Third party administrators: their unique and specific role.

The time was the early 1940s, the world was at war, and in the United States, everyone pitched in and sacrificed to win. Part of that sacrifice was a wage freeze; no one received wage increases except in rare instances, so when it came time to negotiate union contracts, a new item was thrown on the table--benefits. For the first time, benefits were considered and became part of the compensation package and, thus, part of the negotiation. Then, in 1946, to codify this new part of the compensation package, Congress gave us the Taft-Hartley Act, and employee benefits forever became part of union negotiation.

Who was going to perform the administrative functions necessary to deliver these new benefits to the members? Insurance companies were pleased when chosen to underwrite the insured coverages, but were not equipped to set up and maintain eligibility records for hundreds of employers and thousands of employees. The employer contributed to the trust fund, and benefits were paid out directly to indemnify the employee. To handle the administration, the union contracted with a third party to see that funds were collected and dispersed properly. This created a new business--the "Third Party Administrator" (TPA).

Throughout the 50s and 60s, this was the primary role of TPAs. As employers competed for talented employees, more and more companies offered benefits comparable to the union plans. As a result, the need for more administrative capacity grew.

It also became apparent, to some rather ingenious entrepreneurs, that if unions could negotiate Multi-Employer Plans to offer benefits to their members, groups of smaller employers could bind together as non-union Multiple Employer Plans to compete. This allowed for more buying power for small employers. Again, the administrative capacity of the insurance companies was inadequate, and more TPA firms were created to design multiple coverage plans, negotiate with carriers to underwrite, market to agents and brokers and administer.

Then, in 1974, Congress established ERISA (the Employee Retirement Income Security Act) to control the abuses in negotiated retirement and pension plans and, at the last minute, extended to employee health and welfare plans. This allowed single employers to provide excellent benefit plans without a bargaining agreement and in an environment protected by federal regulations which exempted the plan from the multitude of state regulations and mandates. Not only did this increase the need for more extensive administrative services, but it also added the service of providing help in understanding increased federal regulations.

By this time, insurance companies could see opportunity in binding Multiple Employers together and fully insuring benefits through Multiple Employer Trusts (METs). The MET was really born in the mid-50s and expanded in the 60s, but the growth of this approach was not seen until the 70s and 80s. METs allowed insurance companies to apply the actuarial assumptions they had developed, to groups of small employers, even down to two employees. When grouped together, small employers became, on paper, units of thousands. However, many insurance companies were, and still are, not equipped to handle the administration of these plans. The TPA could perform the administration functions more efficiently, and so, carriers contracted with TPAs to be the conduit for these benefit plans.

Today, TPAs provide a unique and specific role in the delivery of health care services. But, while they perform certain roles necessary in employee benefit plans, they must be able to anticipate, as well as react and adjust to market needs and conditions just to survive. They are required to stay current with technology both in health care and information services.

Small Group Reform brings the known changes of AB 1672, as well as the unknown changes of President Clinton's health care plans. The TPA surviving under small group reform must have carriers committed to the market, willing to plan for and aggressively pursue business in new and uncharted waters. The TPA must have committed reinsurers supporting its primary carriers so that shifts in expenses and unexpected large claims will not adversely affect the plan.

Insurance consumers of the 90s are more aware of their rights and limitations within their policies. TPAs must be committed to serving their clients with state-of-the-art administration, products and support. TPAs must be able to communicate to insure the most effective ways of getting health care. Additionally, they must constantly inform and educate the insured on how and why the benefits and premiums are structured, and how to access those benefits while controlling costs.

TPAs must provide to employers and agents a wide range of products. The days of being a one-product administrator are over. Margins on all product lines have gotten smaller and TPAs must offer other products.

Employers need specialized services such as POP and full-service Section 125 administration to provide a means of shifting part of their cost to the employee or government. The flexibility and cost control techniques of self-funding almost demand serious TPA services except for the very large employer. Employers may need just a billing service to consolidate their benefits or just claims processing. Employers need value-added utilization review, which means more than just precertification of hospital stays. They need retrospective claims review and/or case management, which is responsive to control cost and get that insured back to work.

Employers need and should expect a TPA to have good reporting capabilities, not only statutory reporting required by the federal government and different states, but also experience and utilization patterns, upcoding and unbundling, reports on effectiveness of PPO networks and benefit design.

Employers deserve the kind of customer service which treats employees, dependents, providers and agents with respect and professional courtesies, as well as timely and accurate information.

TPAs who provide all of these things will survive and thrive under small group reform. In fact, TPAs will have distinct advantages over carrier administrated plans. First, the agent is the TPA's primary client and as such, TPAs stand accountable, and are responsive, to the agents' needs and concerns. Insurance carriers, on the other hand, are accountable to their stock holders, or in the case of a mutual company; its policy holders, which tend to be individual life or disability policy holders, not group health clients.

Second, direct-writing carriers are more likely to retreat or restrict their efforts in an area to avoid or control risk. Carriers may shift their focus to other lines of coverage in order to increase sales or profits. TPAs don't sell other lines of coverage, such as car, homeowner's, business insurance, individual life or disability insurance, etc. Their focus is clearly defined. TPAs will specifically identify the niche of business which is appropriate for their expertise and stay clear of products which would distract them. The TPA generally is unable and unwilling to leave or restrict geographic areas because those areas are probably its primary territory, and the TPA's livelihood depends on its market shares within an area.

Third, by definition, TPAs are experts in administration. This provides extra value for producers who will be able to expect and receive personalized care and service for themselves and their clients. The service provided by TPAs can be both specific and flexible. This allows agents to request and receive the special attention their clients need and expect.

TPAs have the opportunity, under small group reform, to thrive because of the service and products they provide. Currently, TPAs in the small group market are few and far between, but the ones remaining are efficient, responsive and prepared for the prospects ahead. Today's TPA is here to help the producer be more intelligent and responsive to the needs of the client (small employer). If you have a client who wants great service and competitive products, present your client a proposal reflecting the products and services of a Third Party Administrator.

Mark Reynolds is Senior Vice President with Quorum Insurance Administrators, Inc. Quorum is a full-service TPA located in Diamond Bar, California, servicing clients throughout the western United States.