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Starting a TPA

by SPBA President Fred Hunt

In truth, there is no how-to guide for starting a TPA.  However, understanding the reasons why not and a few handy suggestions will be your most useful tool.

Almost all TPAs are born in response to an existing need, not just a business idea out of the blue.  Therefore, the new TPA evolves in a form and with customs/services with the existing need in mind.  We always point out that the key to success in the TPA business is personalization personalization personalization, and so it is understandable that the new TPA designs itself to meet the personalized needs of the initial client(s). 

What are examples of some of these pre-existing needs that spawn new TPAs ?

n     Employers or plans that are currently clients of an insurer or other TPA are dissatisfied that they are not getting the level or personalization of service they want, so they encourage someone to start a new TPA.  A variation of this is that an employer/plan now in a fully-insured format wants to move to self-funding, and the best way to do self-funding is with a professional TPA.

n     A person who has been an insurance agent or  has been doing TPA-type of services for just a few services (such as dental or vision or 401k) decides or is encouraged by clients or circumstances to move up to being a comprehensive-service TPA.

n     Insurance companies or HMOs find they are losing clients to TPAs who give personalized service, so the insurance company or HMO decides to create its own TPA option from scratch or by buying an existing TPA.

NOTE:  When SPBA uses the term "TPA", we mean comprehensive-service TPAs, almost all of whom are members of SPBA.  However, since there is no official definition of "TPA" (just as there is no definition of "consultant") it gets used and abused for other things, such as:  people & entities who do some TPA-like duties but only for one or a few services.....and/or  people or entities who do TPA services but on only a tiny basis, such as a law firm running a tiny plan for a client....and/or what I call TPAs-of-convenience, who like to call themselves TPA, but do not  know (or obey) virtually any of the important laws & requirements.

TPAs tend to categorize and describe their firm by the main type(s) of clients they serve.  For example: Taft-Harltey collectively-bargained plans and/or Single Employers and/or "Public" plans (state & local governmental employees such as school districts or city employees and/or "church plans" (employees of a religious body such as a diocese).   The "culture" of these different kinds of sponsors varies  (and some laws) in dealing with the different kinds of clients, so anyone starting a TPA should know which market they are entering.  Most firms will serve more than one of these categories, but one is usually stronger or was the roots of the firm.

NOTE:  SPBA does not have a membership category for entities exploring or just starting up a TPA, because SPBA's legal status is for entities (already) in the TPA business.  So, to join SPBA, a firm must have at least 2 clients for its TPA services.  However, the purpose of this memo is to point you in the right direction and give some reminders, because we are eager to have a successful birth as a TPA and then join the SPBA family.  Hints:

1.  Absolutely important is that the new entity have one or more people guiding the effort who have previous hands-on TPA experience.  The TPA business, applicable laws, and frame of mind is so different from "normal business" and insurance companies or HMOs that you need someone designing and running the firm who understands that.  Probably $100 million has been lost by entities buying or starting TPAs and applying "good management techniques" (meaning textbook business school techniques or even customs common in other businesses or the insurance industry).   So, please get people who have experience in the TPA industry, listen to them carefully, and avoid the temptation to apply "good management techniques".  Disastrous TPAs are a loss for everyone.

2.  Do not build your business plan on optimistic assumptions, either that your whiz-bang unique software or super-duper angle or product will attract hordes of clients or outsourcing or whatever.  In my third-of-a-century in the benefits arena, and almost 30 years as SPBA's President,  I have seen about 500 whiz-bang ideas trumpeted as being the savior and major change of benefits, healthcare or whatever.   Every one of those sure-fire products or services or ideas has flopped and faded away.  So, don't start a TPA on the assumption that your whiz-bang idea will carry it to success.  (Yes, your idea may "work"  and be fool-proof, but the main killer of good ideas is human psychology or that your idea triggers some previously-unrecognized tender point.)

3.  The biggest service of TPAs is not processing & paying claims and such.  No, the biggest challenge for TPAs is understanding and following the incredible maze of government compliance.  Even the seemingly-mundane duties of first reviewing a claim or processing it has potential serious government compliance implications.  (This is the main reason that off-shore outsourcing has been deemed too dangerous by most TPAs.)    The main law, ERISA, can be prosecuted as civil or criminal (jail time), and you can be guilty of things you never knew and over which you had no control (and which may be completely legal in other forms of business)  So, this is one of the biggest services & responsibilities TPAs have and provide for clients.  I'm not saying you need a huge legal staff.  Instead, you need staff from top to bottom who "get it" about each unique situation (for which there may well be no clear official guidance how to comply).  Unfortunately, TPAs have never found a way to be properly compensated for these invaluable duties of keeping the employers and plans free from government headaches and jail. 

4.  Many states have TPA licensing requirements.  Each one is unique.  It used to take about $10,000 of legal fees to research them all.  SPBA does a detailed survey each year, and produces a more detailed TPA State Statutes booklet which we sell for $500.  It has not only a description of the requirements, but also the legal citation and contact names & numbers for the person in charge of the program in each state.  The reason that is important is that licensing may be needed not only in the state where you are located, but also in the states where you have business (sometimes meaning individuals in the plan in the distant state).

Similarly, you will want to be up to speed on reporting and other requirements that your clients will probably have to so, such as Form 5500, COBRA & HIPAA notices and such.  You might not be offering to do those as a service, but it saves you headaches to be sure that there is clear understanding (best in writing) about who will be responsible for those kinds of duties and what data or other facts you will need to provide or receive.

All this advice is given in SPBA's typical candid (but constructive) way.  We want you to be a success.  When you have two clients, give us a call about joining.    You will find that SPBA's services pave the road on most of the challenges described above, and SPBA's two conventions a year have  a unique reputation for giving value to do your work.  They are part of SPBA's goal to have your dues be your most profitable business investment each year.