The New TPA Dynamics as HCSC Hauls in Trustmark

The recent acquisition will convert HCSC from customer to owner of the ninth largest third-party administrator (TPA) in the U.S in a bullish and rapidly changing TPA market.

Member lives.

While health plan business diversification means that enrollment is not the only way that payers turn a profit, capturing member lives is still a primary objective. And there are many ways to do it: organic growth, partnership, or acquisition, and by direct enrollment, health services contracts—or acting as a health benefits TPA for self-insured employers.

The recent acquisition of TPA Trustmark Health Benefits by Health Care Services Corporation (HCSC) is one example.

"With this acquisition, we're making it easier for employers of all sizes to have access to our expansive provider networks, our data-driven insights and coordinated approach to care that focuses on quality and value," states Kevin Cassidy, HCSC's president of national accounts.

"Of all sizes" refers to the growing number of smaller companies opting for self-insured benefits. It's good for payers. But are these companies really getting the best deal as health plan, TPA, and employer dynamics shift?

Payers 2.0

"Increasingly, large health plans aren't referring to themselves as just insurance companies. They rent their networks and sell disease management and population health programs. A larger percentage of their revenue is toward selling services."

This from HealthLeaders' interview with Ken Janda, a consultant, adjunct professor at the University of Houston College of Medicine, and 40-year insurance industry veteran.

But don't take only Janda's word for it. In 2021, America's Health Insurance Plans updated its trade association name to just "AHIP"—noting that payers are more accurately providers that "play a critical role in making health care better."

That role includes the big business of TPA contracts.

Speaking last fall to TRADEOFFS for another TPA analysis piece, Janda noted: "The large insurance companies like Aetna, Cigna, UnitedHealthcare … all love to act as a third-party administrator. It's safer than being in the insurance business."

For these insurers, TPA contracts represent the bulk of their covered lives: Cigna at 76%, Aetna at 59%, and United at 42%—representing a collective $20 billion in TPA services in 2020.

This is more than the 10 largest TPAs combined (inside and outside of healthcare). These numbers make TPA contracts not just a payer side hustle but a main gig.

"From an insurance company standpoint, if you can get a TPA contract that pays $50 per employee per month and have the employer take the risk, why wouldn't you do that? Even though the revenue is less, it's less risky revenue."

TPAs 2.0

TRADEOFFS notes that the percentage of workers covered by self-funded plans has risen consistently, for all employer sizes, from 1999–2020:

• Small (3–199 employees): from 13% to 23%
   
• Mid-size (200–999 employees): from 51% to 59%
   
• Large (1,000+ employees): from 62% to 92%

As smaller organizations turn to self-insurance with the help of deals like the HCSC-Trustmark acquisition, this trend is likely to continue.

Until it doesn't.

If and when things change, a new generation of TPAs may cut into payer profits, but likely on their way to being acquired. A November 2020 report from FCA Venture Partners stresses the opportunity: "Since 2015, the TPA market size in the US has risen by over 4.8% per year … The TPA industry is $240.5 billion in revenue per year and is the 35th largest market size in the US … [C]oncentration is quite low, however, with the top 10 TPAs accounting for only 3-5% of the total."

FCA adds that it is "bullish on the potential for innovative TPA solutions to have a meaningful impact on runaway healthcare costs and be an attractive driver of value in the healthcare ecosystem."

FCA brands these solutions "TPA 2.0 … because of their superior tech, patient-focused care, and simple user interface," adding: "Realizing this, larger insurance companies have begun buying up both large and small TPA 2.0 tech startups to modernize their claims process."

Companies like HCSC.

Other sources are also bullish on TPAs. A Third Party Administration Market Study by Straits Research cites TPAs as a "valuable asset to self-insuring programs by mitigating costs without sacrificing quality healthcare for employees."

But does this outweigh the risks, challenges, and the benefits of emerging options?

Employers 2.0

Payer TPA upsides are matched by a growing number of employer downsides. As TRADEOFFS notes, these include insurer contracts that may conflict with the best interests of their employer clients—who may also be restricted from accessing their own claims data and end up spending more on TPA as payers charge additional fees for bolt-on services.

"The original idea of a TPA was to save employers money," says Janda. "Most employers still believe they are doing the right thing by being self-insured because they don't have to worry about a risk pool made up of other employers or about the risk margins of pricing insurance."

Drawing from his prior experience with Aetna, Community Health Choice, Humana, Prudential Health Care, he adds that employers have a role to play as well in building a better mousetrap.

"Most large employers have not asked their insurance companies or their TPAs to go out and get them a better deal, so they are complicit in this as well."

Value 2.0

Today, however, employers have more options, including direct contracting with providers as well as ICHRA—the Individual Health Coverage Reimbursement Arrangements enacted in 2020 in which employees buy their own coverage with the help of employer subsidies.

eHealth, for example, is now offering ICHRA "products and services" on its private insurance exchange, noting that smaller businesses may find the option less risky and more affordable.

The confluence of these alternatives with TPA 2.0 will drive both more M&A activity and an employer market that looks very different in the next five to 10 years.

"Right now, employers will continue to look to self-insurance with insurance companies to support them," says Janda. "In the end, however, this will not drive better value. That will come from VBC models that are more conducive to their goals."