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State of the TPA Industry + Forecast for 2005

By SPBA President Fred Hunt

For a quarter century, I've written a State of the TPA Industry & Forecast for the coming year.  Fortunately for me as the writer and you as the reader, they've proved to be accurate.  Those from recent years are posted on the SPBA public website at http://users.erols.com/spba under the category "About SPBA & Industry Trends".  I suggest re-reading them, since, other than references to specific legislative proposals and such, the insights are still timely when seen through the lens of this year's report/forecast.

For, 2005, the State of the TPA Industry & Forecast reminds me of the dawn of what is going to be a pretty day.  The day will have its hard work and challenges, but there is no killer storm on the horizon.  (With the consistent phenomenal growth & success of the TPA industry over the years, we sometimes forget that the majority of those years had some kind of hovering storm that threatened to kill or drastically change the market .)

Diminishing Dangers: What happened to the threats of yesteryear?

>>National Health Insurance:  The longest and biggest threat (often described as a certainty) was some form of nationalized health insurance, similar to Canada or England.  Even in the darkest days, SPBA always pointed out to State & Federal governments, (and anyone else who would listen) that there is not enough money in the world to provide as much health care as the people want and feel they deserve.  The more politicians talked about health as a "human right", the more impossible the task of government to achieve that goal.   The idealistic rhetoric continues, but most realists in government now understand that government-run health benefits is not a workable option.  This is further cemented as the systems in countries which used to be hailed as wonderful examples are suffering their own aches & strains (not to mention the existing US governmental programs of Medicaid & Medicare).  So, we can breath easier that what was the biggest storm on the horizon for years has now dissipated.

>>Grabbing patients for Medicaid cost-shift:  The other threat has also come from government.  For almost 20 years, State governments are getting strangled by Medicaid costs, so they are very eager to shift or water-down that risk by using some group of citizens in their state.  That, for example, was the secret agenda of the "pools" in the Hillary Clinton proposal.  This is still a secret agenda to beware.

>>Unfair competition:  A more recent problem was the custom of some insurers to incentivize brokers in ways that did not make a level playing field for plans to choose type of coverage and service provider.  Investigations by state Attorneys General about such practices in other parts of the insurance industry seem to be making these practices retreat.

Legislative reality check:  Being the start of a new Congress, brace yourself for a flurry of bills in the US House, Senate, and state legislatures.  Remember that thousands of bills are introduced or floated.  Only a relative handful of ideas actually become law.  So, when you hear that a bill has been introduced on such-and-such, be aware, but don't panic.  It is a very long winnowing process.

President Bush's health benefits and Social Security concepts are already known and can offer opportunities for TPAs.  Even the "threats" are workable.

>>Health Savings Accounts (HSAs)  are the biggest piece of the President's health agenda, and in a few years, and are forecast to be the biggest player and centerpiece in the health plan arena in a few years.  It is still a new concept, and both clients and TPAs have shown some caution or suspicion.  What is going to happen is that one by one, TPAs are going to get calls from clients & brokers saying they want to know all about HSAs and want to implement one quickly.  Fortunately, SPBA was working with the shapers of government HSA policy even before HSAs were born, so even the most hesitant TPA will be able to look smart on short notice with the materials SPBA has already provided.   There is a double market for TPAs from HSAs.  One is to use HSAs as the vehicle for client health plans and hire a bank to be custodian/trustee.  The other market is to be hired by banks/custodians to provide the HSA services to individual HSA customers of the bank.

Humorous irony:  President Bush's original intent was to wean the nation from employer-based health benefits to self-responsibility formats such as individual HSAs.  However, the Administration quickly realized that HSAs were never going to evolve except via the employee benefit system, so doing away with the employee benefits system is now on a back shelf, and they have been extremely cooperative with the benefits community to devise roles for HSAs within the benefits structure.

>>Association Health Plans (AHPs) are still in the legislative stage and face extremely fierce opposition.   On the one hand, they would open a market for a limited number of associations to offer self-funding for member employers.  However, in practice, it would be mainly large groups such as NFIB, Chamber of Commerce, etc. who  would set up such plans and solicit the wide range of businesses that belong to such groups.

>>Refundable tax credits for low-incomers to apply towards health coverage is still in the thinking stage.  However, any influx of money to individuals to help low-income people stay in the private employee benefit system is a plus for us.

>>Health Information Technology (including other monikers such as National Health Information InfrastructureÉNHIIÉ and some other IT-sounding names such as "Interoperability") is intended to bring the US medical system into the 21st century in terms of both systems and practices.  It has bi-partisan political support, so it should be able to side-step much of the partisan bickering on which Congress and public opinion will spin wheels (despite a funding glitch in the new budget that left no money for it). Health Information Technology started out magnificently with high level very candid brainstorming. SPBA had a key role for input.  (In fact, at one such high-level meeting, of 16 non-government people from very influential organizations 6 of the 16 were from SPBA)  As it has grown, it now seems to have taken on some flavor of excited vendors and people seeking to make a name for themselves.  However, health information technology is a good thing, and will make life easier for health TPAs.

>>Social Security reform is also still in the concept stage.  Depending if and how it emerges, the portion of FICA which employees would be able to invest themselves might well become a new service for TPAs (more to coordinate the program for the employer & worker than to become investment advisors).  However, if TPAs start to play this role, investment advisors will beat a path to their door, as pension investment advisors do to pension plans.

>>Tax Reform & simplification:  President Bush and some Congressmen will probably try to launch massive shift in the tax system from income-tax to value-added or sales-tax.  One of the ideas would be to repeal the tax deduction for employer health benefits.  I think it will cause much rhetoric, but the chances of passage are slim.  I think the biggest challenge will be to calm clients in the benefits market from getting spooked by the rhetoric.  Of course, part of the reaction to being spooked might be to prod some employers towards HSAs (which can be created with little or no employer dollars).

 What are the chances of tax reform? Removing most tax breaks and relying more on use-taxes is a priority with the President and some Congressmen, but there are too many entrenched tax deductions (such as mortgage interest & charities) with powerful lobbying clout who will fight bitterly to retain tax-favored treatment.  Employee health coverage is doubly tax-favored (to the employer + employee), so, it is one of the top two "tax revenue losses" (the taxes that would be collected if there were not tax-favored status).  That makes tax-favored treatment for health coverage a huge potential target.  However, in the face of ever-higher health costs, it would be politically difficult to remove the tax-favored status and thus create the net effect of increasing health costs for Americans.  We've been through this battle with government during the Reagan Administration, and we won.  It will take diligent educating by TPAs of public opinion and politicians to avoid letting this can or worms get opened.  SPBA has already started with high level discussions with the White House & Department of Treasury, but it will take dedicated hometown work of SPBA members and clients to educate & shape public opinion in their towns.

We still have some unsettled issues to solve or to have work themselves out in our current employee benefits operations:

>>"Discounts" have become a deepening quagmire.  Everyone claims to offer ever-higher "discounts", and clients love the sound of the word "discounts", but no one does the rest of the math to clarify discounted from what (therefore, what is the true net savings)??   So, too often, the prices being charged or the discounts being given are fuzzed, and little or no real savings are achieved for the patient and the plan.  The system needs to be cured, but the risk is that the quagmire may cause horror stories that government will "cure" with overkill.

For now, TPAs are somewhat trapped with the unappealing choice of either going back to the days when a set amount was allowed for each kind of procedure (and patients pay the rest)...and/orÉTPAs try to give employers a reality check that "discounts" often don't yield true savings...and/or TPAs try to negotiate their own deals.  This latter would be time-consuming and an uphill job of convincing, but since the "patient volume" incentive on which the discount system was built is now so watered down, things the TPA may be able to offer might look very attractive to providers. 

>>The medical-pricing mess is the mother of the discounts quagmire.  It will take time to work out.  HSAs will start the process.  HSAs put patients on the front lines of  the costs of medical services.  While patients are learning the totally-new skill of being cost-efficient healthcare consumers, there will probably be some sad stories of patients who become penniless.  This will be blamed, at first, on the concept of HSAs, until the media, government and public opinion learn to look at what was charged for what services, and was it needed in the first place.  Doctors & hospitals who see prospective patients saying "no thanks" and going elsewhere for services will begin to take notice. 

Again, SPBA is fortunate to have contacts at the highest levels of government to whom we have explained the problem, and they are working with us to explore a more sane medical pricing system and/or "transparency" of true prices.  There is some light at the end of the tunnel.

>>Unrealistic expectations is still the largest problem for all of health care.  Many malpractice claims emerge because patients expect miracles every time.  Meanwhile, patients treat the purchase of health care the opposite of any other consumer purchase.  Everyone wants to pay the lowest cost for health coverage...but then they demand expense-is-no-object services to be paid by.  It's like a person going to a car dealer and buying the cheapest car on the lotÉand then being insulted that a brand new stretch limo isn't delivered.  We must get past this distorted perception, but politicians tend to pander to it.

>>Extra commissions & payments unreported to clients is being heavily investigated by some  state Attorneys General and Congress.  The main target is the insurance and broker community.  It will get even hotter in 2005, and such investigations can ricochet in unexpected directions.  

ERISA's policy is clear and safe.   Any benefits derived because of the existence of the plan (such as commissions, interest, bonuses) are seen as belonging to the plan.  The plan may give permission for a TPA, broker, or other entity receiving such benefits to keep them, but, obviously, the plan trustee(s) need to have full disclosure of what it is that the Department of Labor would consider them to have given away.  Also, the amounts must be reasonable as part of the total compensation received for the services.

Over the years, TPAs have become the viaduct for more and more ancillary services for plans, such as Stop-Loss, PPO, UR, PBM, etc.  There is often some kind of commission, payment or reward to the TPA from the new service for implementing and/or coordinating the service for the plan.  Meanwhile, TPAs are in a very cost-competitive business, and have tried to offset charging higher TPA fees with these other types of income.  The intent is understandable, but TPAs need to be very very careful that their full good-faith disclosure to the client meets the high standard of ERISA (which should easily meet any standards State or Congressional investigators expect).  So, TPAs need to be totally open, to avoid even the slightest chance of anything looking like a secret pay-off.  Disclose disclose disclose, or some TPAs choose to turn such payments over to the plan, and collect what they need in the TPA administrative fee.

So, the good news is that SPBA has been cautioning, guiding and preparing its members for years on these issues.

Is the TPA business alive, well and growing?

 The answer is definitely yes.  There have been at least 200 private studies commissioned by entities considering entering the TPA industry or investing in it.  The studies are proprietary documents, but I am often called for follow-up conversation or questions, and the callers tell me some of the things in the studies.  As far as I know, every study has forecast a very rosy future.  I should point out that written and spoken descriptions we give the people doing those studies is extremely candid.  We do not sugar-coat the hassles & risks.  However, one study called the TPA industry "a golden goose", so that's my favorite description.  (Many longtime TPAs who feel like they are running on an uphill treadmill every day to please clients and make a buck are usually surprised to hear that their career is a "golden goose".)

The TPA industry has had an active, but not eroding amount of mergers & acquisitions among members.  Frankly, the biggest problem is how to tally SPBA's comparative "size" from year to year.  A firm name may disappear from the roster, but the office & workers & clients are still in the TPA business under the merged SPBA member name, so they are not really a "loss" to the industry or SPBA.  So, it is not truly a "loss" or shrinking.  Meanwhile,  we find that for every merged or closing firm, there is a new firm joining each year.  So, our total number of member firms has been holding steady in the range of 400 firms.

A change from the early days of the TPA industry is that many of SPBA's new firms were bought, formed or spun off from insurance companies, Blues, HMOs, hospitals & health organizations, etc.  SPBA has always fiercely defended its independence from influence by other entities, so both we and those outsider parent organizations keep arm's length.  However, I can assure you that the TPAs who come into the SPBA family that way very quickly understand and embrace the SPBA & TPA mindset.  We are also finding that, especially with the advent of HSAs, some entities who may have previously only provided one or only a few "TPA" services (only, for example, prescription, dental, vision, 401k, WC, etc.) have decided to step up to the comprehensive-TPA arena which SPBA represents.

Funny story:  Just before the Spring 2004 SPBA meeting, we had such a huge influx of new members, most of whom would be attending an SPBA meeting for the first time, that I sent an e-mail to the Board & Past Chairmen alerting them, and  asking that they be ready to help demonstrate to and guide newcomers about SPBA's cherished customs (some of which are very different from other associations to which the newcomers may have belonged).  Well, the Board & Past Chairmen were prepared, but after about 10 minutes, everyone in the room had gotten the flavor of SPBA and the TPA profession and was an "old-timer".  In fact, one new member attending his first meeting was a speaker, so new members could see that there are no cliques, and every new member is instantly welcome and respected for his sharing.  So, SPBA has the ideal combination of many new facesÉyet the loyalty and participation of everyone feeling like an old-timer.  Therefore, SPBA and the TPA industry is strong & healthy, and (even more important) retaining the best things about the industry in the process.

Projects for 2005:

As noted above, Health Information Technology, National Health Information Infrastructure (NHII), Interoperability, and the various other names given to the project of bringing the medical system into the modern electronic efficient 21st century is strongly supported by the full spectrum of political interests.  A first project by proponents is an interoperable accessible electronic medical record system for Americans.  All sides seem willing (providers, payors, patients, etc.)É..except that the medical community shows no sign of moving forward on any electronics or modernization unless they get government "incentives" (a.k.a. near-total subsidy) to do it. 

Most of the current players & vendor enthusiasts in the NHII and electronic modernization community think they are blazing a new trail.  Most have no idea and little interest that payors such as TPAs have already been down the trail, and it lead to almost nothing.  Payors were forced by Congress to gear up for Electronic Data Interchange (EDI).  There were no financial "incentives".  The medical community was encouraged to be ready voluntarily.  After a half-dozen years, payors have spent about  $1 billion to gear up for EDI, but they receive only an average about 10% of the claims from medical providers in EDI. 

Our health technology challenge & goal in 2005 is to educate and remind the government and electronic modernization enthusiasts that there is history (EDI), and they need to learn from the mistakes of that history, such as:

>>EDI exists, but is not fully functioning.  They need to understand the realities of why it has not evolved as promised by proponents, before similar projects are promulgated.

>>Payors received no "incentives" for their modernization, so why is the medical community more needy?

>>If there are "incentives" provided for modernization projects in the future, the incentives need to be for all parts of the medical process (including the huge tracking, processing, and anti-fraud role of payors).

Overseas Outsourcing is another issue floating around for "mundane" TPA functions.  We have received nearly 200 phone calls in 2004 from entities who wish to provide this service to TPAs or buy TPAs to use to implement this concept.  As described in detail in a piece  entitled "Outsourcing & Offshore Considerations" on the public website, it is a no-go idea for TPAs.  Proponents of outsourcing have a hard time accepting "no", because it seems like such an obvious business-school-textbook successful idea.  However, the success of TPAs is based on personalization, personalization, and more personalization.  That, plus the fact that government compliance impacts and guides even the most seemingly-mundane functions in a TPA, means that there are no "routine clerical" duties to be outsourced.  The verdict is also still out with various entities with whom TPAs must interact, such as Stop-Loss, State TPA licensing, etc. about if and how they will react to TPAs with offshore outsourcing.  So, blithe assurances are insufficient for a TPA to stake his future.  Some entities which either own the money (such as fully-insured) or provide "TPA" services without government compliance may find this worthwhile.  However, the years have shown that the ever-growing group of employers who hire SPBA TPAs want the kind of contained and intensive service they have been receiving.

Let me close with sincere respect and congratulations to SPBA members for earning the reputation and respect for their knowledge and compliance with government and legal requirements.  Your life would be easier, and your wallet thicker (for awhile) if you did a slap-dash job. However, such firms tend to fade away in a year or two.  You have chosen the more challenging role of professionalism.  You have to make legal and compliance decisions about virtually every action of your firm and client.  It is tiring; it is often frustrating, and often cost-inefficient.  However, you have built, educated and maintained a market of employers who don't always like what you have to sayÉ.but they respect you for it.  It is this level of professionalism since SPBA's founding 30 years ago that has let these annual State of the TPA Industry & Forecast reports be good news.

Let me continue the congratulations by thanking the Board & Past Chairmen and every member who appears on the Heroes lists, and every member who makes SPBA what it is.  SPBA's founders were fierce competitors, but they believed that a self-help organization could be created in which even competitors  would be willing to share insights & experiences for the good of the whole profession.  It worked then, in 1975, and it is still the basis of SPBA's success.  It is gratifying to see the selfless sharing, and the enthusiasm, loyalty & dedication of how each of you act in and towards SPBA.  There is no bickering, ego, turf battles, self-aggrandizement or bureaucracy.  You're dedicated and loyal, and that shows in the operation of SPBA and in the way the association can respond quickly to situations and opportunities.   When government asks for input about an evolving policy, some associations take months to hammer out a response.  Your constant and close interaction lets SPBA start playing a role instantly.  SPBA members use the word family a lot to describe SPBA.   It's true; we are a family.