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State of the TPA Industry + Forecast for 2016

Personal candid comments from SPBA Active Past President Fred Hunt

 

I have been writing these candid report/forecasts for 35 years.  I appreciate SPBA President Anne Lennan inviting me to continue the tradition each year.  I am happy to say that the rate of accuracy (how things have turned out) of these reports & forecasts is about 90%.  These were originally designed for reading just within SPBA, but our members believe in transparency, so the total candor is open for anyone to read.  So, these are read not only by SPBA members to compare their situation to what I’m hearing from their peers….but these are also read by investors in SPBA firms, brokers, clients, etc.

The state of the TPA industry is truly the best I’ve seen in my 35 years of being intimately involved.  To show that statement is not just hype, if you were to read these reports from the late 1990’s & early 2000’s you would see I bemoaned that some TPAs were getting lazy or tired (there was also a generational transition going on in many firms).  They were not putting in the time, money & effort to keep their firms constantly adapting to be on the necessary cutting-edge at a time when laws & regs were adding more and more operational requirements (such as HIPAA).

When Obamacare (ACA) was taking shape, SPBA & members had a unique early insider perspective & insight.  We were not politically involved.  (SPBA is non-partisan & non-political, but always provides constructive candor & insights to all sides.)  So, the architects of ACA were seeking the real-world expertise of SPBA members.  Consequently, every SPBA member had insight about the inner parts of what became ACA, and knew the actual legislation was a hodge-podge bargaining document which would have shed about 80% of the content in a normal legislative process.  However, Senator Kennedy died, and the political balance in the Senate shifted, so the hodge-podge version got rushed through.  So, what became law was never intended to be the law.  So, from the start, SPBA members had the (unique in the nation) advantage of knowing that ACA was a series of accidents waiting to happen.  So, SPBA members shone because they were able to guide & advise their clients years before other players in the employee benefits community understood the law, reasons & process.  That is a game-changer advantage!

The 2016 reason for reminding you of this legislative history is that the fact that it was a bill originating in the Senate is now the factor at the center of a new US Supreme Court (SCOTUS) case challenging that the law is totally unconstitutional, because of the “origination clause” in the Constitution, which requires all tax laws to originate in the House.  A previous SCOTUS decision on ACA confirmed that it is a “tax” law.  So, Nancy Pelosi was absolutely correct when she told the House members in the rush to pass ACA that they “needed to pass it in order to know what it says”.  So, 2016 will tell us whether Obamacare disappears.  (Caution:  Though it sounds like a slam dunk case, the court & government have lots of ways to tweak, take odd interpretations, or delay outcomes.)

In any case, TPAs knew in 2009 & 2010 that Obamacare would not work and would cause damage to the health coverage & care system.  Frankly, I worried that many TPAs would say “to hell with it” and close up or sell out.  Not so!  One member said it best, “I was planning to sell or retire, but I’ll be damned if I’m going to let the government put me out of business!”

That was when SPBA & members kicked into high gear that continues today.  The amount of time, talent, expense & education TPAs have put into being the undisputed best-informed experts is truly amazing.  Even the people who write the rules & regulations seek & rely on the real-world expertise & insights of SPBA TPAs.  This is often done at SPBA meetings, with members having active face-to-face candid brainstorming with the officials who actually write the rules.  So, that’s a long way of saying that SPBA members are like a sports team with each member in top shape to win in 2016 and the future.

Meanwhile, Obamacare has caused the many problems & failures we forecast from the start.  While ACA has caused many headaches, the SPBA TPA market has actually been helped by ACA.  For example:

        >> Obamacare is a thick forest of regulatory rules, reports & requirements.  Government compliance is TPAs at their finest!  So, more and more employers who want & need personalized hands-on compliance guidance & services are turning to TPAs.  Large insurers and other forms of employee benefits are not geared to providing that kind of detailed personalized service & expertise.

        >> Many employers are finding that fully-insured plans no longer fit their best interests, so many, who had never considered self-funding or a TPA, are now interested.

        >>  ACA caused a large chunk of the commissions insurance companies used to pay to evaporate.  So, Brokers are showing far more interest in TPAs & self-funding than previously.

        >> What might have been competitors in the marketplace have far under-performed the original expectations.  CO-OPs, ACOs, Private Exchanges, ACA Exchanges, etc. are not seeing the growth & enthusiasm TPAs are experiencing, and many are struggling.  The fact that they do not have the same level of hands-on personalized service, general health coverage management experience, or government compliance expertise means that the chances of these other options suddenly being very successful is very unlikely.

There has been a shift in the perception among employers of self-funding & insured.  Self-funded used to be perceived as some odd gimmick only used by huge employers & unions.  In truth, self-funding had become the dominant funding format for health employee benefits many years before.  Because insurers call themselves “ASO” when they do TPA, it is often confused as being different from TPAs.  ASO was simply a marketing term for insurer-TPAs invented in the 1980’s. 

Meanwhile, insurers have seen fully-insured health plans shrink dramatically in their percent of business (often replacing it with ASO self-funded business with the insurer in the TPA role).   The government & ACA itself have treated insurers shabbily.  The amount & quality of new business from ACA is about half what was promised.  Also, almost half of the uninsured individuals who are eligible for the ACA Exchanges, but choose to be uninsured, are the actuarially-necessary 18-34 year olds needed to offset the older sicker enrollees.  The law knowingly rigged the Exchanges to favor older over younger, and the framers of ACA assumed that the young Obama voters would eagerly sign up anyway.  Now the Exchanges are in what appears to be a downward spiral of non-sustainability.  During all of this, the Administration & media have stooped to frequent name-calling & vilification of insurers as “evil”.  Now, the government is short-changing insurers on the promised amount they’d get if Healthcare.gov business was a loss (so-called “insure bailout”).   SO…the question becomes when will insurers (or their investors) say enough is enough and pull out of not only ACA Exchanges but the whole fully-insured health market, which is only a tiny slice of their volume of business?  Also, the mega-mergers within the insurance industry are causing various kinds of upheaval.

I know that insurers withdrawing from fully-insured sounds crazy, but some fallback plans have already been made.  Before the 2008 primaries or election (in other words, the name Obama was barely known, and certainly ACA never envisioned)  I got calls from some insurers’ senior corporate planners or firms they had hired to look ahead for them.  Their question was “What happens if we lose the US health market?”   At the time the fear was single-payer health insurance.   We brainstormed and I asked them to let me know any findings they had.  The response was unexpected….but very logical.  They realized that they could get more than enough customers & income in Europe & Asia to offset lost US health fully-insured business.  The overseas buyers do not want to be reliant on their national insurance plans.  They want health insurance so they can jump on a plane to the US for instant care.  As a bonus, insurers would have much less governmental interference overseas with this extra product than they get in the US.  Consequently, even people who do not know this history are seeing that insurers can afford to walk away from the fully-insured business in the US.  You may notice that some insurers started increasing their overseas offices & programs soon after these phone calls.  So, pulling out of the fully-insured business is not a traumatic option.

What would happen to the large chunk of insurer ASO self-funded business??  Most insurers with large blocks of ASO also own or are related to independent-named TPA firms who are SPBA members.  I suspect that if insurers pulled out of the ACA and/or US fully-insured market, at least some state Insurance Departments and/or Uncle Sam would make trouble for the insurer-name entity (perhaps still try to apply old insurance rules on what would no longer be insurance).  So, I assume it would be logical for the insurer ASOs to convert that business to be under the name of the related existing TPA firm….or create a TPA.  I can’t predict the insurance industry.  My simple point is that insurance companies are no longer the permanent rock most  of us have always envisioned.  Of course, if things evolve anything like the above guess, TPAs, self-funding & SPBA would be clearly recognized as the dominant proven successful mode of employee benefit funding & administration.

Are there any bad or scary factors?  Yes.  The bigger and more successful a concept or industry, the more it becomes a target for higher taxation, tighter regulation, more obstacles, “reform” and/or reputation-smearing.  We are quickly being recognized as the biggest player.  As TPAs have grown, we have experienced this kind of harassment at every step.  Each time, we have survived and even thrived.  (People often say that TPAs & SPBA have a knack for turning lemons into lemonade.)

        >>Inexperienced “TPAs” are a concern.  There is no official definition of TPA, so the term is used & misused frequently.  SPBA is the national association of what we describe as comprehensive-service TPAs, and nearly 100% of those TPAs are members of SPBA.  This does not mean that every SPBA TPA provides every service for every type of plan & client, but it means that the TPA is more-or-less one-stop-shopping for ongoing services to the types of plans in which they specialize.  TPAs tend to think of themselves by types of client plans they serve….such as Taft-Hartley multi-employer (collective bargained), single-employer, state/local govt. employers, religious entity employers, etc.   A TPA firm serves multiple types of plans, but not necessarily all, since there are some differences.

By “inexperienced TPAs” I mean people & firms who just start using the term, because it sounds good, and the term carries professional prestige.  Sadly, most of these have no idea of the key governance & rules of TPAs….such as very strict ERISA fiduciary duty (far more strict than rules for insurance or normal business), tax regulations, etc. etc.  The mega-mergers in the insurance industry right now are causing some “refugees”, meaning firms/offices/people dropped in the mergers.  They may have been a claims processing office or marketing or whatever.  So, they decide they can be “TPAs”.  The problem is that it would be like me walking into a hospital and saying I’m a surgeon.  The patient would suffer from my inexperience.  I worry that entities who don’t know better will stumble themselves and/or their clients into serious trouble, and all TPAs & self-funding will be smeared.  This has been a problem for years, but the mega-merger and other types of entities caught up in the changes in the coverage & medical worlds vastly increases the number of refugees who may declare themselves to be “TPAs”.

        >>Buying a TPA:  An off-shoot of the “inexperienced” issue is that entities who are not intimately familiar with TPAs and the various related factors, such as ERISA fiduciary, etc. should buy a firm only if they plan to keep its customs and listen to the existing staff.  An outsider perception of bringing in “good management” has led to many failures.  The reason is that the applicable laws, such as ERISA fiduciary, are so different than normal business.  Also, the highly-personalized service & customs of a firm has evolved from the wishes & needs of the clients, who see changes as less-desirable service, and they will leave.  (I saw a TPA purchased for $30 million lose all but one client in a year because of “good management” changes by the new owner.)  Beware.

        >>Single Payer (national insurance or state-by-state) obviously, is the other potential concern.  Though it has failed in many other countries and/or imposes waits, limits or things that would not meet the very high expectations & sense of entitlement of American patients, it sounds warm & fuzzy in the abstract, and has a permanent army of supporters, especially as “socialist” and such terms are becoming used more in government policy debate.

        >>The medical provider community is undergoing massive shifts & changes, as are some related fields such as very expensive drugs and other services.  There will be some culture shock, and some shocking costs in this process.  The format of doctors’ employment & practice will dramatically change as big hospitals buy-up private medical offices.  Since TPAs (and every other payer) needs to work with the medical entities, who provide the diagnosis & services being billed, upheaval in the medical world will probably cause some headaches for TPAs.

SPBA has been internally gearing up services for members.  Anne Lennan as President and the Board have created all sorts of improvements & expansion of services for members to be able to keep up with the growth & pace of the industry & issues. (It is not legal advice.) For example, the member-only website is reportedly the largest and most complete reference source for employee benefits, ERISA, self-funding and the hundreds of related laws & issues.  Because of the personalized service style of TPAs, members often need precise insight on a 24/7 basis.  So, the member-only website has been revamped for easier more-precise access, and it has both technical as well as big-picture explanations.  There also forums and other forms of education & brainstorming in between SPBA’s two annual conventions (open only to members, and no commercialism).

So, the summary is similar to the opening statement.  The state of the TPA industry is truly the best I have seen in my 35 years, and prospects for the future are strong.  For more detailed insight & background on many of the basic issues, such as ERISA & fiduciary, visit SPBA’s Public website at www.spbatpa.org.  Read the pieces carefully, and the answer to the most frequent follow-up question is “Yes, we do mean what the articles say.  It is part of our policy of candor & transparency. 

Fred Hunt

Active Past President