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State of the TPA Industry + Forecast for 2003

by SPBA President Frederick D. Hunt, Jr.

Background & context

For the 23rd year, let me share candid insights on how the TPA & employee benefits industry looks...and forecast for the coming year(s). Any wisdom expressed is due to the uniquely-close interaction between SPBA staff and our members. We hear your problems and questions and you are candid about the marketplace reactions you are seeing first-hand. So, this report is actually a joint project with you.

I apologize for the length, but we find that these reports become a tool for current judgement about the industry and how individual firms are doing, as well as long-range planning. So, I have tried to add answers to the most common follow-up questions. This would have been even longer, but, instead, re-read the Forecasts from recent years, posted on the public website at http://users.erols.com/spba in the "About SPBA & Services" section. What they report is still accurate, and I would be repeating them in this report.

You may notice a slightly different tone in this year's report. In past years, the challenges or threats have been issues over which we have little control. This year, the challenges & threats can be eased or avoided if TPAs & Stop-Loss are willing to make some pro-active effort. So there is a tone of prodding TPAs & Stop-Loss to be pro-active, and assuring them that SPBA has been fore-warning and fore-arming them. Consider this "constructive nagging".

Some statistics

Please always remind yourself of the reality-check that every number or statistic about TPAs, benefits, health care, insurance, etc. has a built-in 1,000% distortion factor. It is not that anyone is lying. The main culprit is that even the simplest vocabulary terms have vastly different interpretations in the benefits industry and other related groups, and thus statistics get skewed. So, common sense estimates are always more accurate than purely statistical findings.

Has the TPA industry grown this year? Definitely yes...probably in a true range of 10-15% (which has been a pretty consistent rate of growth for the past five years or so, after 15 prior years of breath-taking growth each year).

In March 2002, there were 403 member name firms. (This number is after subtraction of firms who had merged with other members.) In December 2002, there are 433 member name firms. So, SPBA's growth is the 30 new firms in 9 months + the fact that the merged firms may no longer have a separate name in the roster, but they are still actively in the TPA business (and thus do not represent a decline in TPA business). There were only two or three firms that simply exited the TPA business. So, the balance of all that is that the TPA business had a net growth of about 10-15%.

In terms of the market TPAs are experiencing, it is a mixed bag, often reflecting geography. Some TPAs have prospective customers beating down their door. Other TPAs are in a slow but steady growth mode. Others find that the market in their area is very stiff or skittish. This spotty pattern has been true for about 10 years, but not always the same kinds of TPA firms, types of clients or geographic areas.

The number of Stop-Loss Service Partners has also grown, jumping from 52 to 57 during 2002. This growth is despite great upheaval in the insurance market in recent years and 2002, and predictions by "experts" that Stop-Loss would dribble to just a hand full of sources.

Prospect for the future: "We have nothing to fear, but fear itself."

Franklin Roosevelt's quote, above, from his first Inauguration, in the depth of the Great Depression, keeps jumping to mind as an apt description for TPAs in 2003 and beyond. There are significant challenges in regulatory compliance logistics, possible legislation at federal & state levels, financial pressures, the medical delivery system showing scary signs of disintegration...and, yes, some psychological pressures TPAs are facing.

However, the important point is that there is still time for TPAs & Stop-Loss to act now, and minimize many of the problems. So, to be blunt, the question is whether you do some pro-active work now....or do you procrastinate and then whine & cry later because your firm & livelihood are threatened. It is your choice and your opportunity.

There is also the proven track record that TPAs have a habit of turning "lemons" into "lemondade", and or mastering what may seem like the most impossibly onerous requirements. For example, for the first half of 2002, there was hew and cry about how DOL Claims regs would "never be possible". By the end of 2002, most TPAs say, "Yeah, we've got it under control".

Regulatory challenges


As someone who has been an intimate observer of this business for over a quarter century, let me say that today's TPAs & Stop-Loss make the pace & challenges of yesteryear seem like a snooze. You face more issues & challenges-for-action every month than came in a year or two in the old days. So, you can pat your self on the back, and you are justified in feeling that you are a perpetual decathlon performer handing 10 challenges at any one time. However, patting yourself on the back should not be accompanied by that other "P" word, "procrastination".

EDI (Electronic Data Interchange) has been on the ever-closer horizon for 6 years. Outsiders originally predicted that 30-40% of TPAs would simply fizzle and die because they could not afford the very expensive learning curve to understand the options and work to guide the TPA towards EDI compliance. To give every SPBA member firm & Stop-Loss Partner the basic part of the learning curve...which would cost a firm $150,000 to $1 million if done alone...and to combine the experience & brains of the whole industry, SPBA sponsored 4 years (8 meetings) of very intense education designed for Senior management (who would need to make decisions and financial commitment) + "Techies" (who would need to convert the generic knowledge into the process best for their own firm) + marketing, claims, and other types of staff (who would need to communicate & work with clients and other vendors). SPBA also initiated an EDI-specific website for firms as an excellent learning resource and even a chance for firms to chat & brainstorm on their EDI problems & solutions.

There is good news and bad news about EDI: The good news is that the education process turned out to be better than SPBA ever dared hope. National experts on EDI say that it was the very best educational effort, and that the SPBA firms who put in the time, effort & personnel to attend those meetings, use the website, and do work in-between are in the elite of best-informed & prepared on EDI.

The bad news on EDI is that too many TPAs & Stop-Loss played ostrich. They stuck their heads in the sand in hopes that EDI would disappear. They often said that they could not "afford" to attend all the sessions or send enough or the right people. Now they are faced with a huge expensive learning curve with consultants who can demand the highest fees at this crucial time. And/or, they will find that other solutions which allow them to run their claims through some outside service to achieve the EDI compliance is going to add considerably to their administrative costs....hurting their competitiveness in the marketplace. We noticed a number of ostriches pulling their heads out of the sand at the Fall 2002 meeting. (The special intensive EDI education project, however, ended in Fall 2001). If it had not been for some serious scrambling by SPBA to get HHS to exercise a 1 year delay in the EDI effective date, the ostriches would be roadkill now on the highway of progress.

Sadly, some of the ostriches have become like deer frozen in the headlights. They are not moving with the speed they need, to avoid being run over. Some think doctors & hospitals won't demand EDI, so they can skate under the radar screen. In the early years after HIPAA passed, that seemed true, but Medicare and business pressures now make it look like all but the most tiny or rural providers will soon be demanding EDI, and you will need to be able to react. Others think some vendor is going to come up with a simple turn-key inexpensive solution. Ironically, some of the TPA software and other vendors report that they are under-whelmed with TPAs seeking to implement the EDI solutions that are available. Too many firms seem to be waiting until the last minute...and will then find that the vendors are too busy to help them. Some ostrich/deer say "SPBA staff can help us through it." That's complimentary, but not realistic. SPBA's help came in the 4 year education project, the still-existent EDI website, getting the delay, and keeping you posted of new insights. SPBA staff can't help you, at this stage, with EDI any more than we can advise you about programming your firm's computer. All is not lost, the SPBA EDI website does contain nearly all information & links you need to know. It is a long long project (like sitting down to read and implement the entire encyclopedia), but it is the lifeboat which SPBA has provided for the "ostriches" and "deer".

HIPPA privacy, on the other hand, seems to be spooking TPAs, Stop-Loss, clients, and providers more than it should. It is not as radical and onerous as it is being hyped. SPBA has worked very closely since day one with the people writing the rules and making the interpretations. We fed them real-world kinds of situations you reported to us, and how other benefits laws and customs might impact privacy. I am happy to report that HHS has been extremely understanding and cooperative to avoid having privacy become an obstacle to necessary day-to-day provider and payor practices. For example, the category "Health Care Operations", with which SPBA worked especially closely with HHS, makes the HIPAA privacy very workable for most TPA operations.

I am not inviting people to procrastinate on HIPAA privacy. Just don't become frozen in inaction because you think it is some insurmountable mountain. It is mostly simply formalizing privacy safeguard procedures and customs you and your client probably already had. To make this easier & quicker, SPBA has provided you with extensive explanations and sample formats for you and your clients to adapt. SPBA also scrambled to get you a 1 year delay of the effective date. So, my message is: Don't be the deer frozen in the headlights on HIPAA privacy. It is doable with some relatively short focus time by your firm. Then, you can check it off your to-do list, and tackle the other challenges.

While HHS has been extremely reasonable on federal privacy rules, the HIPAA law said that if a state had a tougher privacy provision, the state law would supercede the federal law (the reverse of preemption, and ERISA preemption does not apply). This is 50 wild cards. There is no easy solution. Even in our talks with research groups that normally do excellent reporting on state developments...it does not appear to be something that will be readily available on some handy list or reference. So, I regret to say that if you're waiting for SPBA to send you some handy comprehensive list of state privacy requirements; don't. We will share in UPDATE what you report to us, but this is looking like an on-your-own project. In truth, the issue is not "reporting". You and others in your state need to be pro-active with state legislators & officials. Shape what your state does. Don't whine like a victim if you did nothing.

More in-house compliance offices in TPAs & Stop-Loss

We have noticed a steep upswing in the number of TPAs and a few Stop-Loss partners creating a dedicated compliance person or staff. This is good...but in no way should be a sign that senior management or anyone else in the firm abdicate their interest & involvement in government compliance. The compliance person(s) are invaluable as antennae to catch, track and direct information. However, understanding & implementing government policy requires the nitty-gritty details of the specific plan document, client, TPA process, etc. So, it is unfair and unwise to stick the compliance person in a room and say, "tell us what we need to know". The compliance role is to be a coach who alerts, prods all segments of the firm, and generates discussion toward a solution or strategy. Also, the compliance staff come from very varied backgrounds. Often, it is someone who has been in the TPA business for years, and is given more time to focus. Sometimes it is a paralegal or attorney. What is best depends on the format of the firm. In any case, if it is a new person, they have a very steep learning curve. Be sure they are named as an SPBA "contact" for your firm, and be sure they have time and direction to do the catch-up reading, such as the SPBA websites and old UPDATEs and an orientation to become familiar with every function of your firm's operations.

New Markets & Profit Centers

The story of TPAs and employee benefits is a story of constant evolution. Most services which most TPAs sell today are new since I came to SPBA in 1980. TPAs have a reputation for turning "lemons" (onerous new laws & challenges) into "lemonade" (a new market or profit center). It is important for that growth to continue.

The SPBA Fall '02 meeting had a session showing that HIPAA privacy/security is a natural and profitable market for TPAs. TPAs are perfectly situated to be familiar with the functions that need to be secure for the employer. If TPAs don't provide this service for their clients, law firms and consultants are aggressively marketing these services for high fees. So, it is up to you whether you want to grow into this guaranteed market, or let the profit center go to someone else (who may grow their own influence to someday displace you).

Patient-Directed Health Care (PDHC) and its subset Health Reimbursement Accounts (HRAs) show promise. It is predicted that within 10 years, 90% of health plans will have some aspects of patient direction & choice. It will probably be in various evolutions of the current common format, but it is not a market to which to turn a blind eye. Fortunately, in the various mailings during the summer of 2002, SPBA has positioned you to be probably the best-informed technical experts on PDHC (recognizing that everyone is still a pioneer in this uncharted new area). Because SPBA's role at the highest levels of government on PDHC, we foresee the evolution, and have pointed members in three separate markets that can be pursued: just simple HRAs + HRA/bridge/back-up format + TPAs creating whole formats & products which use the best of PDHC and traditional plans. The Fall 2002 SPBA meeting had a detailed walk-through of one such new product, in order to spark the creative juices of other TPAs to create a new market and profit-center for their own firm.

Pensions might be described as a back-to-the-future TPA market still a few years away on the horizon. When I came to SPBA in 1980, pensions, mostly traditional defined contribution, were done by 99% of the members, and health was a small after-thought. Public opinion (heavily driven by baby-boomers approaching retirement age) is starting to re-think the pension scene. The stories of poor 401(k) performance, almost zero saving among Americans, cash-balance plans, talk of the impending Social Security crisis, etc. do not point to "golden years". Within the next 5 years, there are going to be opportunities in the pension market. How & where we don't know yet. However, you should place this idea in the back of your mind to be alert for opportunities and new products/services you might offer.

Let me end with an odd observation about our efforts to get TPAs to be open to exploring new markets & profit centers. You would think that it would be easy to convince people to make more money and grow their business. However, we have received more resistance and excuses against expanding services & profit centers than any other issue. This seems to be mainly attributable to the desire of TPAs to always do a good job of anything they undertake, and thus to not bite off more than they can chew. However, that should not be taken to an extreme of over-caution.

Marketplace challenges

There seem to be two main nagging challenges for TPAs in the marketplace. The first is medical inflation. This is a world-wide problem, not just TPAs. However, because TPAs typically have a much more intimate caring & involved relationship with clients, they feel the frustration more directly. There are dozens of logical reasons that contribute, such as technology, aging population, new/better/earlier treatments, etc. However, we must regretfully also keep focus on the truism that there is no way to provide all the health services that people think or wish or imagine they deserve. There's just not enough money in the world. This sense of entitlement is even eroding socialized-medicine systems in countries in which the populations have been accustomed for decades to government deciding what services they will and won't get. Politicians & special interest groups certainly don't want to admit this. Their solution is to pander and promise mor....simply postponing and adding to the problem. So, everyone around the world with any role or responsibility for the payment of medical services is in the same boat, and it will probably get worse for a few years, before it gets better.

The second is very specific and a chicken/egg Catch-22. In the face of medical inflation and the public unpopularity of HMOs due to the Patient Protection hysteria, many employers want to explore or seek other options for their health plan. Often the solution they seek is self-funding with a TPA. However, to give the client the most accurate estimate (including the best possible deal on Stop-Loss) pretty specific history of the plan's performance (claims & potential problems) needs to be disclosed. Too many insurance companies & HMOs refuse. The expressed reasons range from saying HIPAA Privacy rules don't allow it (which is a legally inaccurate reason) to various forms of bureaucratic mumbo jumbo and delay. The result is that employers are denied a choice & options at a time when the national economy and medical inflation may lead them to just stop offering health coverage at all or make draconian cuts. Several state insurance commissioners are becoming alarmed over this. SPBA has provided some practical advice to TPAs & Stop-Loss in this predicament. However, in the meantime, it has a strangling effect on the employee benefits market.

Universal coverage & Socialized medicine: The Big Bang for Benefits?


From about 1978-82, some form of universal government-run national health insurance always seemed to be on the fast-track in Congress and an "inevitable" eventuality. We then entered two decades of boom & blossom in the private health benefits market. Universal coverage is now inching up in the public opinion polls. There are two reasons. First and foremost, the public always likes a quick-fix simple-sounding solution. By saying the magic words "universal coverage" all medical & money problems and suffering magically disappears. This is a tragically short-sighted approach, and ignores that many of the countries whose systems we might copy are seeing their own universal coverage process straining or quickly falling apart...and with no safety-net fall-back for citizens. It also ignores that Medicaid, Medicare and other government health plans are struggling. However, politicians and public opinion are never known for far-sighted skills.

The second factor...and an important difference from 20 years ago…is that the "uninsured" are no longer lowly and poor people (who don't vote often). No, the new face of the "uninsured" are often young and pre-retirement yuppies who have financial or priority reasons that they cannot "afford" health coverage. These people are vocal and voters, and the kind of people a Congressman might run into. (Congressmen just love sad anecdotal stories to spur hearings and bills, and if it has hometown connection, all the better.) The issue of the uninsured is insincere on the part of the government. (If they were serious, they could just allow buy-in to the gigantic federal employee plan or Medicare or Medicaid, or state-employee plans, etc.) It is also often the stalking horse for some other agenda (such as states wanting to lower their cost exposure from Medicaid).

In any case, simple-minded, short-sighted, and/or secret agenda pressure to pass universal coverage is apt to build. Everyone in the employee benefits community is going to have to make the effort to challenge glib talk in the news media and talk shows. Common sense can't win, and tremendous damage can be done if the people who have first-hand experience in the realities of how the health care & payment system works don't make the effort to educate and correct public opinion in their communities.

Psychological factors

That is an ominous-sounding sub-title, but it is simply to denote that many developments in the TPA industry this year and looking ahead are personal and a state of mind. One such facor (a contributor to the "ostrich" and "frozen deer" analogies earlier) is what I would call battle fatigue. The pace today is so demanding and fast that many TPAs feel the paralysis of exhaustion, like a marathoner asked to run several marathons per day. However, just as successful athletes must overcome this exhaustion, so must TPAs.

Another factor is that as more and more "outside businesses" (HMOs, insurers, health providers, banks, venture capitalists, etc.) diversify and enter the TPA business (which their careful research tells them is a great business opportunity that is flexible to accommodate changes in markets & laws), SPBA finds it has more people in senior TPA & Stop-Loss positions who are new to the TPA business. The nuances & customs of the TPA business are usually very different from anything they have ever done. I am happy to say that most of these people have achieved a very quick learning curve of both the issues and practices...but also the spirit of the TPA business & SPBA. However, they often say that while they now understand what is what, their owners or overseers still see (and try to manage) the TPA function in some larger bureaucratic format. The people who have achieved the learning curve and can show their bosses that they are plugged-in are making great success stories for themselves, their firms, and the industry. However, I mention this whole situation as heads-up that outsiders who try to run a TPA in a bureaucratic manner or run it like any other business are creating a formula for failure.

Buying & selling trends of TPAs seems to be a fixation of outsiders who study the TPA industry. They try to read things into each transaction or what seems like a pattern. They view it like a rise & fall in some stock. They are always astounded when I pop their balloon of theories by saying that the major factor in selling of TPA firms is what I call "the biological clock", with practical logistics in second place.


Many TPAs are privately owned. So the age/health/endurance of the owner(s) is a major determinant. When I came to SPBA, most members were from the Depression/World War II generation. In the mid-80's, as many of them hit 55 or 60 or 65, they considered their timeline. If they did not have children interested in taking over, they felt it was time to sell. They knew that most buy-outs have a 3-5 year transition, so they sold 3-5 years before they expected to retire. We are now starting a period in which Baby-Boomers are in the 55-60 age range, and thinking of their own timeline. Sometimes, this is also influenced by practical business considerations such as, "If I'm planning to sell in a year or two, should I make the heavy investment for EDI (or whatever), when I won't be around to regain the full pay-back of it?"

The public website has a summary of considerations about the buying/selling of TPAs entited "What are the impacts of mergers & buy-outs on TPA operations" in the "about TPAs" section. The members-only website has three private detailed discussions at the end of the Tips for SPBA Members category. See "TPA buy/sell advice" + "TPA buy/sell price range." + "TPA buy/sell share your wisdom."

Summary

The message is, overall, very good and promising. The key point is that every one of the threats and dangers is something that TPAs can take a pro-active role to avoid or cure. That's why I keep thinking of Franklin Roosevelt's quote of, "We have nothing to fear, but fear, itself." The question by this time next year will be whether TPAs and Stop-Loss partners made the effort to avoid the problems and expand their markets. If TPAs are apathetic or defeatist about not taking a pro-active approach, it will be a sad loss of opportunity. So, as the Dr. Laura radio show would say, "Now go out and do the right thing!"