Current Prospects in the TPA Marketplace
By SPBA President Fred Hunt
Summer - 2007
To understand the business prospects for TPAs, you must understand the diversity of the industry and the marketplace in which they operate, so there is no one forecast or report.
Is there a future for TPAs? Yes. Despite the emotional political rhetoric about the supposed-certainty of single-payer or universal coverage healthcare for the nation, the chances of that actually happening are far from certain, just as the absolute certainty of single-payer universal coverage in the early 1980's drowned in its own rhetoric. In 2007, serious-minded politicians & planners see single-payer universal coverage programs such as Medicare & Medicaid and virtually every country with single-payor systems headed for bankruptcy. Why would the US want to duplicate that failure nationwide here?
Yes, there are growing changes in the medical arena , but it now looks like the changes will first come in the much-needed area of medical efficiency, quality, and price transparency. TPAs flourish in all those arenas. TPAs are also well-positioned to profitably pursue new formats such as HSAs So, the opportunities are definitely there.
In fact, price transparency, which is part of an energetic and widely-accepted government/private program called Value Driven Health Care, will also remove the issue of phony medical pricing & discounts, which has been a headache and has caused an unfair competitive disadvantage for many TPAs in recent years. TPAs shine in fair competition for value & service. It will take a couple more years to become the norm, but as Value Driven Healthcare brings transparency to the health process & pricing, TPAs will be able to shine for the extra values they bring to the table such as personalization and attention to government compliance which other sources of benefits do not match. For detailed information in Value Driven Healthcare, go to www.hhs.gov/transparency/employers
What's the TPA Golden Goose? There have been about 200 business prospect studies of the TPA industry in recent years (for investment, purchase, mergers, etc.). From what we've heard (they are all proprietary and thus private), all have been endorsements for a bright future for TPAs. I was told that one used the term "golden goose" to describe the profitable prospects of being in the TPA business.
That is flattering, but VERY misleading. No one should be in the TPA business with the expectation of it being an consistent money-making machine. The successful TPA business is a labor of love, with dedication to the client being the top priority. In an ideal world, that would be richly rewarded, but "What have you done for me lately?" appears by the time fee & contract renewal time rolls around, which means that TPAs end up giving away a lot of expertise for free in this very competitive business. Also, many of the greatest and most valuable achievements of TPAs for their clients are invisible (like avoiding gigantic future government compliance problems or attention to plan design. Thus, annual ROI can vacillate because when there are new government requirements or technology, the TPA bites the bullet to get up to speed on behalf of the client. Ironically, TPAs have achieved what would be a textbook goal of every business. TPAs have spoiled their clients with superb dedication, personalization and services. That high standard is nice, but TPA clients often think it was effortless and thus not worth paying for the extras.
Is the future universally bright for all TPAs? No. Different TPAs will flourish and fare differently in the coming years, and the difference between success and fading will be internal factors. First, let me describe TPAs whose future has some bumps in the road:
--- Some TPAs are owned by people just hoping to coast along a few more hears to retirement. It is a generational shift such as we experienced when the World War II generation did the same in the early 1980's (followed by a subsequent boom in new vibrant TPAs).
--- Some firms are just tired or unsure of the future so they aren't investing time and money to remain on top of their game. They hope to be bought/merged and continue for awhile without the headaches of running a TPA firm. --- Some firms are pursuing the age-old goal of becoming "the McDonalds of TPAs" (meaning nationwide with the efficiencies of size). The business model is good, but what has failed previous attempts is that success in the TPA business depends on intense personalized service for each client, and it is hard to be large and have the efficiencies of size, and still make each client think that they are the one-and-only priority. Fortunately, current SPBA member firms pursuing this goal have learned some lessons from previous failures, so this may become a lasting segment of successful mega-TPAs.
With any of these kinds of firms facing bumps in the road to their future, there is the risk that clients will become disgruntled and leave, often taking key staff with them to start a new TPA to give them what they want. Ironically, most of these situations of orphan or renegade clients have been in situations where some entity buys a TPA, brings "good management" (seen as impersonal textbook business practices by the clients), and the clients leave because they yearn for the "good old days" of personalization. So, "good management" is a money-losing term in the TPA business.
On the bright side, TPAs that remain eager, energetic & innovative will have a very bright future. Some of the recent big headaches of the business will fade, and there are several new services and options which TPAs can bring as new profit centers or attractions for clients. The enthusiasm & innovation takes entrepreneur-like zeal, and a willingness to try some seemingly-unorthodox strategies. Sometimes, owned TPA firms have the zeal & innovation, but their outside owners/investors can't accept the seemingly-unorthodox customs or strategies. Owners & investors need to have faith and go along. Yes, the idea may not pan out, but stalling will definitely not be a winning strategy. The TPA business is human-relations business as much as it is a financial business. Trust.