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TPA Temerity: Regional Players Make Push for National Status

Robert L. Whiddon

Employee Benefit News -- February 4th, 2006 -- Regional third-party administrator North American Health Plans has a big plan. With a billion-dollar investor, the company hopes to become a national powerhouse for middle market employers.

The concept has been tried before, and most efforts have failed to successfully marry a national organization with the parochial needs of the employer market. Will this time be different?

Elliot Cooperstone, president of North American, insists that the mid-market needs larger, more sophisticated service providers. He's not alone in his belief, as Fiserv announced late last year it would further integrate its collection of regional firms to better serve the marketplace.

A national TPA appears to be a no-brainer, observes Fred Hunt, president of Chevy Chase, Md.-based Society of Professional Benefit Administrators. Health care is big business. More complex plans demand greater resources, which can be leveraged across a national group of service providers. It makes all the sense in the world, but ...

"How do you become McDonald's and yet still have your clients think you are just sitting there living and breathing only for them?" Hunt asks. The answer? You don't. Or at least historically, firms have not been able to. Companies have said for years that they are going to create a national chain of TPAs, notes Hunt, "but I have yet to see anyone be successful at it."

That's not stopping Amherst, N.Y.-based North American, which has been renamed Meritain Health for its rebirth.

Cooperstone recognizes that service is key. He plans to grow by acquisition, preserving the strong relationships that bind clients to their TPAs while augmenting overall capabilities with enhanced technical resources and expertise.

The need

Industry experts are blunt about the gap between the service and capabilities of the larger and smaller TPAs when it comes to serving midsize employers. The big managed care companies, including Blue Cross Blue Shield, United, Cigna and Aetna (sometimes called BUCA), have the expertise in medical management, cost management, and disease management. Those capabilities cover just about everything employers are pinning their hopes on for cost reduction.

The smaller TPAs have the lock on service. They will do just about anything and everything for their clients, such as being more flexible, customizing plan designs, and doing detailed claims reporting.

Yet Cooperstone asserts that, "In today's marketplace, that's not enough, if it ever was." He faults the current crop of TPAs for what he calls a myopic focus on claims management, shorting the suite of next-generation administration services - wellness along with case and disease management. He also claims that mid-market clients suffer from administrators' modest cost-cutting targets, which are usually pegged to a point or two below health cost trend.

"How good a job am I doing if I am just focused on trying to improve trend ... deliver results that are a couple of percentage points better than trend?" Cooperstone asks. That's why he thinks a national play will work this time around.

Bruce Flunker, president of Milwaukee, Wis.-based Employee Benefit Consultants and a SPBA member, is familiar with such lofty aspirations, typically from the larger carriers. TPAs regularly lose business to carriers promising 20% claims reductions, he says. The problem is those cuts rarely materialize. He knows because he asks if costs declined as expected. "I haven't found [a former client] that says yes," he says.

Carrier promises of dramatic cost reductions, according to Flunker, are predicated on the strength of network discounts. He believes these discounts will lessen as providers demand parity. Once you take away discounts, carriers and administration firms will have to go head-to-head on claims management and other services. He likes his chances, and the collective chances of the broader, diversified market of small and regional TPAs.

"There's a nimbleness in smaller regional TPAs that the market supports," Flunker says, adding that the level of service they can provide - scrubbing through claims - will allow them to find more savings in administering plans than highly adjudicated, highly automated carrier systems.

While Flunker is upbeat about his firm's prospects as a regional player, Cooperstone is confident that industry demographics favor his plan.

Many TPAs came into being with ERISA about 30 years ago. These firms are still owned and operated by their founders, now in their 50s and 60s, who may be considering an exit strategy. The way Cooperstone sees it, these firms can "double-down" and invest in new technology and greater capabilities, or they can go the M&A route.

Hunt is still skeptical. TPAs are just too personalized to be easily subsumed into a larger platform, he believes. "A TPA is like a butterfly. If you touch their wings, they are not going to fly anymore."

An anecdote from a former SPBA member firm explains his point. After moving claims information online, the firm stopped sending out a weekly claims report, which was printed on blue stationery. Hunt says it's a decision most experts would support, preferring 24-7 access and technology enhancements to paper-based record systems. The clients didn't see it that way. They thought the firm was cutting services.

"By renewal of the second year the little blue piece of paper had become a cancer, and all but one client was leaving," Hunt says.
The ability

Meritain is not the only company striving to create a cohesive national presence. Financial services juggernaut Fiserv operates several large regional TPAs, including Wausau Benefits, Benesight and Harrington, among others. The company announced in December it would rebrand and further integrate its regional operations under the name Fiserv Health.

"We wanted to convey through our structure and design the financial strength and stability of Fiserv," Jim Cox, president of Fiserv Health, says. "Combining our business into one TPA is a logical step that allows us to take advantage of our scale and share best practices."

Flunker concedes that size and resources have their advantages. But he maintains that while technological investments are imperative for success in the TPA market, billions of dollars are not needed to be state-of-the-art.

"The technological advancements are critical. If TPAs haven't made them, they will no longer exist," he says. But, he continues, technology costs have come down tremendously in the past five years, and no longer are the hurdle some might think.

Cooperstone argues that technology and regulatory costs are only going to increase. The long-term perspective of Meritain's primary investor, New York-based Caxton Iseman Capital, allows for continued growth and improvement, he says. Caxton, along with Cooperstone's own North Lake Capital, acquired North American in January 2005. Shortly after the purchase, the firm made two acquisitions-North American Benefits Network and Century Planners/Westport Benefits.

Most recently, the company entered into an agreement to acquire the health plan administration side of Indianapolis-based Nyhart. More deals are to come, he says, the available capital is almost limitless.

"I would probably be doing a disservice to the situation if I gave you a figure," Cooperstone says. "There is as much capital as we require to build a large successful formidable competitor in the health care field."

Sherri Camp, Watson Wyatt's national practice leader for administration performance review, says capital can convey stability. Employers want to be able to trust that the company has staying power. The national carriers have that presence.

Camp adds that while the large carriers have not ignored the middle market, it is true they are focused on the large national accounts - 10,000 to 25,000 lives.

"What they are marketing is their national presence, their national networks and how they can provide the higher level of service to those larger organizations." Camp says. Clients that don't meet the national account requirements feel the pain, she adds.

If an organization is large enough, they may warrant a dedicated customer service or claims payment center. Smaller clients are pooled and share resources.

The result

A national firm singularly committed to midsize employers would attract employers' attention, she says.

"There may be some organizations that would be very interested in talking to them, knowing that their focus is on the middle market.

[This concept] may intrigue companies that have 1,000 employees or 5,000 employees and don't feel like they have been getting the highest level of service in the past."

Leo Hefner, a benefits consultant for long-time North American client Egyptian Area Schools Employee Benefit Trust, thinks that the time is right for a national TPA, and that North American has positioned itself to succeed. He is confident North American's transformation to Meritain will allow for even more improvement.

"North American was very proactive and put a lot of money into technology," says Hefner, whose non-profit trust manages the benefits for the employees of 136 school districts in South-central Illinois.

A client of a firm that North American acquired in the early 90s, he says the company knows how to roll up disparate entities into a cohesive unit.

"They haven't just swallowed up TPAs just to get more numbers. They've actually done something about it when they have taken those people in and improved the services that were being offered," he comments.

A more recent North American devotee says the war chest is definitely appealing. But he is less certain that a national TPA is needed.

"Access to more financial resources is a good move for [North American]," says Gregg Conroy, executive director of the Tennessee Independent Colleges and Universities Association Benefit Consortium, which provides medical benefits to about 2,100 employees (3,500 total covered lives) and signed on with North American in August 2003.

"[Capital] gives them the opportunity to expand some areas that they've got going already, such as case management, and to morph that into some of the more state-of-the-art things in the areas of disease management."

However, Conroy suggests, these are things that any TPA needs to do to remain competitive.

"I don't know if you have to be national," he says, "but you must have a commitment of resources to be able to hit some things." - R.L.W.