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State of the TPA Industry + Forecast for 2004

By SPBA President Fred Hunt

Background & context:

Visitors to SPBA's public website, http://users.erols.com/spba will find these annual reports & forecasts for the past few years, and old-timers can remember 24 years of them. I am happy (relieved) to say that all of them are still accurate, and you should review the available earlier ones for the continuing factors, because each year, I only have space to address a few items. The particular issue or factor of interest to you now may well have been discussed a few years ago, so go back and review what was said before. It is still timely.


We're on the eve of major evolution:

Many envisioned Y2K (or, more precisely 2001) as the start of a new millennium raising the curtain on so much different from the past. I always thought that was just convenient calendaring. Instead, I predict that in our world of employee benefits and health care, 2004/2005 will be the start of probably the biggest change since Medicare in 1965 or Social Security in 1935. It will be a change in the playing field.

One change will be that unless it happens to catch an accidental popularity or political boost to become law, we no longer have the prospect of nationalized health insurance (NHI) as the "inevitable" dark approaching cloud on the horizon that could be legislated to change the whole scene. Yes, NHI in various forms will emerge during political campaigns and from various groups seeking what they think is a "less-expensive" and "fair" easy remedy. Political rhetoric has gotten more harsh & strident than before, and even goofy statements are swallowed whole by media and the gullible & wishful thinking part of the public. So, it will be a major whipping boy…but 99% posturing rhetoric.

Why only rhetoric about NHI? Realistic heads in Washington (even most of those who would favor NHI and continue to give lip service to it) know that government health services are an oft-proven quagmire. >>Medicare (which is increasingly being recognized as not being a comprehensive package of coverage) is heading for bankruptcy at the very moment it will receive the mega load of baby-boomers. That bleak prospect is despite counter-productive cuts already made >>Medicaid is the #1 headache and money drain for states, so they are making cuts. >>VA and military health systems are troubled and have cut many people who felt they'd been promised and earned health care. >>Countries, such as Canada, which used to be held up as shining examples of government health coverage are having growing problems, so the supposed success stories are disappearing. Therefore, thinking heads in Washington and states are not eagerly seeking to inherit the full load of all these problems for the whole population. Besides if government were the provider of medical services, there would be no one on whom politicians could load cost-shifting and mandates.

Another, and possibly more important, change is that most players now realize that our medical system is out of kilter. Costs, attitudes, and technology have been exploding. This has had effects not only in the transition from "old school" doctors to styles and expectations of younger doctors, but also improvements (and also perceived declines) in the quality of health care, due to factors such as technology, the nurse shortage, corporate structure & ownership,…not to mention patient expectations (both realistic and unrealistic). It is also now realized that the US medical system would not be able to handle many tests of the modern world, such as bio-terrorism.

Medicine has become a "business", and the image of the health providers is rapidly changing from kindly TV doctor "Marcus Welby M.D"…..to the scorn consumers and public opinion can heap upon corporations. For example, price manipulation, over-charging and medical errors & waste are no longer hush-hush topics. The doctor or hospital is as apt to be described as a rip-off as the large pharmaceutical company or some corporate scandal.

Against all this ominous backdrop of public and (quietly) political opinion, the cost of health care and coverage has been zooming, and has helped cause or feed other problems. Many jobs are lost or moved overseas "to save on health care". In order to afford health care, the previous-twin benefit of pensions has been disappearing. Co-pays and deductibles have been on the rise for the patient to pay more of the cost of his own care (either to save money…or encouraged by some in government to make patients "better consumers" of health care). Increasingly, the high co-pays are causing employees to take themselves out from the whole health plan.

Pharmaceuticals have been the lightning rod of resentment in 2003 and leading into 2004. Government leaders vent their frustrations by either giving thinly-veiled threats to impose controls…..or even turning to schemes that even a first-year law student could see have gaps of illegality (such as US patients who have not been seen by a Canadian doctor receiving prescriptions from a Canadian pharmacy.) We're also suffering from short-sightedness, such as the seductive political sound byte, but short-sighted idea of states buying Canadian or other drugs to distribute to their citizens. Drugs are a business, and just as OPEC can slow down or redirect the supply of oil, the producers of pharmaceuticals can take actions to minimize losses and direct their markets. (It is not illegal. Car manufacturers do it all the time. Some models are only available in Europe; some models are dropped; some cost more in different countries.)

So, you ask yourself, "Why is an employee benefit forecast going on and on about the health care industry???" The answer is that health care is the biggest product employee benefits "buy". So, any changes in the health care arena…especially bringing out into the open currently-murky issues of pricing, best practices, quality, effectiveness, fraud & waste, etc.) will have a huge positive change for employee benefits. It won't be a quick or smooth evolution, but it is happening.

There are quiet VIP conversations starting to take place among entities in a position to see, evaluate, and bring about major realignment. These are the kind of quiet think groups which have given birth to most of the changes in health and benefits over the last 50 years. Fortunately, SPBA is well-represented, and the breadth of TPA's insights (and now-proven accuracy of past observations & predictions) puts SPBA in a well-respected position as the brain-storming and ideas evolve. In the past, SPBA has been well-respected at the working levels as already-proposed or passed concepts were being implemented. This time, SPBA is on the inner of the inner circle in these various kinds of conversations. That portends well for TPAs….but better, SPBA is known for presenting very pragmatic good-for-the-nation views. Since TPAs have an independent role from clients & providers, we are one of the few unbiased voices.

Will we be ready?

This major evolution will take time…perhaps 5-10 years for the new environment to fully evolve. World history has many examples of the eventual victor being on the verge of collapsing from exhaustion just before the victory becomes clear. Many TPAs (at least privately) would probably admit they are in that verge-of-exhaustion stage. So, frankly, a question is whether we and our markets can survive current pressures until the evolution comes.

I've already described the direct and indirect ravages of repeated years of double-digit medical inflation. Federal & state governments also continue to heap on expensive, burdensome and cost-shifting requirements…and that will probably continue for a few more years as government flails around trying to look like it is "doing something" and bringing "solutions".

Many insurance companies have jumped back from the much-shrunken role they had been left in employee health plans. They are currently "buying business" by giving special bonus commissions to place a client with an insurance company rather than self-funding, and/or charging prices for their health coverage that seem artificially low.

Many TPAs are feeling the pain from that "subsidized" competition. However, it is just another passing fad. Ten years ago, managed care companies were "buying business", and TPAs were feeling the pain. The insurers will experience what managed care did: Customers prefer the personalization of TPAs & self-funding over big bureaucracy. Meanwhile, to make up for red ink they are writing now, the insurers will need to make even bigger boosts in premium costs in a year or two. (Insurance company stockholders do not like red ink, and heads would roll.) Thus, just as we saw an influx of "refugees" who had been lured by the under-priced managed care companies, we'll soon see refugees returning from the insurance companies. Artificial incentives & pricing are not a sustainable business plan, no matter how big the entity may be.

All is not smooth in our own back yards.

TPAs and their service partners such as Stop-Loss, PPOs, Utilization Review, etc. are digesting requirements like HIPAA EDI, Privacy and Security. SPBA has invested great time with its members to have them be fully informed. Unfortunately, rumor, incorrect assumptions and incorrect information from some "experts" has muddied the water elsewhere. Not only do TPAs need to figure out how to adapt themselves, but they find that they need to educate (or re-educate those who are stubbornly sure "their" solution is correct). It is not only clients, but also service partners, medical providers, suppliers, and even some state governmental folks. This is not to excuse that some TPAs played ostrich all or some of the past 5 years of SPBA instruction and are not up to speed. because they just hoped it would go away.)

Many outsiders (and even some within the TPA community) had predicted that 30-40% of TPAs would not be ready for EDI on October 16, 2003 (but naively assumed all other entities would be). They predicted "For Sale" and "Out of Business" signs would become common in the TPA industry. Not so! As much as some TPAs are still groping for a workable solution to EDI, it must be kept in mind that top experts who see the EDI preparation of thousands of entities across the country, including some of the most sophisticated corporations & providers, repeatedly tell us, "SPBA members are the best informed we see." It is important to remember that TPAs have an uncanny way of adapting to the impossible…and often turning "lemons" into lemonade.

There will be no "lemonade" for TPAs that are getting lazy or cutting corners. In the real world, the most important issue is not software, but "Where does the TPA get its government compliance information and how does it digest it and then convey and implement it for the client. Many TPAs have vastly increased their performance in that arena…with enough different attendees at SPBA meetings with backgrounds to absorb the parts applicable to different TPA functions. Many are also appointing and empowering government compliance staff. Though those firms would probably say "Ignorance was bliss.", those firms are succeeding and are well positioned for the future. On the other hand, some TPAs are saying "We don't have time…" or "We can't afford…" to attend SPBA educational meetings and really focus on and process information when it comes in. These firms are bouncing from ignorant (avoidable) crisis to crisis with their plans.

Many TPAs feel that Stop-Loss is a weak link for them. They understand the reasons they hear, such as making up for the prior buyers' market, more demanding oversight by owners and re-insurers of Stop-Loss outlets, and even the insurance industry's 9/11 hits. In fairness, it must also be admitted that too many TPAs or clients muddy the water by trying to manipulate the system.

However, the problem is that TPAs are reporting that the premium for just back-up Stop-Loss is often more than an employer is being quoted for fully-insured. Meanwhile, lasers often act as a cancer to undermine the belief of employers that self-funding won't let them be economically destroyed. Gaps that emerge (usually when there is a big claim) between interpretation of the client plan and interpretation of the Stop-Loss agreement are also a killer to client confidence in self-funding. If we lose client confidence, it is over for self-funding.

We can no longer waste time pointing accusatory fingers over who's good & bad and why. Just accept that this is a situation, and it needs to be solved amicably, or our business & market will be gone before the new environment describe earlier arrives. So, if you want the bright future coming soon, both TPAs & Stop-Loss have to stop their self-righteous defensiveness, and posturing. Either make the system work the way it is supposed to, now….or argue about it all the way to the unemployment line.

The other potential threat to TPAs are "new" ways. We're definitely not stick-in-the-mud, but it is long-proven that the key to TPA success is cozy personalization, personalization, personalization. This may not meet the business school model of "good management" and cutting-edge modern technology & techniques, but almost all of the firms that have applied "modern management" to the TPA business have promptly become expensive failures. There are always tempting "new" techniques being touted by eager people who only know the TPA business from the outside (which means their research has been influenced by finding what supports their view). If something seems slick and modern, that's how it will seem to the clients…whom we have spoiled over the decades to expect (demand) very cozy personalized service. So, be cautious. Other TPAs will be only to glad to offer your clients the personalized ways, and your clients won't hesitate to move to the warm fuzzy personalized format of another TPA that they used to have with you. So, be forward-thinking, but never lose sight of what sells. SPBA UPDATEs & Meetings often pass along new trends that are working or not working for other TPAs.

Back to the big picture:

Again, go back and read these reports & forecasts for past years. The information & insight is still accurate, and will cover more factors than just this one report. They are on http://users.erols.com/spba

Despite the exhaustion & frustration of the current battles, recognize that the TPA business is still growing, and business experts who study and evaluate trends and types of business keep judging the TPA industry to be 'the golden goose" (as one report called us). I should point out that when I talk to such researchers, I definitely dwell on the bad news as well as the good, so there's no "snow job".

I also strongly urge any outside entity eager to buy into the TPA industry (or even TPAs buying other TPAs) to read the piece, "What are the impacts of mergers on TPA operations?" in the above-mentioned public website. The biggest killer in the TPA industry is "bad marriages". If the factors in that article are not truly genuinely honestly handled, it is a painful expensive downhill slide. Beware!

Why is the TPA business a golden goose? They feel that the TPA profession will never go out of business (because red tape will never be eliminated). The TPA industry and their association (SPBA) have attained a high level of respect for their government compliance knowledge and skills. Clients like the service (spoiled pampering??) TPAs provide.

So, the TPA industry is alive and well and many independent experts feel we have a very bright future (and that's before they even knew about the bright future news at the start of this report). However, as noted, we have a responsibility not to fumble in the meantime.

Have a happy, constructive, forward-thinking (and prosperous) 2004.