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Answers to the Most Frequent Questions re: TPAs & Their Marketplace

Personal candid comments from SPBA Active Past President Fred Hunt

IMPORTANT INTRO & PURPOSE:  We have done state-of-the-industry reports for almost 40 years, and we keep about a dozen back years available on the SPBA public website so you can go back to double-check the real-time perspective written at those times.  You will see that they are absolutely candid. (I am often asked, “Did you really mean what your wrote??  The answer is yes!)

 SPBA wants both outsiders studying TPAs to have the good, the bad & the ugly as much as our members who are living it, and as a training tool for our members’ new employees.   I am happy to say that the accuracy rate of forecasts & descriptions has been well over 90%.   (Kudos to my colleagues on the SPBA staff + members who generously share their real-world insights & discoveries.)  The forecast of positive prospects for TPAs & the market has been the same for over a third of a century, and come true every year.  I think this report will also remain timely for several years.  People often say, “I want to pick Fred’s brain.”  No need!  I have worked hard to download everything onto the SPBA website(s).  So, you have  “my brain” + candor instantly at your fingertips on-line and in written format…and often (importantly) described from various contexts in different pieces).  It’s much better than trying to keep up with my fast-talking descriptions of complex interrelated issues.  You have it all if you poke around in all the pieces in all the various categories of the website(s).   If you are serious, read carefully; don’t skim or jump.  I also recommend you visit WWW.Selffundingsuccess.com for outside articles about the work of TPAs & their client plans + specific case examples.  When you have finished all this reading; congratulations.  You are an expert.

 

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What’s the Future of the TPA industry?  The future is bright…with the caveat that the U.S. health coverage system, costs & regulation is in a crazy state (a not uncommon situation).  Both Obamacare (ACA) & Republican Repeal & Replace (R&R) are negatively stymied.  So, my only concern is if this situation causes the nation into a desperation knee-jerk ricochet into Single Payer or some such. We (along with a lot of other services) could find ourselves unneeded, especially if the single-payer system was designed to drain funds or enrollees from employee-benefit plans.  As a reality-check, for 40 years, I’ve been solemnly told by “experts” that the demise of TPAs is fast-approaching.... but each time we come up stronger & with an expanded market.

>><<  Expanded interest in TPAs 

With the future role of Obamacare & its employer options and/or the future course of the insurance industry unclear, employers, plans, and other entities are turning their interest to TPAs.  So, this report is to address the most frequent questions being asked.  The insights are not only based on the present factors, but also in the historical examples & context of the ups & downs over the past 40 years. 

What's the buying/selling market for TPA firms?  I used to keep a file of people actively or confidentially willing to sell or merge their TPA ......plus another file of entities seeking to buy/merge.  Both of those files have been unused for most of the past 10 years!  (That’s good news; read on.)

Why no list of sellers & buyers?   First, candidly, I expected lots of TPA owners to bail out as soon as ACA was passed in 2010, because forecasts were grim.  It did not happen!  In fact, several TPAs (who had previously been eager to meet a buyer) made comments such as, "I'll be damned if I'll let Uncle Sam put me out of business!”  So, ironically, ACA has had the effect of stimulating the TPA industry & member dedication; not demoralizing it.  SPBA member TPAs redoubled their dedication & work to adapt & thrive.  So, while ACA has been a massive compliance headache, business has generally improved for TPA firms.

Therefore, because business has been good, and prospects seem to be favoring TPAs, I think owners are deciding to hang on, and I think the recession of 2008/9 steered some family members or employees, who may have wandered previously, into the TPA firm.  So, there is new blood.  That is an important factor, because most TPA sales of firms are generational...as the original founder gets older and retires, and there is no obvious or financially-able in-house successor.  So, the summary of why TPAs for sale/merger aren't plentiful is that it is like when a person has a profitable investment, they stay in it, and they have new blood to make that possible. 

The second reason TPAs are very private about selling or buying is that many of the sales at the turn of the century turned out to be disappointing in the mind of one side or the other.   Most TPAs see their firm as part of the family and a life’s work, and they want it to have a “good home” with a buyer.  Also, just as TPA services to clients are very personalized, the secret of success of TPAs is that the TPA firm itself is personalized in its services and approach to clients.  Clients value that special touch extremely highly.  They’ll dump a TPA quickly if they feel the style, services, or whatever have changed.  Even what may seem like good or efficient changes can trigger client exodus.  (See more on that below.)  So buying or selling is more like picking the right lifetime marriage partner.  Quick ownership turnover is also viewed by clients as a destabilizing change.  (Also read about ERISA fiduciary duty below.)

>><<  Who is most interested in getting into the TPA market today?

  Buying TPAs and/or assembling several (and the frequent dream expressed especially by outsiders to become the mega “McDonalds of TPAs”) has not been successful.  The reason is that TPAs’ style & charm is that they are different and their customs often emerged from the wants & needs of their early clients.  It is almost impossible for a buyer to resist the urge to tinker with a TPA it buys

Too many buyers/investors blow off the above paragraph, so let me give you an actual example.  It sounds corny and too cute, but it is true, clear, and has a $30 million loss impact.

There was an excellent successful TPA firm.  The owner was ready to slow down, so he sold to an HMO.   I gave the personalization warning to both parties.  The buyer kept the existing CEO & staff, and seemed to be hands-off.  A few months later, the CEO (former owner) got calls from some big clients saying that they were no longer getting the blue piece of paper every week.  (The TPA had the unusual custom of sending a sheet of upcoming claims costs to the client each week.  It was originally as a heads-up to have enough money accessible to pay the claims. It was on blue paper, and considered a valuable service by the clients.)  In response to the questions about the missing blue paper, the CEO happily said that instead of the blue piece of paper, each client now had a private on-line site with the information, updated every day.)  The client’s responses were “What about the blue piece of paper we haven’t been getting?”  Long story short, the “loss” of the weekly blue piece of paper report became a spreading resentment of lots of things suddenly seen as “reduced service”.  By renewal at the end of the following year, almost every client gave notice they were leaving.  They had apparently contacted the #2-3-4-5 people in the firm and said that they would either split off and start a firm with “the old services” or they’d look elsewhere.  They told the CEO, who told the outside owner, who laughed.  So the CEO saw it was lost and nodded for the 2-3-4-5 staff to proceed.  So, the bought TPA was a hollow hulk and a lost investment to the outside HMO buyer.  Again, this is a true story.  The blue piece of paper is an unusual service, but every firm inevitably has some customs near & dear to clients.

The other problem in mergers is that the absorbed branch offices inevitably get treated as orphans.  We notice that they get dropped as SPBA contacts (the main & sometimes only source of necessary government compliance information) and they are not allowed to attend SPBA meetings anymore.  The result is that the staff in the bought office are no longer on top of the game, so they seem to the clients like ignorant bumpkins, and, indeed, they often do stumble into legal or other problems because they don't get the heads-up.  They also no longer have any power when a client calls to ask for a favor.  The relationship and sense of helplessness of the absorbed leader becomes a downward spiral.

So, that is the good news/bad news of buying & selling in the TPA industry.  TPAs provide such intensive personalized services that it doesn’t lend itself to cookie-cutter formats or shortcuts in information & staying abreast.  It’s keep the customer satisfied!

>><<  The biggest challenge facing TPAs today is clear guidance.

With old laws (such as ACA) & interpretation/enforcement thereof in limbo, and what might (or might not) be repealed & replaced…or change independently or part of tax or other policy changes, the answer to most specific-situation government compliance questions today is, regrettably,  “There is no answer.”  Meanwhile, there is a stream of pronouncements from Congressmen & officials & media (all of which have no authority or effect).  Unfortunately, government enforcers & lawsuits later will conveniently forget that there was no clear guidance at the time, and simply say you didn’t obey.  It’s a frustrating challenge.

Employee benefits law has been in a state of evolution since the passage of ERISA in 1974, so newness & change are practiced skills of TPAs.  Consequently the TPA industry and SPBA have an active mutual brainstorming and exchange of experiences.  Also, SPBA may be a small association in number of member firms…. but is one of the largest in terms of the number & breadth of background of people served by their client plans + every size & format of employment.  So, SPBA is a huge & respected resource for the agency officials who must interpret the laws and write/enforce the actual rules & regulations.  So, while we suffer the “There is no official answer” quandary, we are often able to tell our members who tell their clients how the regulators foresee situations working out.

Another advantage for TPAs is that most handle ERISA plans.  ERISA was written to be the ultimate consumer protection law, so they are tougher than normal business law and stricter than insurance law.  ERISA is also unusual, in that it can be investigated & enforced as civil and/or criminal (jail) offences.  The result is that since TPAs are so used to working under such purist rules, TPAs are ingrained to be squeaky clean in their dealings

Referring back to the buying of TPAs by outsiders, many have no knowledge of the strict fiduciary rules, and think that they can use a bought TPA in some way to built tie-in deals with, for example, medical providers or such, or access to the money.  Sometimes the purchase was made with the uninformed assumption that buying a TPA would be the key to such deals to make a profit.  Not!  The truth about fiduciary is often a culture shock.

>><<  Summary

So in mid-2017, the state of the TPA Industry, market and partners such as Stop-Loss and firms which are devising new services & products specifically geared to TPAs and the marketplace is that the national situation is in chaos with unknown outcome.  However, the nature & professionalism of TPAs and because they are a beacon of relative calm in the health policy mess makes the forecast bright.