one "newcomer" TPA CEO described his instant adoption of the mood & style of SPBA and TPAs, "If it ain't broke, don't fix it." So, the net good news is that the influx of new members is not watering-down SPBA or the industry. It is strengthening us, and it only takes a few weeks for "newcomers" to become "old-timers".

Last year, I detailed several issues as potential challenges on the horizon:

>>>Patient Protection: We accurately predicted a year ago that it would fizzle out for this year in political wrangling in Congress). What will happen in 2001? Once an issue faces defeat (non-passage) in one Congress, it tends to lose momentum in the next Congressƒand Patient Protection did not turn out to be a decisive political issue in the elections. However, do not relax yet. It is an issue that lends itself to emotional play, so it could be revivedƒ.especially by a new President eager to show bi-partisan unity and compassion. Anything that passes will be because opponents try to compromise and start on the slippery slope backwards. It is viewed as purely a political popularity issue. The logic & logistics have long been lost, and the new DOL Claims regs address ost of the issues. TPAs must educate Congress (and, just as important, local public opinion) on the real-world weaknesses (the fatal vocabulary goofs and impact of liability lawsuits against the ERISA plan for medical malpractice)ƒor else something will pass when Congress and/or the new President wants a bi-partisan feel-good show.

>>>Access is a broad term used to describe the ultimate goal of giving everyone womb-to-tomb coverage without any financial worries. This issue rises & falls in popularity depending on what anecdotal horror stories are floating in the media and political circles at the time. Recently, the pressure has not been too high, and some of the other issues (such as Patient Protection) would probably throw more people out from coverage. However, this issue arises every few years. 2001 will be one of those resurgent years for rhetoric & "solutions" for access to health care (and the public & politicians assume no health coverage equates with receiving no health care) The sad truth is that the idealistic goal is impossible. No employer or nation's tax-base is rich enough to provide unlimited coverage & services at rock-bottom cost.

>>>Privacy & confidentiality of medical records: Fortunately, SPBA was involved early and consistently with the officials involved in shaping this policy. So, it appears it will be workable for TPAs. Ironically, it will be many types of providers (who originally were strong supporters of privacy & confidentiality) who will raise potential horror stories to Congress and the media about how privacy & confidentiality rules cripple them. The possibilities of technology will also probably collide occasionally with privacy.

>>>Banking changes: We thought there might be a frenzy as banks, investment firms and insurance companies tried to rush into each others' fields as allowed by a new law last year. We harbored fears that the lack of experience would cause problems for which all of us would be blamed. It does not seem to have been a frenzy, and, as noted earlier, those who have ventured into the TPA business (at least those who have joined SPBA) seem to have done so with care and professionalism.

>>>EDI now has regs issued and the clock is ticking to the Fall 2002 effective date. Fortunately, SPBA members are about as up to speed as possible in this issue, which hinges so much on the fast-pace of computer & software development. SPBA's first session on EDI was in Spring 1992. In recent years, the Board mounted a full effort, which dominates about 1/3 of each SPBA Spring & Fall Meeting. The goal is to educate & prepare TPAs & Stop-Loss Partners on the requirements and possible options. There will be no "one" answer or turn-key program. Each TPA firm will need to custom-fit the final package. SPBA recognizes that to be totally successful, all segments of each TPA firm must understand and help shape the EDI future of that firm, so SPBA's EDI education approach is unique, in that it is geared to everyone in the TPA firm. When the HIPPA law first passed with the EDI mandate for payors, many people predicted that up to 50% of SPBA's member firms would throw in the towel, unable to tackle EDI. Some firms may still decide to merge or sell, but it will be an informed decision, not one of desperation. This year, you will be attending SPBA Meetings and the EDI segments. Why? Expect more and more clients (and some medical providers, especially hospitals) to be asking for a status report and your plans for being in compliance by Fall 2002 (much as you were asked to certify your Y2K readiness). You need to be able to tell clients and others that you are proceeding methodically and as part of a nationwide effort and working with the key government officials.

>>>PPOs were identified as a potential problem because TPAs kept foreseeing how PPOs might slow or hinder attempts to comply with other legal or operational requirements (such as EDI, privacy, speed of claims processing, etc.) The questions & concerns remain.

>>>Stop-Loss was the other potential problem mentioned in last year's forecast. It has been coming true, as many Stop-Loss Partners had warned for several years. Offerings went down and price went up, along with more restrictive payment and interpretation of contract language. The harshest impact of the Stop-Loss tightening was predicted to last "one or two years". Are we over the hump yet? Some in Stop-Loss say "almost" and some say we're just barely over the hump. (More on Stop-Loss and the "culture gap" later.)

>>>New Regs: Several new final regs are emerging the last days of the Clinton Administration covering DOL Claims rules, SPDs, HIPPA Privacy, HIPPA Non-discrimination, and maybe Cafeteria plans. Thanks to input to reg-writers from SPBA all through the process, we expect all of them to be livable (and certainly better than originally envisioned).

Threats from within the benefits community:
This year will be the start of a crucial test of the size and viability of the employee benefit system. Two movements are converging, and could spell trouble

>>>"Defined contribution" health plans, "individual choice" and/or "individual responsibility" is a movement that started with conservative Republicans and has been gaining support for a few years. It would replace the employee benefit group plan concept in favor of giving employees money or vouchers to buy whatever health coverage they want. Employers are led to believe it will be cheaper and more carefree, and employees are given the illusion of a happy hunting ground of endless cost-efficient health coverage options. Proponents formerly compared it to how Americans choose their own car insurance, but SPBA emphatically pointed out that was precisely why the "individual" concept would flop. Despite laws in many states demanding the purchase of car insurance, as many as 50% of individuals in those states do not buy it. Since SPBA started pointing out this fatal flaw, proponents no longer use the car insurance analogy. So, common sense says individual-responsibility & choice concept won't work and the failure will lead to a demand for national government insurance to "solve" the problem. It is an idea with idealistic appeal to some mythical image of rugged individualism. Idealistic images gain support in Congress and public opinion faster than common sense.

>>>Limiting our market is a grave threat and catalyst for change in the employee benefits market. Again, there is no simple "right" solution. Self-funding grew from just a small specialty market into the dominant form of employee benefit because it tried to serve every type of client. This was mainly possible because innovative minds in the Stop-Loss community devised ways to make their product workable for more and more of the market (smaller and smaller employers). So, during the 1980's, "minimum size" for a self-funded employer fell from 2,500 to 1,000 to 500 to 200, to 100, and finally to many plans below 25 lives. Meanwhile, while self-funding was making itself available as an option to more and more of the marketplace, many insurance companies in the 1980's were unsure what market sizes would be their focus. Many decided to abandon "small" employers as uneconomicƒso those small employers became pioneers in a new type of coverageƒself-funding (and many of the same insurers wondered where their market had gone once it was too late).

Today, the small employers seem to be being abandoned again. Many Stop-Loss sources don't want to take on small cases (which they fear will be money-losers). The Stop-Loss sources are not being mean or evil. It is simply an understandable business decision.

However, if Stop-Loss (and thus self-funding) walks away from small-employers and plans with sympathetic patients, the risks to the whole industry are great. First, small employers are the fastest-growing segment of employment. They are also the fastest-growing in adding health coverage. Second, they are vocal, innovative and politically powerful. On the rebound from self-funding, some will be victimized by shoddy schemesƒwhich will give all of us a black eye and lead to government "reforms". Some will embrace the "individual" coverage movementƒwhich undercuts the basis for all employee benefits. Some will use their clout and sad stories to demand that the government become the universal health coverage provider. So, by walking away from any vital parts of the benefits market, we are sewing seeds of our own demise. This is a mutual problem. We can't just point fingers at Stop-Loss for not wanting to lose money. We must all explore ways to keep our doors open to the broadest range of the market. There is probably an innovative solution in someone's head. It needs to meet the current state & federal laws. Some laws may need some changes. But the key is that we must all be in the forefront of trying to achieve a solution rather than being seen as throwing away the fastest-growing (and politically powerful & sympathetic) segment of the market. This is a tough challenge, but it is the biggest long-term threat to the industry as we have known it.

Culture Gap:
Finally on Stop-Loss, the current situation has highlighted an emotional difference in culture & outlook between TPAs and Stop-Loss. People in the Stop-Loss industry tend to view their role like an investment or business. If it's not profitable, or if prospects don't look good, get out or charge enough to protect yourself. That's not an illogical approach. It's the whole basis of how all of us buy and sell stocks. However, TPAs traditionally feel a very strong bond of loyalty to clients through thick and thin. (For example, TPAs put in time & effort for clients in trouble, knowing they'll never get paid for their efforts.) So since TPAs feel that devotion to help clients and individuals in the planƒthere is an emotional resentment when they find partners in the process do not hold the same feeling. It seems like disloyalty to a concept. The culture gap may have lasting effects.

TPAs Cutting Corners:
Out of desperation, laziness, or (most often) because they are afraid to spook or be forceful with a client, some TPAs cut some corners. It may be not having trusts, or fiddling with eligibility or claims approval or stop-loss. We realize that it is no fun being the messenger-with-bad-news, which is why SPBA provides so many pieces in my name, so you can give it to your client, but I take the brunt of their ill-will, not you. Cutting corners usually leads to a crisis, and if it becomes a "horror story" it hurts all of us. Be sure to occasionally review the pieces on the SPBA members-only website and have new employees read it as part of their training so you understand the intent of the lawsƒand know what SPBA has made available to you as tools to help you be most professional.

What's the state of SPBA as an association?
SPBA turned 25 last October in spry health. Membership continues to grow (entirely by word-of-mouth recommendations, we are proud & grateful to report). More importantly, SPBA's members are more involved and connected than ever. The challenges are large, but member enthusiasm for SPBA is very high. That spirit & unity provide momentum for the industry to continue to play a vital role, and SPBA's long tradition of informal, frugal, candid member-oriented focus and services (making you look brilliant to clients & community) continues to be a winning strategy.

So, yes, there are threats (as there have always been). However there is more good news than bad news, and the biggest threats are within the benefits community to solveƒnot some colossal unknowing government threat.

Happy & prosperous 2001!