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What's the Size, Role & Future of TPAs' Marketplace?

by SPBA President Frederick D Hunt, Jr. - April 2008

IMPORTANT:  First and foremost, forget specific numbers and formulas!  Focus on the relationships and trends.  The variations in the benefits business and increasing corporate incest (not to mention differences in the assumptions about basic vocabulary terms) make numbers derived by research and surveys distorted and misleading...especially when they are combined with other numbers.  The estimates used in this report are intended for guidance to understand what is really going on in the marketplace...not to be used as "gospel" or plugged into statistical formulas. Basic differences in vocabulary means every number has a built-in 1,000% potential distortion factor.  For example, a family of parents and 10 children are variously described as 1, 2, 3, 4, or 12 "lives", so even simple counting of heads will be distorted.

A 2003 survey by Fidelity Employer Services showed that 91% of employer companies outsource their health benefits administration totally (30%)  or partially (61%).  A 2002 survey reported that 79% of firms with in-house benefit managers use TPAs.  Those are flattering, but we feel a bit optimistic.  Our more modest estimate is that SPBA's member Third Party Administration (TPA) firms administer the employee benefits of about 55% of all U.S. workers with non-federal health and/or pension employee benefits.  Entities other than SPBA members performing TPA duties...such as insurance company Administrative-Services-Only* (ASO*) cover an estimated additional 10% of the U.S. non-federal workforce.  So, you're seeing how statistics vary.  We try to be conservative & realistic.  Your sanity & credibility are at stake if you try to add, subtract or multiply any specific statistics. Just comprehend the concept and that TPAs are a major player in the marketplace. (The same is true of the definitions, varied statistics, and size of "self-funding".)

*NOTE:  ASO is simply a marketing term.  It is not a term in law.  It is simply the name some insurance companies give to their TPA services.  So, the difference between TPA & ASO is the same as the difference between Ford & Mercury cars' label.) On the other hand, many insurance companies & Blues own or are sister firm to TPAs which operate and are called TPAs.

What are the major markets for TPAs?

            There are eight major market segments, with variations within each:

First:  About 2/3 of the workers in Taft-Hartley union-management multi-employer plans are administered directly or indirectly by TPAs.  This was the birthplace of the TPA concept.  The unionized segment of the overall workforce has dropped from an estimated 33% to about 16% during the past 25 years. So, SPBA's phenomenal overall growth is despite the shrinkage of the client market in this area.

Second:  As small employers met increasingly tough underwriting and costs from traditional insurance sources, and as stop-loss reinsurance became more available, the role of self-funding and TPAs has grown for small plans.  The growth of the small-employer market has been via single-employer plans, multiple employer welfare arrangements (MEWAs) such as those sponsored by trade associations for member employers, and by commonly-owned groups of employers.  Notice the important differentiation between multi-employer (collectively-bargained plans) versus multiple employer.

Third:  Public & religious plans: There has been tremendous growth in the number of TPA client "government plans" such as city, county & state government entities for their employees.  There is also a market for plans sponsored by a religious body (such as a diocese) for its workers. Note that while administration of these two types of plans is similar to other plans, these are not subject to ERISA.

Fourth: Large employers have been impressed with the superior government compliance expertise TPAs have (usually better than what even the largest employer can do on his own, as explained later.) Also, branch offices & subsidiaries of large companies are a market for TPAs because of the local attention, service & government compliance a TPA can bring.

.Fifth:  Health Savings Accounts (HSAs) and other "consumer directed" & individual choice plans:   SPBA has positioned TPAs to be in the forefront of this new concept. SPBA has worked with the White House and others, and been strong in researching the real-world compliance aspects of underlying laws and related requirements.  It has been estimated that within a few years, 90% of health plans will be totally, or will contain components of, "consumer directed".

Sixth:  Some medical facilities, including HMOs, PHOs, IGPs, PPOs, and hospitals want the efficiency TPAs have brought to the payor side of health plans, so some have acquired or hired a TPA. 

Seventh: Sometimes, insurance companies & Blue Cross or HMOs "farm out" administration of some of their work to be done by TPAs in the name of the insurer or Blue...or have an insurance product designed for TPAs' clients.  "Farming out" to independent TPAs, should not be confused with, numerous insurance companies & Blues buying or forming their own TPAs or ASOs. 

Eighth:  Occasionally, consulting & personnel-related services are requested of TPAs, since common sense + more and more of benefits government compliance involves HR, security, and other functions.  This is a slower growth area, because HR involves its own laws & rules.  Just as we bemoan entities rushing into the TPA business without understanding it, TPAs respect HR & other specialties' uniqueness.

A special niche: Employers in roughly the 75 to 3,500 employee size are an especially good market for TPAs. These are firms where the boss probably knows everyone at least by face, and sees them in the parking lot, grocery store, PTA etc. These bosses are protective & caring. They want the TPA to help them design a package of benefits that is customized to the needs of that workforce. These bosses also want the employees to be well-informed, and want to avoid any government compliance or other problems. This is a perfect fit for the highly-personalized services & style of TPAs. The downside of this niche market is that sometimes the protectiveness makes the boss hesitant to include new options. Also firms in this size range have beenthe most susceptible to financial stresses and the churn of buy-outs & mergers.

What's the definition of a "TPA"?

            There is no official definition of a "TPA" or benefits, nor a prescribed set of duties.  You will hear estimates of the number of TPAs (depending on the definition & understanding of the term "TPA") ranging from 400 (SPBA's approximate membership) to a few thousand.  It must be understood that the relationship of a TPA to a client plan is not like that of an insurance company.  The TPA holds no "risk" to pay for the medical expenses.  Instead, the client relationship with a TPA is much like that with a law firm on retainer for ongoing service.  Thus, the issue is not the form of funding, but instead, who is performing the delegated administration functions.  The numbers used by SPBA look strictly at who is doing the function...not what is on the parent company letterhead or who is holding the funding risk or what fancy marketing names have been assigned (such as insurance company TPA services going under the marketing label "ASO".

            SPBA members might be described as the "core" of "true" TPAs offering a comprehensive array or services.  SPBA emphasizes the arm's-length fiduciary requirements in ERISA against "self-dealing".  While government enforcement of these prohibitions has been unpredictable, and many inappropriate TPA-like arrangements have evolved, both civil and criminal enforcement of fiduciary compliance is imposed by the Department of Labor.  SPBA's TPAs have earned respect & reputation with government authorities & clients for being extremely careful on these points.

Who are the other players in the TPA benefits administration market?

            First:  We can dismiss as de minimis the thousands of entities who claim to be TPAs, but who are actually doing so little, so narrow, so tangential or such different duties as to be only a factor of confusion rather than real players in the TPA market.  This includes many of what I call TPAs-of-convenience, such as consulting & law firms where it is unclear where consulting ends and TPA functions begin.  When it comes to state licensing, fees, liability and some of the onerous responsibilities on TPAs, these folks who claim to be "TPAs" suddenly become invisible or quickly re-label themselves.

            Second:  There are a thousand or more "TPAs" who provide only one service or product, such as just vision, just dental, just drugs.  There are also TPAs who do primarily Workers Compensation or are TPAs for casualty/property insurance.  SPBA's use of the term "comprehensive array of services" to describe SPBA members is to differentiate from these other firms.

Third:  The biggest "other" players are ASO (TPA) functions within insurance companies and Blues + arrangements, which legally would be considered self-administration.  ASO is a marketing term, not a legal term.  Legally ASO = TPA.  It is like the difference between a Ford and Mercury car label.  However, statistically, ASO business often gets lumped into the "insurance" category instead of self-funding or TPA.  Examples of self-administered arrangements that sometimes think they are TPAs include associations which run a single plan for their member employers, and/or a company that may spin off an entity to administer its sister firms.

Any other factors or problems figuring out who administers?

  When surveying actual employers and plans, a huge new set of misunderstandings & distortions emerge.  The biggest is built-in to the self-funding concept.  ERISA & TPAs spend great effort reminding plan employer/sponsors and trustees that they (the employer or plan sponsor) are the official legal "Administrators".  Thus, when asked who "administers" their plan, many employers with some form of self-funded plans sometimes name the employer or trustees themselves ("self-administered"). That is the technically-correct answer (but is misleading as to who actually does the functions), so statistics about the number of "self-administered" plans is a statistical wild card.

            Examples of employer confusion causing distortion in survey responses include:

(a). "Miss Brown in our personnel office administers our plan."  What they really mean is that when an employee or the boss has a problem with their plan, they go to Miss Brown in the personnel office as their contact (but the work is done by a TPA and the legally-official "Administrator" is the boss).  (b). "We're covered by __(name of an insurance company or Blue)"___.  Because many TPAs were or are also insurance agents or brokers and were originally known by the client in that capacity (and/or still buy life insurance or other coverage from the TPA in his insurance agent capacity) many self-funded and other clients still unconsciously think of their TPA with that other insurance company label.  Similarly, ASO functions and TPAs related to insurers or Blues sometimes use the letterhead or make reference to the parent company.  Thus, these kinds of potential distortions should be considered! Some researchers have had as many as 60% of the respondents give inaccurate or misleading answers... even when the questioners were aware of the problem and phrased the questions very carefully.  So, the potential distortion of these employer/client misunderstandings should not be discounted!

Why has the market for TPAs grown?

            (1).  Personalized service:  ERISA and self-funding allow a plan to be custom-designed specifically for the workers of that employer, so the plan itself tends to be more personalized than those under state regulation.  On top of that advantage, the "we try harder" attitude has created a spirit of close personal attention and responsiveness by TPAs to their clients.  The key to understanding TPA's service and their success is personalization personalization personalization. (Memorize the previous sentence.)

(2).  Government compliance:  Each year, there are hundreds of new laws, regulations, interpretations, opinions, and major court cases emanating from about 300 government offices (which means many contradict each other).  Not all apply to every plan, but the plan must be aware of each to make that determination.  Adding insult to injury, only about 1/3 of the requirements are adequately explained, even in the technical trade press.  Worst of all, only about 1%  (yes, 1%) of the requirements get final official comprehensive guidance how to comply.  Therefore, just as more and more taxpayers have turned over their tax preparation to professional CPAs and tax experts to process their taxes...more and more employers and plans have turned to TPAs to be their guide, crying shoulder, detective and all the other skills needed to survive and attempt to comply with government rules.  Most of the new government requirements each year are legal responsibilities of the sponsoring employer...not an insurance company or the plan itself.  While many insurance companies & Blues make some efforts to assist with rules that directly affect the plan, insurance companies & Blues are not in a position to provide the very personalized on-going assistance and guidance that is needed by each client on the whole range of issues.  Meanwhile, government penalties for even unknowing goofs can be devastating to an employer, so government awareness & compliance is a huge uncharted factor & valueTrue example:  On two major employer benefit laws, an insurance magazine reporter...who knew SPBA TPAs had been training clients for over a year...did a survey of non-TPA employers & plans of insurance companies on the date the two laws took effect.  For one law, 91% of the non-TPA employers had not been informed about the law and/or had had no preparation how to comply.  The survey for the other major law showed 81% of the non-TPA employers & plans were uninformed...and some major insurers were incorrectly telling them that the law did not even apply.  Meanwhile, lawyers and some consultants have the disadvantage that employee benefits covers several areas of law.  An attorney may render an opinion that is correct for tax law...but which could send the client to jail under ERISA law.  TPAs have stepped into this void...not to render legal opinions...but to help clients be aware and  obey.

            (3).  Under-served segments of the market:  As insurance companies & Blues underwent marketing strategy shifts in the past 25 years, huge segments of the market were dumped, hit with high premiums, or limited coverage offered.  Much of the growth of TPAs and self-funding was filling those market vacuums, and managing those plans efficiently.  Word then spread of the personalized service.

            (4).  Lower cost:  Independent studies have shown that TPAs can cost as much as 40% less than comparable coverage via insurance companies & Blues.  While large insurers & Blues have the advantage of size for the most efficient computer & processing costs, they also have extremely high overhead, which balloons their costs.  Note:  Because TPAs tend to include a much wider array and depth of government compliance services (described below), especially for the majority of laws and rules that are legally employer (not plan or insurer) responsibilities, prices for "administration" are less and less directly comparable. Except by careful value/service comparison, it is apples & oranges. 

What about market pitfalls & risks?

Every few years, some segment of the "competition" seem to mount a marketing effort to challenge or squeeze the self-funded and TPA market. Self-funding & TPAs are dealing with actual dollars, whereas insurance companies, HMOs, etc. can "buy clients" by charging unrealistically-low premiums or providing bonus encouragement to brokers & agents. The competitors are very large and have deep pockets, so they can mount a hard squeeze. However, even big competitors can not afford to underprice their product for too long, so the market rebalances. For example, Managed Care was the buzzword and aggressive competition in the early 1990's, and TPAs had many clients lured away. However, the managed care prices started going back up, even Congress attacked managed care practices, and employers missed the personalized service...so TPAs noticed a steady stream of "managed care refugees" coming to TPAs afterwards. Over the years, we've seen several of these onslaughts & retreats from marketplace competitors, and TPAs come back stronger each time.

What's the future of the TPA market inthe face of "reform"?

     Congress, special interest groups and the media are always full of ideas and proposals for womb-to-tomb comprehensive health care and/or coverage and various reforms and safeguards at "less" cost.  However, a look at the models of what these plans might be (Medicare, Medicaid, VA, and other countries with universal care) point to a huge gap between wishful thinking and reality.  The American public has assumed as a "right" unlimited instant medical services at little or no personal cost. Some recent polls have found that most Americans think or feel that comprehensive universal care can be provided for no more cost or taxes. Among those who were willing to pay more, the average wllingness was to pay 5% more.

Fourteen foreign governments have sent delegations to SPBA to learn about TPAs, self-funding and the private employee benefit system, because they candidly report that their governmental systems are not sustainable (much as US Medicare & Medicaid are in a financial tailspin). From this experience, we have a wider insight into what works and does not, and we've realized that Americans have a very high expectation of instant, free-choice, high-priced health care. The various forms of rationing by other nations woudl cause revolution in the US.

Many of the reform ideas would seem to eliminate a role for TPAs. However, several factors point to an increased need for TPAs.  For instance, most reforms add complexity and paperwork shifted to human resources offices.  Other expansions would mean every individual or every little barbershop and person who hires a housekeeper is an "employer" with benefits responsibilities. Also, there's never mention of any intention of repealing about 10,000 laws and requirements that have accumulated for employers to obey....plus a few thousand inevitable new requirements under any "simplification" or reform.  Therefore, TPAs and would keep very busy. Government complexity & red tape guarantees the need for experts.  Last, but not least, TPAs have been innovative in spotting and filling other health & benefits market needs, such as verious forms of wellness. So, TPAs have a busy future as long as personal service & flexibility remain their hallmark.

There is a fear that the industry could self-destruct.  You have now read consistent emphasis that very personalized service has been the key to TPA success.  If those who run TPAs and especially those who buy into the industry try to institute "good management techniques" (which is seen by clients as impersonal bureaucracy), the TPA business will burn its own bridges.  Too many very good TPA firms have died quick market deaths (and major $ lost) due to new buyers instituting "good management". So the biggest threat is if TPAs depart from their proven business strategy of personalization personalization personalization (which includes remaining on the cutting edge of new options & laws for clients).