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State of the TPA Industry + Forecast as of December 2001

by SPBA President Frederick D. Hunt, Jr.
Background

For 22 years, it has been a tradition for me to give a candid report on how the TPA & employee benefits industry looks...and forecast for the upcoming year(s). My "expertise" is simply that the SPBA office serves as the central information clearinghouse for the industry (and TPAs, themselves, tend to be information clearinghouses of insights in their own market areas). So, my knowledge is simply wisdom from the members. We also participate in continual sharing & brainstorming with government officials as well other associations that represent both clients of TPAs as well as other forms of employee benefits.

The previous reports & forecasts have had a similar focus & message. Each year, some major piece of legislation or trend seems on the verge of wiping out the market & role we have known. However, each year, TPAs and their market grow and prosper because of innovation, flexibility, adaptability, willingness to give needed types & levels of services...and a healthy dose of education and luck that has derailed some political juggernauts.

With such a rosy history, why does SPBA prepare its members all year with preparations which sound like gloom & doom??? It is because it is SPBA's philosophy that you should be alerted and prepared for the worst case scenario...so any less drastic outcome is good news. So, yes, SPBA members get a lot of worrisome warnings, but that means that TPAs have looked brilliant and prepared. TPAs are winners and survivors for their clients. One press observer of TPAs noted, "TPAs have the uncanny ability to turn every lemon into lemonade."

Looking Ahead

The major focus and sources of concern are different in this year's forecast. Yes, there are external challenges, but TPAs also need to do some introspective examination.

Externally, the biggest challenge facing everyone is the steep rise in health costs. It comes at a time when many employers (and workers' cost-sharing from their own pockets) are facing a challenged economy. Health costs will be a massive pressure impacting every governmental policy and business decision.

The generous heroism of self-funded employers, insurance companies, and HMOs in volunteering to waive the "war" exclusions relating to September 11th showed the hype of Patient Protection legislation to be false. Proponents had accused employers, plans & insurers of being cheapskates who cheat beneficiaries of rightful coverage. Instead the "villains" whom Patient Protection would punish accepted risk for huge losses for claims that they easily could have side-stepped. (Ironically, if Patient Protection and the silly "designated decision-maker" provision had become law before the September 11th terrorist attacks, the law's legal pressures would have probably led most employers, insurers, and HMOs not to be generous and ignore the "war" risk exclusion in the plan. So, thank goodness bad legislation had not passed.) Let us hope that Congress and former supporters of Patient Protection legislation learned that lesson, and that the legislation will wallow to an ignominious death, as has happened to other counter-productive political proposals.

How to handle risks & health costs from terrorism and threats on into the future will be a dilemma. No entity can afford to absorb potentially-gigantic risk without budgeting (or collecting premium) for it. So, should employers & plans permanently waive "war" and "terrorism" exclusions? Who should pay every time there is a threat (or even just a media-induced panic) leading to expensive testing or prophylactic drugs? This will be both a national policy issue as well as a decision for employers and even workers. (If workers find their percent of cost-sharing expensive now, imagine how they will feel if that amount jumps tremendously to cover ongoing terrorism concerns.)

>>>"If something sounds too good to be true...it probably is." This real-world warning should be repeated daily by all employee benefit consumers. There are lots of innovations popping up in the market. Some claim to save money. Some claim to remove employers for benefits legal responsibility. Some claim to give employees freedom of choice and happiness. Many are very clever and many make business sense if employee benefits were in a vacuum, without lots of laws and regulations. Unfortunately, most seem to fail to meet the various requirements of law...or they leave the employer naked and ignorant about serious legal liability. In other cases...such as those that feature freedom of choice and "defined contribution", the human psychology or economics doesn't work out. What do I mean by psychology? Remember how the Medical Savings Account (MSA) seemed like an ideal of freedom and cost-efficiency that would explode with popularity? Instead, it flopped miserably. By cost-efficiency, I mean that an employer may be happy that he has capped his outlay...but his employees' morale plummets as more and more workers can't afford the coverage or co-pays they need. Also, most of the too-good-to-be-true ideas lead the employer to think that he does not have to hassle with the laws and responsibilities of being a plan sponsor. Sorry...almost anything you do makes it a "plan" with a "sponsor" with all applicable laws. (After all, you don't notice employers begging not to take tax deductions for what was paid into the plan. So, those tax deductions prove they have a "plan".)

Introspective thinking for TPAs

One of the great strengths of the TPA industry is the individuality and personalization of services. However, this makes generalization very hard. As I always tell researchers, "When you've seen one TPA, you've seen one TPA." So, let me lay out some questions for each TPA firm to examine for their own operations...and how their competitors will be adapting.

>>Will TPAs achieve the expensive required operational changes & upgrades to be successful in the coming years? By this I mean EDI, Privacy, and other changes that are actually responsibilities of the client plan, but TPAs need to be ready...and TPAs will usually be called upon to implement it for the client.

>>Will TPAs be able to modernize their own thinking and that of their clients to upgrade to a more realistic fee basis for the array of services & expertise being provided? SPBA member TPAs provide dozens of services besides basic "administration". Unfortunately, in cost-comparisons, SPBA TPAs' array of services are compared to bare-bones TPAs prices.

Most TPAs are very loyal and protective of their clients, so when there are new requirements on the plan or employer, the TPA usually undertakes research for how to comply. (TPAs pay significant amounts of dues and meeting expenses to SPBA for some of this research, for example). Currently, SPBA-member TPAs are saving their clients thousands of dollars of legal fees by researching and providing sample language for the client's legal responsibility under various new privacy requirements and EDI. It is not "legal advice". It is simply practical actions to get the employer plan's requirements met. SPBA TPAs also stay on top of issues like COBRA, military reservist call-ups, IRS, and a hundred more issues. It starts from the very first meeting between TPA and client or broker...when the TPA tries to find a custom-designed (but legal) format for the client.

TPAs have been absolutely lousy salesmen about explaining the range and value of extra services they've been providing on an on-going basis. By contrast, consultants, attorneys, and others do a wonderful job convincing employers & plans to pay huge fees for just doing a one-time blitz of one or two of these services. While it is a tribute to the selfless professionalism of TPAs to spend money to help the client and get little or no appreciation or payment for the services above-and-beyond ordinary "administration"...TPAs will not be able to stay in business to serve those clients if they don't get paid enough money for providing these expensive services. This is the greatest single risk to the TPA industry. Some of the best and most selflessly-professional TPAs will not be able to afford to stay in business. That is sad & ironic.

Most TPAs don't even realize how much extra blood sweat and tears they give away for "free". A first step is to sit down and make a long list of the extra services (including know-how) you give beyond just paying claims that come in. Just as a lawyer's "product" is his knowledge of what to do in various situations, the TPA provides that "product" for a hundred or more major areas of requirements (COBRA, "discrimination", IRS issues, ERISA, fiduciary, etc. etc.). This knowledge is so expensive to compile that even most of the largest employers in the country use TPAs today, because they can't afford to compile the expertise in-house. (One major self-administered employer told me, "We blow $100,000 of legal and consultant fees on every twist & turn of government requirement. Your SPBA TPAs are providing it to our competitors for free.") SPBA TPAs are getting such a reputation for government compliance insight that insurance companies and HMOs and their clients are seeking their assistance. Let me repeat: Collecting & implementing this expertise & extra services is very expensive. No business can afford to give away such an expensive product without adequate compensation for the extra value provided. There is also sometimes a legal protection in offering and pricing TPA services to clients on an a-la-carte menu basis. A client or broker may verbally say not to do the Form 5500 or COBRA services...but if it then slips through the cracks, it looks like the TPA failed to do all the "administration". As I said at the beginning, charging enough to survive to provide the quality & value of extra services will be a mental adjustment for TPAs who always want to give the lowest price. It will also take a mature big-picture understanding by employer, clients and brokers that there's a great deal in employee benefits that can lead the employer/plan/broker to jail or bankruptcy if taken for granted or done "on the cheap". You can't get a Mercedes at Daewoo prices...and if you could, Mercedes would go out of business because it can't build-in Mercedes quality & features and compete at Daewoo prices.

>>A corollary of TPAs charging enough is that they must bear whatever cost it takes to have all the staff who have responsibilities well-trained and kept absolutely up-to-date. That means several or dozens of people in each TPA firm. Just as airlines have every pilot fully trained, re-checked, and forced to remain absolutely up to speed...it is crazy to cut corners on TPA staff whose daily duties have the fate of the TPA firm and the client in their hands. (The tiniest unknowing claims or marketing decision can blossom into a serious crisis.) This is the second-biggest single threat to the TPA industry. A TPA firm is no place for hiring the cheapest warm body, or automatons who don't think, or treating employees like mushrooms (keeping them in the dark). TPAs must invest the time & money for all staff to read and discuss and understand new developments.

>>What will be the impact of Stop-Loss? The Stop-Loss market was already getting much tighter in order to reverse their large losses in the late 1990's. This was a financial and culture shock to TPAs and clients who had gotten used to an earlier "kinder gentler" Stop-Loss market. Now, on top of that tightening is the unknown of how the staggering losses from September 11th will impact the insurers and re-insurers of Stop-Loss. Will there be a price jump? Will there be a capacity crunch? It is too early to tell.

SPBA uses the term "service partner" to describe the role between TPAs and Stop-Loss. (This is not to indicate that "service partner" is synonymous with "mutual love".) TPAs need to do better communication & brainstorming with their Stop-Loss sources during the thinking stages before decisions are made. For example, we get questions such as, "We've got a potential client with an unusual situation that.....". or, "What would happen if we paid for ___claim?" The TPA is brainstorming with us about possible government implications. However, most questions also raise Stop-Loss implications. (Does including Uncle Joe's employee's in his brother's firm's plan make it a MEWA? Does paying for the boss' wife's vanity face-lift√Čnot covered in the plan language...get included in the specific or aggregate of Stop-Loss?) Brainstorming early avoids surprises and anger later.

>>Will outside ownership of TPAs dilute, change, or poison the successful culture and style of TPAs? The landscape is littered with dead once-great TPAs who were bought or merged with outside entities who decided to change them or bring the TPA into line with the operations and mentality of the parent or partner. To often, the comment from new management that, "We're making changes & improvements" ends up meaning "We're poisoning this TPA". TPAs are unorthodox...but that's because of the highly-personalized service which has made the whole industry so successful. Many TPA customs may seem the antithesis of what is taught in Business School...but the TPA customs have survived longer and better. Clients of TPAs will not accept cookie-cutter policies or bureaucracy. If you don't give clients the kind of personalized TPA services they expect, they'll go to your competitor...who will give them what they want. It happens...and many an "improved" TPA has shriveled because of it.

The TPA business is also not a big-profit gold mine. It is a gratifying labor of love with modest profit margins. Part of the reason is custom (as noted above), and part of it is legal oversight and restrictions such as ERISA fiduciary and no-self-dealing. Too many outside entities buy TPAs with hopes of big profits or opening new marketing options. When they discover that that is not the case, some buyers decide they don't want to play TPA anymore and throw away the business or sell for pennies on the dollar of what they recently paid. That's not healthy for anyone.

A majority of TPA firms are today owned by or affiliated with some outside entity√Čoften an entity with a competing project or agenda (such as insurance company or Blues or HMO or medical facility). TPAs who are truly left alone by their owner or affiliate usually flourish...and also avoid ERISA fiduciary risks of the appearance of conflict of interest.

So, the role that outside owners play in TPAs, and the degree of freedom or regimentation they try to impose on the TPA operation is always a significant concern for the TPA industry. Every time that an outside owner imposes "improvements" (and ends up alienating the comfortable personalized services the client has come to expect), not only does that TPA take a hit, but the reputation of all TPAs are tarnished a bit.

A final macro market summary forecast

Well, I've fallen into my old habit of preparing you for worst-case scenarios. However, let me say that in the big picture, TPAs and their main market in self-funded health plans have better prospects than their competitors. Why? Most self-funded employee benefit health plans did not suffer staggering losses on September 11th, though they heroically stepped up to the bat willing to accept what might come that day. Therefore, self-funded employee benefit health plans do not have to make up for hundreds of millions of dollars. Self-Funded plans will probably face aftermath via Stop-Loss insurers and re-insurers, but not direct massive losses. Many insurance companies and entities affiliated with and re-insuring them will need to tremendously increase premiums & cash flow for years to overcome their losses. Meanwhile, the too-good-to-be-true competitors will probably turn out to be a flash in the pan because of legal or public-acceptance reasons. Also, despite a constant onslaught of government micro-managing & mandates, ERISA and self-funding retain the advantage for custom-designing the most cost-efficient package of coverage for each employer's workforce. As health costs rise and money gets tight, this advantage really kicks in (as it did when it spurred thousands of percent of growth in the TPA & self-funded market during the last big cost spike in the 1980's). So, this is not gloom & doom. It is candid realism and fine-tuning to be prepared to be successful in the coming years.