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State of the TPA Industry & Market – June 2016

This is in place of my normal weekly e-mail since it is in similar content, but packaged differently.  Also, SPBA has always shown these reports on the SPBA Public Website, so clients, prospects, investors, etc. have access to what is below.  The good news is that since it is so clearly candid, it has won great respect for TPAs, SPBA, and the member firms.  I mention this so you know what your clients, prospects & investors are seeing. We also hope this will prime the pump of your thinking to get out and tell the story in your community.  You’ve got a great story to tell! – Fred

We have been producing these candid reports for 36 years, usually near year’s end, but occasionally in-between, like this, when things are cloudy or confusing.  I am pleasantly surprised to report that they’ve had about a 90% accuracy rate for specific predictions.  Also, we have often quoted Mark Twain’s comment when he read reports of his death, “Reports of my demise are pre-mature.”  The demise of TPAs & our marketplace have been forecast dozens of times (and the situations, did, indeed, look grim).  However, have we come out stronger & more respected each time…usually better than those who predicted our demise.  So, keep that in mind as you read the candor below.

“It was the best of times. It was the worst of times.” Was the opening statement of Charles Dickens’ famous novel “A Tale of Two Cities”.  It is also a catchy description for TPAs, self-funding, and our gigantic marketplace in mid-2016.

Obamacare (ACA) is disintegrating and has achieved a fraction of its projected market & goals.  It has only 13 million people  (compared to an estimated 157 million in employee benefit health plans…most of whom are in self-funded plans).  However, ACA is an example of the political & public opinion penchant for latching onto little issues and the small issue becomes the tail wagging the dog.

The original draft of ACA would have devastated self-funded employee benefit plans & TPAs.  The drafters had no concept that there was anything other than “insurance companies”.  So we would have been put under the many burdensome & punitive requirements of insurance companies, even though those rules would be like mandating horseshoes on deer.  We had hundreds of discussions & explanations with the drafters of the law.  That built the credibility that led to a great act of professionalism on the part of both the law-writers + SPBA’s TPAs & Stop-Loss (S-L).  At an SPBA convention of about 400 TPAs & S-L, there was a very candid reality-check discussion of how/why self-funded (mostly ERISA) plans were very different from insurers.  For example, it was news to the govt. folks that self-funding has no “selfish” motive of seeking a profit, so there is no need for the safeguards & controls against “excess profit”, and there is strong enforcement of fiduciary responsibility.  This very professional candid discussion changed history and saved self-funding.  (SPBA’s approach to issue discussions with government officials is not bombastic.  Instead, we use real-world facts to point out that they will look very silly (and be subject to professional criticism & ridicule) if they proceed with something that makes no sense or will backfire in the real world.  Self-preservation is a powerful persuader.)

Here’s the “best of times”:  The net result for us from ACA was that TPAs & self-funding got buried in regulations, like everyone else, but the market of self-funded plans was pretty much unscathed, and looking more attractive than ever to employers & brokers who had not previously considered TPAs & self-funding.  Meanwhile, the punitive provisions in the law and after-effects impacting insurers unsettled their marketplace, and may even lead insurers to decide the fully-insured US market is no longer a profitable business venture. 

What impact would withdrawal of fully-insured have on TPAs?  Insurers are huge players in the ASO (Administrative Services Only) market.  ASO is a synonym marketing term invented by insurers in the 1980s, when they were losing clients to TPAs & self-funding, and needed a matching product, but needed a different name than “self-funding” & “TPAs”, which they had been bad-mouthing up until then.  So, counting ASO as part of the total self-funding TPA-type market is logical, and if it comes to merging ASOs into the SPBA TPA family is not a misfit.  In fact, there is already inter-marriage.  Most big ASO insurers also have or are related to TPA-named members of SPBA.

The only challenge I foresee in the TPA/ASO marriage is that the main difference I notice between TPA-named TPAs and ASOs is cultural.  TPAs give highly-customized service and so the TPA firms tend to adapt a unique personalized operating personality & customs.  That is a key factor in client retention.  SPBA TPAs also are govt. compliance nerds (a compliment)…. digging deep into the nitty-gritty of interaction of the DOL ERISA Fiduciary, IRS, HHS, etc. etc. regulations.  As noted above about ACA, this has earned respect & credibility with the people who make & regulate the laws.  Meanwhile, I notice that entities that use the term ASO are usually much more under the wing of the parent insurer, identifying more with the insurer than self-funding, ERISA, etc.  Also, this close relationship means that the ASO often relies on the insurance company legal department for compliance advice, and services seem less customized to each client.  Insurance lawyers are great, but it is like asking French lawyers for US legal advice.  ERISA & self-funding laws are extremely different, with different laws & regulatory overseers.  Also, what may be a totally legal practice in insurance law can lead to civil and our criminal (jail time) under the laws regulating the ASO self-funded plans & clients (such as “self-dealing”).  The needed culture-shift for ASOs is not insurmountable.  (On the other hand, in fairness to insurer legal departments, insurers have deep legal pockets, so most of the significant ERISA preemption and such court cases have been achieved by insurance companies defending their ASO business.  My above comments relate to the constantly evolving day-to-day compliance.)

Govt. compliance & regulation has become smothering for every entity related to health; including health benefit plans & insurers, employers, doctors, hospitals, etc. etc.  There is micro-management and hoops to jump through which were inconceivable even a few years ago.  I would guess that the quantity of govt. compliance load is about 400% of what it was pre-ACA…though ACA is not responsible for all of the extra regs.  This is a logistical & financial challenge for TPAs, and most clients assume (and want to assume) that the TPA will just magically take care of it.  (TPAs too often have the “bad” habit of rendering service & guidance on government issues quickly and seemingly effortlessly, so unlike the same kind of insight & service from law firms, consultants, etc. costing huge fees, clients too often assume there should be no payment for the expertise & compliance services of TPAs.) 

The marketplace?  The politics of health care, coverage & payment today is like an active earthquake zone.  There is the slow acknowledgement that ACA is an expensive under-performing flop.  However, there is the political legacy need to preserve & enshrine it.  Also, as we predicted, people now expect the “goodies” of subsidies, no pre-ex, children on parent plans to age 26, etc.  The political battle cry to “just totally repeal ACA” would have serious political ramifications, which I’ve dubbed “like taking candy away from a child after giving it to him”.  So, the ramifications of ACA will be a factor in the health coverage/payment market for a long time.

The failure of ACA (which may get spun as “a failure of the private sector system” because of withdrawing insurers & other problems) has left the public exasperated, and ready to jump on any new savior idea.  Single-payer (govt. as the “insurer”) is being seen as the only “proven” only workable solution.  Most envision it as a national plan, but some states are already exploring the idea for themselves.

Single-payer sounds idyllic.  Care is available to all, is “free”, is overseen by a caring govt., and is cost-efficient.  People, however, fail to look at the longstanding example of a US federal single-payer plan… the Veterans Administration’s longstanding scandalous mistreatment of the nation’s most-deserving patients. 

Also, govt. financial projections are guided by numbers mostly grabbed from the air or misleading (politically-convenient) studies.  So, they almost always turn out to be grossly incorrect.  For example, the plan Sen. Sanders is touting on the campaign trail is estimated by even supporters of the idea as ending up costing 300% of what he claims.  So, the real-world dilemma facing single payer is what I was warned 30 years ago:  “There isn’t enough money in the world to pay for all of the medical attention people think they deserve.”  (Re-read that, since it is key to your ongoing understanding of health “reform”.)

Go-it-alone individualism:  Since the Reagan Administration, HSA-like plans have been the idealized solution proposed by conservatives & Republicans.  Right now, it is again the direction both Republican leaders and Trump seem to be heading as their solution to push in the next Administration. 

Rugged individualism, like single-payer, sounds idyllic.  However, it assumes everyone is superbly wise as a consumer & negotiator for medical care + everyone is financially self-disciplined. The cost aspect of getting health care is an unbelievable minefield.  Every cost-control idea is soon circumvented or perverted.  People go to the ER for a bump or cough… and come out owing $100,000 (a recent news story).  You need someone on your side who knows the business, the cost & service trends, the (mostly technically legal) scams, etc. and will fight for you… as well as to be honest and tell the covered individual that the vanity face lift doesn’t count.   As far as financial self-discipline, let’s just say that money tends to burn a hole in the pocket for most of us.  We are currently seeing much of this play out in retirement savings that have not been saved as designed.

Interestingly, TPA-administered self-funding is a win-win of the customized concept + the ultimate-consumer-protection ERISA law protecting the plan participant & plan assets.  Unfortunately, most people in government and who have never had to meet a payroll aren’t aware of or misunderstand self-funding, so ignorance dominates.

The TPA business:  The number of people in TPA-administered self-funded plans has consistently grown, and is probably the largest bloc of the estimated 157 million people with employee health benefits.  However, the number of separate true TPA firms has shrunk during the last 20 years, along with the growth of market.  The explanation is that, like most types of US businesses, there have been extensive mergers & acquisition within the industry.  This has been caused mainly because the ever increasing regulatory + technology + new services imposed, and/or it has been just wise business to combine in hopes that size improves cost efficiency of the TPA.  That is good.  The challenge is whether & where is the magic size when a TPA can no longer give the highly-personalized hands-on service that TPA clients want & expect.  If clients feel the special personalized feeling is gone, they leave.  This cannot be over-emphasized.  I first asked/warned about this 20 years ago, and I have been amazed how well most TPA firms have achieved this balancing act.  

Conversely, can small-personalized TPA firms survive & thrive facing the same challenges of staying on top of & implementing govt. compliance, like the big firms?   The answer is that SPBA provides intensive govt. compliance information to TPAs of all size, so there is equality, and a growing number of technology and other providers are creating ways to increase capabilities easily.  We have watched this same trend in law firms, and some of the best & most successful are quite small.  However, size is something to watch, and it would be a culture adjustment if mega ASOs meld with their TPA-named SPBA member sister firms.

So, the “This is the best of times. This is the worst of times.”

Here are the questions I see facing TPAs and their marketplace in coming months & year:

>Will politicians continue to focus on minutiae & special interests, and be like a bull in the china shop of the health & payment system in the process?  The answer is almost assuredly yes, because that’s what politics does.

>Will the current exasperation with failed ACA + (unrealistic & unaffordable) desire for “free” limitless health care woo Americans to seek a government single-payer plan?  That is a huge question with an unknown answer at this time.  The election will tell much, but also remember that big-talk in elections rarely happens and/or it goes off in wild unexpected directions. (Example: Obama mentioned health only 4 times in his 2008 election and only in passing.  “Obamacare” was the invention of Congressional “old lions” who had sought massive health reform for 30 years and saw their chance.  They made up the “Obamacare” name to appeal to his ego and get his support, and associate it with his popularity…despite warnings from many of his staff that health would be a waste of his political honeymoon.  So, health reform was nowhere on the radar in the 2008 election.)

>What will be the future of insurance companies & fully-insured health coverage in the US if it becomes an unwise business strategy to remain?  Keep in mind that 90% or more of the business of several of the large health insurers is already ASO/TPA self-funding, and insurers have already researched & made tentative moves for a replacement for pulling out of all or most of the US fully-insured market by selling plans in other parts of the world to people in their govt. plans, but they want coverage for prompt & expert care.  As a bonus, there would be little or no govt. nit-picking as they get in this country.

> Will people decide that the TPA role can be done by a robo-TPA or “virtual” TPA?  Knowing the amount of ever-changing detail + constantly drips & drabs of new guidance + the fact that the whole enforcement program for ERISA is “it depends on every fact & circumstance of each situation”, the idea of “robo” or “virtual” TPAs sounds like dumb & dumber.  This is not a robotic or algorithm process (not to mention that each client demands personalized plans & services).  Since the penalty for even unknowing goofs or omissions can lead to criminal jail time, few employers & plan sponsors (whom government holds ultimately responsible) will want to risk having a prison jumpsuit with a number because the virtual robo missed something.

What’s in the TPA name?  I have been using the term “TPA” and also warned that statistics are terribly skewed because basic terms have vastly different meanings.   “TPA” is an excellent example.  Though it is used in federal laws & regs laws (unlike the marketing term ASO), there is no formal specific definition.  However, for clarity, let me give my homemade distinctions (so these are Fredisms, not official or legal terms).

>> Comprehensive Service TPAs – about 200+ firms, of which virtually all are SPBA members.  These are firms who provide ongoing comprehensive services to client plans & employers.  This does not mean that they offer all services for all types of plans, but they provide comprehensive services to the types of plans they serve.  This is the kind of TPA for whom SPBA is intended.

ASO is a marketing term used by insurance companies that offer Administrative Services Only (TPA) by the insurance company for self-funded plans, & employers. Comprehensive Service firms administer the plans of the vast majority of the people in self-funded health plans.

>>  Specialty TPAs – These firms administer one or a few types of benefits, such as dental, vision, only HSA, etc.  There are probably a couple hundred.  Because of the kinds of plans they serve, they tend to have far less govt. compliance.

>>  Minimal TPAs – These are entities which do some TPA work of various levels, but the TPA work is only a tiny % of the overall work of the firm.  Examples:  Law, CPA etc. firms that happen to do some TPA functions for their otherwise law, accounting, etc. clients.  And/or a software company that does a little TPA works as a testing vehicle for their software work. 

>>  TPAs of convenience – These firms want the prestige of “TPA” on their company resume, but what they are doing usually has little or nothing to do with actual TPA work, or they don’t know what TPA means.  They often brag the most, but back-peddle even faster when asked how they handle the fiduciary, legal & compliance roles of the TPA job.

Don’t get bogged down in numbers & statistics.  (Numbers don’t lie.  Yes they do!!) Because the basic vocabulary of what is being tabulated has vastly different usage & meanings…such as TPA & ASO described above, and even simple word like # of “lives”…I warn that every number or statistic has a 1,000% distortion factor from one source to the next, and that distortion multiplies as numbers are accumulated & manipulated.  On a couple of occasions, SPBA was recruited to explain to the top Federal statistical agencies why they always come up with vastly different numbers for the same thing.  So, focus on the concepts, not misleading statistics.

For more insight, go to the SPBA website at You will find that the underlying answer to almost every question you may have (even if the superficial question is different) can be found on the website in the categories of ERISA & Fiduciary + Intro to TPAs & Self-funding + MEWA + Health Reform (on the Public website + extensively more explanations in these & specific compliance categories on the Member-only section of the website).

Fred Hunt – SPBA Active Past President