It is budget time and you are trying to figure out how your TPA operation compares in efficiency to "the norm". SPBA is called and asked "for the statistics on TPA operating ratios". The answer: Ain't no such thing!!! In fact, if there are numbers floating around, be very suspect and be sure that you know exactly what was measured and how it was defined in each step of the process. There is no such thing as a "norm" or "industry standard". When you've seen one TPA...you've seen only one TPA.

Threat of government imposing one-size-fits-all: Several years ago an association did a careful study of "reasonable administrative costs" for one type of plan that the members of that association served. When the association lawyers found out, they insisted that every copy be re-called, and all records be destroyed. Why? Well, (as will be explained, below) every client and every TPA have a unique set of circumstances (and thus costs) needed to prudently administer the plan. Since one piece of ERISA enforcement is for DOL to evaluate the TPA fee & charges to see if they are "prudent" for the client, it was feared that if there were some study presenting one number, the DOL and other agencies would naively latch onto that one number as the one and only prudent amount or formula (which would be ludicrous). So, there is a legal reason for understanding & explaining the diversity of factors that drive operating ratios of a TPA.

Sanity & credibility check: Every number or statistic related to TPAs, benefit plans, health coverage, etc. etc. has a 1,000% built-in distortion factor. The reason is that even the most basic vocabulary has vastly different meanings. For example, "Lives" sounds like a simple word and consistent basic measurement for comparing TPA performance. However, even this most simple term has a family of Mom + Dad + 10 kids variously counted by different TPAs as 1,2,3,4, or 12 "lives". Terms like "income", "revenue", "staff", "salaries", etc. also have the 1,000% vocabulary distortions.

Has SPBA tried to compile this data? Yes, several times privately (and also cooperating with professional research & government studies efforts). In 1992, we thought that maybe if TPAs composed the questions and defined the terms, we might have success. Then-Chairman Bill Clifford gave the results at the Fall Meeting: "I see that 30% of the TPAs have no office; 20% of you have no staff; 10% of you have no telephones." The list of carefully-compiled, but distorted statistics continued.

Obviously, all the TPAs have offices, staff, and telephones. However, many TPAs have grown laterally from another firm (such as a co-owned insurance agency or brokerage)....or, for tax or liability reasons, they have set up a series of technically-separate corporations that function as one....or the TPA is a subsidiary or related to another entity. Thus, who pays the rent, who technically employs the staff, who purchases equipment & supplies, and how the money flows is unique for every firm.

Added to that confused base, there are some other wildcards in the equation: Commissions of various kinds appear in a number of different places for different firms. For TPAs owned by individuals, their "pay" appears in various places and in various ways.

Factors outside the TPA are also distortions. Obviously, there are vast differences in pay scales in different parts of the country. Also, since TPAs don't make a big deal about corporate titles, two people with the same title may have huge differences in their level of responsibility. How much of the process is actually done by the TPA is a no-brainer (but often ignored by people making comparisons). Last, but not least, because the key to success of TPAs is personalized service, different clients within a TPA and among TPAs may look comparable, but take far more work. Last, but not least, different kinds of plans (Taft-Hartley, Single-employer, MEWA, HMO, PHO, fully-insured, and size of plan and number of client's branch locations) influence the "efficiency" and thus cost-ratios of serving them.

So how do you know if you're an efficient operation? The best (and only accurate) is to evaluate your firm on its own. Go over everything with a fine tooth comb to see if each step is cost-efficient within the conditions of your firm. This should be done by people who are intimately familiar with your firm's situation and how the TPA business works. (Because of the highly-personalized services and TPAs' professionalism in staying attuned to the non-stop flow of new government requirements, some TPA functions might seem "inefficient" to an outsider...but that "inefficiency" may be the key to the happiness or legal compliance that keeps that client with the firm.)

Where have TPAs gotten into trouble in this process? Well, it's mostly when an outsider, such as an outside consultant or outside owner of the TPA, insists on coming up with "a number". The invisible 1,000% distortions start playing havoc. Then the TPA is measured against something that doesn't match...such as an insurance company. Their roles and financial structure are very different. Finally, in ignorance or frustration, cuts are usually directed in the very areas that give the TPA its market advantage in personalization & service. Sometimes firms never recover from the damage done.