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State of the TPA Industry & Forecast as of November 1999

Dear Friends,

For 20 years it has been a tradition for me to give a candid report on how the TPA & benefits industry looks, and a forecast for the coming year(s). My expertise is simply that the SPBA office serves as the central information clearinghouse for the industry, so my knowledge simply is wisdom from you. The message has been remarkably consistent: Each year it seems like there is some major threat on the verge of wiping us out. Each year, however, TPAs grow and prosper because of innovation, flexibility, adaptability, and willingness to give customers services they need. SPBA is often accused of being a purveyor of potential gloom & doom. That's because it is our philosophy that you should be alerted to and prepared for the worst case scenarios (thus, anything less is 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:

In a nutshell, we're doing pretty well, though the market in different parts of the country can be very different. Some TPAs are fighting hard to hold their current group of clients while TPAs elsewhere have new clients knocking at the door...especially "HMO refugees". There are all kinds of new hybrid arrangements popping up and approaching TPAs. This is a tough call since the old laws would seem to not allow such arrangements...but TPAs hear "everyone's doing it".

There continue to be more players in the TPA market. On the one hand, there continue to be some mergers & acquisitions. Fortunately, both buyers and sellers seem to be taking a more careful approach...especially to compare the personalities & philosophical beliefs of the two potential partners. Too many of the earlier TPA marriages did not work out as well as hoped.

Meanwhile, there is a continuous flow of new TPAs and new TPA-like operations. (You may have noticed that each UPDATE has several new candidates for membership.)

How independent are TPAs today? In the old days, total arm's length independence was a prime requirement for eligibility. However, more and more reasonable and understandable exceptions kept arising. By 1996, the Board's long-range planning process found that 81% of SPBA TPAs had "some other interest or affiliation" (owned or a sister of an insurance company, Blues, HMO, PPO, hospital, etc.) That percent is higher now. The good news is that most TPAs and their owners & corporate siblings have recognized and respected that the TPA must think and act as if it were totally independent. TPA-like operations which have not achieved that spirit of independent service to clients have tended to fizzle or are ERISA fiduciary self-dealing prohibition cases waiting to happen. Most clients (not to mention the DOL) want and expect the TPA to be thinking of the client's best interests, independent of other pressures. Meanwhile, it has been a clear lesson that each TPA is so unique and designed for the wants & needs of its particular clients, that even well-intentioned management tinkering will spook clients. I often use the analogy with potential buyers that TPAs are like butterflies; if you touch their wings they won't fly anymore. Most TPAs and outside investors have been wise enough to recognize the importance & value of uniqueness and independence. (It is SPBA policy that we focus only on the member TPA entity, so even if the TPAs' big big outside owner calls, our loyalty is only to the TPA entity and TPA industry.

What challenges are on the horizon?

The new millennium is going to start with a whirlwind of challenges & changes. Each will seem, at first, like a challenge, but each also holds some opportunity.

Public opinion and the perception by Congress and the media of public opinion will decide whether the concepts noted below are deadly or dead or opportunities. SPBA has a non-stop effort to provide you with ammunition to shape public opinion in your areaÉand help you be sure that the media & Congressmen know about your side of public opinion. You need to shape public opinion...or that is the one thing that can snuff out TPAs and self-funding.

>>Patient Protection in its 1999 form will probably die a bureaucratic death in "conference". However, "concern with HMOs" (which would hit us also) remains the #1 political issue in polling of Republicans, Democrats and Independents, so public opinion may well make it politically expedient in a tricky election year to go through the Patient Protection legislative process again next year. In any case, the ideas in patient protection (like allowing "plans", employers, etc. to be sued) will pop up from time to time in future bills. So, you must continue to educate against these follies of the concepts. SPBA has given you more than enough ammunition & analysis over the past two years to use.

>>Access is a short word, but encompasses all sorts of challenges. Democrats such as Gore & Bradley may succeed in establishing the agenda as being some massive remolding of the health coverage system. (Once an agenda has gotten into the minds of the media, they get tunnel vision and think that thatÕs the only option.) Meanwhile, with Republicans & conservatives, it will take some careful parsing of words by all of us, since a totally different concept of "access" is their mantra. For example, it is SPBAÕs position to support anything that expands the private employee benefits system and access of workers and their families to stable cost-efficient coverage. However, much of the new use of the word "access" (especially among conservatives) is a Trojan horse to subvert or de-emphasize employment-based health coverage in favor of "individual responsibility" and "choice". Since ERISA and self-funding are based in law solely on employee benefit plans, anything that cuts employment-based plans poisons ERISA & self-funding. Ironically, the "access" and "choice" proponents would remove the type of health coverage that about 3/4 of covered workers & dependents have chosen. "Choice" would be limited to only fully-insured products.

>>Privacy & confidentiality of medical records will probably be livable for TPAs, but costly. The current proposed regs do not regulate TPAs directly...but most of what TPAs do (so it's sort of like TPAs take on fiduciary by what they do). This will be an evolving issue with twists and obstacles as Congress jumps in to fill gaps (such as maybe allowing lawsuits for "damages" for perceived breech of privacy). Court cases will also create some goofy precedents. For example, this law only applies to information that is now or ever was in electronic form. So you can imagine all the claims of what is "electronic" and who let information slip out how. For example, my doctor happens to make his comments for the patient's record by talking into a tape recorder and the information is then transcribed by a nurse. The use of that tape recorder seems to make it information that was once "electronic" and thus covered by the law. However, how would a TPA receiving a paper claim from that doctor know about the tape recorder??? So, like COBRA, this issue will probably raise a host of unique questions and situations in order to administer. However, there is a silver lining to this cloud: (a). This will be one more reason why employers should hire arm's-length TPA services (rather than in-house administration or other arrangements where they might ever have a chance to see personal medical information). This has been a strong selling point for TPAs in the past, and now becomes a stronger marketing point. (b). Like COBRA, this will probably be more expensive than assumed at first. Get paid for it (just as many TPAs bill extra for COBRA and other services).

>>Banking changes: Banks, insurance companies and investment firms will be allowed to get into all three lines of business. This will set off a frenzy of activity as each rushes into the other's turf (usually with only superficial familiarity with the new line of business). Since employee benefits are one of the biggest and most stable golden eggs in the nest of the financial community, and since many of the bank/insurance/investment players have paid for expensive studies to discover that the TPA business is the key to this market and "in a golden position" (as one such report summarized it), we can expect to feel a lot of that whirlwind. Sometimes the wind will be against us, and sometimes it will help us. Against: (a). Most TPAs use a bank as trustee for client plan assets. Yet, that bank may now be a potential competitor directly or through a sister firm. Look into a non-compete agreement (with the threat of moving the money) before the banks have time to figure out this market. (b). Most of these financial players have no familiarity or understanding of ERISA fiduciary responsibility and prohibitions against "self-dealing". Expect some pretty blatant tie-ins and abuses which could lure your clients. SPBA is writing to DOL to suggest that a reminder announcement be issued before unknowing newcomers give us all a black eye. Good news for TPAs: Many of these folks will realize (or you should enlighten them) that they are neofites in the benefits business, so they should hire your firm both for your operational expertise & experienceÉas well as to minimize and guide you through the ERISA fiduciary considerations.

>>EDI: This is an ongoing issue. SPBA had its first EDI session in 1992 to prepare you for things to come. Now the time has come. The SPBA Board dedicated great importance and assets to this issue for you (since many "experts" predicted that TPAs could not afford the initial research & preparation and thus TPAs would wither away). Each SPBA meeting now has an intensive EDI segment, and after four such programs, TPAs are on the cutting edge (though too many took the ostrich approach at first and are only now awakening that the timeframe is closing quickly). SPBA's educational project is no turn-key EDI program. It is merely to save you the thousands of dollars that would have been needed to explore the options & expectations. SPBA's effort is unique in that the Board recognized that EDI will need to be understood by everyone in each TPA firm...from the "techies" who develop the final form, to the CEO & COO who must pay for it, to the claims & marketing staff. Each TPA firm is going to have to develop its own personal EDI implementation. Take advantage of what SPBA is providing you! EDI now shifts into high gear. The HHS regs are expected around New Year's, and that is then the blueprint. We will probably stretch SPBA meetings for the next few years to give more time for EDI (while still covering all the other issues). While EDI will be a headache for most TPAs in the short run (like the headaches & costs when TPAs automated 20 years ago), in the long run it looks like it will be a major cost savings for TPAs and put you on the same footing as "the big guys". So, this also has a silver lining.

>>Stop-Loss: TPAs & Stop-Loss have a love-hate relationship, and for most of the self-funded market, are dependent on each other's role. The Stop-Loss market has grown rapidly, and each year there have been predictions of "the big shakeout". 1999-2000 will be years of major adjustment for the Stop-Loss industry on several levels. Is it the long-predicted "big shake-out"? Only time will tell. However, no matter how much bitterness sometimes arises, the cross-fertilization of information from the SPBA Stop-Loss Service Partner arrangement seems to have both sides in much better shape than would be true otherwise.

>>PPOs: The public perception of PPOs saving big money means that most plans feel obligated to offer PPOs. However, for many of the new developments in employee benefits such as privacy, EDI, and speed, PPOs may be a problem.

What's the state of SPBA?

SPBA is alive and kicking. Considering that I was told that SPBA would die within 90 days of when I took the job in 1980, that's good news. In 1980, we had a 33% deficit budget. Today, we have built a functional reserve to provide members with new services & expansion when needed. The goal of the operating budget each year is to usually be close to even income/expenses. (For example, for 1999, out of a budget of nearly $1,600,000 we expect to end with about $30,000 surplus.) SPBA has had several secrets of success. First, we had founders and early leaders who instituted some seemingly-unorthodox, but incredibly wise customs & policies. These have flourished in the test of time. Second, SPBA Boards over the years have been very wise. They not only remained loyal to the proven customs and policies, but they also kept cool heads to lead SPBA through some times when many other associations hurt themselves by jumping impulsively. SPBA's third secret of success is the members. You all are wonderfully loyal, supportive...and good sports. We don't sugar-coat bad news, we nag you, and we expect you to perform. From its smallest days, SPBA has always had the feeling of being a family. This family is strong, and this family will last. Happy New Year!!!