Frequently asked questions about TPAs
Candid answers from SPBA Active Past President Fred Hunt
1. What are the nuances between "TPA" & ASO"?
The difference between TPA & ASO is like a Ford & Mercury (merely a different name badge). TPA is a generally-recognized legal term used in laws & statutes. In the 1980's, the TPA booming growth came when a large percent of the fully-insured market was lured away by TPAs to self-funding. Insurers had previously bad-mouthed self-funding & TPAs, so they needed another term in order to do the "if you can't beat 'em, join 'em" strategy. Thus was born the ASO (Administrative Services Only) marketing term for the TPA look-alike.
As years passed, many insurers acquired interest in TPAs and placed their self-funded business in those independent-named TPA firms. Some insurers kept both ASO in their own name and a TPA for their self-funded business. The function of both is still legally TPA. ASO is simply a marketing term.
In the past 10-20 years, the terms ASO & TPA have taken on two informal usages to differentiate operating style. ASOs tend to be TPA-like operations, but which are much more under the wing of the parent insurer, usually using the insurer name, insurer staff, and insurer legal/compliance staff. So, an "ASO" tends to look & feel more like an insurance company. A concern is that insurance law & customs and ERISA & self-funding law & customs are quite different, so there is the worry that an ASO will think like an insurer instead of a TPA....which can trigger problems and even criminal law violations from ERISA.
2. What are the key market segments of the TPA market. How have they grown/changed/shrunk in recent years?
TPAs tend to think of themselves by their major types of clients (and most firms have more than one type of clients). So, those market segments are Taft-Hartley (a.k.a. Multi-employer or Collectively Bargained) plans + Single Employer (especially a niche market of 100-3,000 employees, as explained below), State & local governmental units such as school districts, city employees, etc.) + Religious/Church employers (such as diocese employees or schools run by a religion). There had been a growing market in Multiple Employer (not to be confused with the very different Multi-Employer) for associations of employers, etc. However, that concept got caught in a political crossfire, and has faded. TPAs are also being approached for whole new markets that want their expertise in health payment & plan management, even if employment is not a factor. These include state & local jails for inmate health care + various uses by native reservations for employees and/or residents + overseas missionaries, etc.
Originally, the TPA market was almost entirely collective-bargaining unionized pans, with the focus on pensions. The percent of unionized employees is a fraction of what it was, and defined-benefit pensions have rapidly been replaced by defined-contribution (such as 401k) as new plans without intensive administrative needs. So, the original major TPA market is a shadow of itself. HOWEVER, in the meantime, the TPA market (in the various types of clients described above) has grown several thousand percent (how many thousand % depends on how you count). Today, about 52-55% of US workers in employee benefit plans are in plans administered by TPAs. Yes, there are ups and downs, such when HMOs or Managed Care were popular new concepts...and/or when insurers, HMOs, etc. would "buy" (under-price) business away from TPAs. However, most of that business returns to TPAs in a couple of years, so the growth is not wild like it was in the 1980s & early '90's, but it remains steady. Health Reform is expected to boost the use of self-funding & TPAs, because it will be the only remaining option with flexibility for customizing health plans for each workforce and the various new employer administrative requirements. The growth is expected to be among smaller-than-normal employers and if the insurance companies withdraw from the health insurance market due to restraints by health reform.
Niche market: A segment of employers who seem to be especially appreciative & loyal to TPAs are employers with roughly 100 up to a few thousand workers. What makes this segment special is that the boss may not know everyone by name, but (unlike mega employers) the boss (benefits decision maker) tends to see the employees in the parking lot, at company parties, and in the community. So, these employers not only want workers whom they see be happy, but they have a sense of protective paternalism (in the good sense of the word). So, they especially appreciate plan design customized for those workers, and they also appreciate having top-notch personalized government compliance assistance for which TPAs are known. This niche does not preclude other markets. It simply epitomizes the market appeal of TPAs.
3. What are the key elements of the TPA value proposition? (What makes them so desirable?)
Personalization personalization personalization. TPAs custom-design with the client the benefits & conditions in the coverage to fit the wants & needs of that particular workforce, and they discuss both the administrative functions and the government compliance services which the client can choose. The TPA offers a very visible administrative fee up-front for the services (compared to invisible in an insurance policy). So, the value proposition is like the question whether you would like a custom-designed hand-made suit for a known (usually lower) cost...or something handed to you off the rack at an unknown price?
4. Who are the leading players in the TPA business?
The true answer is that every TPA is a leader, because (as described above), "success" is personalization, personalization, personalization. Various firms have advantages that fit their clientele's desires...such as being big, or small, or specialized in some type of plan, and/or government compliance. When I am asked what is most important of those, I would say to examine the attention they give to government compliance. Where do they get their information (such as the earlier caution between ASOs & TPAs), and how well does the TPA work with the clients to understand, customize and implement the constant flow of government compliance. (Why do I say government compliance? It is the service that keeps clients out of jail and from crippling fines.)
5. How are large health plans & insurers participating in the TPA market?
As noted in the ASO explanation, many large health plans have a strong role in the TPA market under a TPA name and/or ASO label. Most do well, ( keeping in mind the ASO concern, above, about government compliance if the entity is not always thinking from a TPA legal state of mind). The larger any ASO or TPA, the larger the conflicting challenge of wanting to brag that they are huge...but meet the demand from clients for the very hands-on customized laser-like attention that has become the expectation from TPAs.
Frequently Asked Questions about TPAs
Frequently asked questions about TPAs