For small companies, "their systems costs are just eating them alive," said Donley, president of Donley & Co. Inc. "If they lose a couple large clients, all of a sudden they go from being in the black to being in the red."
Donley and others say the skyrocketing cost of doing
business has triggered a wave of consolidation in the Indiana market for benefits administration. Since 2003, larger companies have gobbled or plan to gobble at least seven independently owned third-party administrators.
In fact, Donley and insurance broker Greg Wright can think of only three independents still based in the Indianapolis area, compared with the dozen or so that operated a decade ago. Aside from Donley's business, they are Key Benefit Administrators and Wabash American Benefits, which started a year and a half ago.
"Everybody else is either closed up or sold," Donley said.
Traditionally, third-party administrators, or TPAs, have handled plan administration, billings and other elements of group insurance plans, primarily for employers who self-insure. But their clients are demanding more services-such as Web-based applications and wellness and disease-management programs-contributing to the strain on the industry, Donley said.
Uncle Sam has his demands, too. The federal Health Insurance Portability and Accountability Act, for instance, requires TPAs to receive claims in standardized electronic formats.
"The technology is expensive and the skill set is something a lot of them do not have in-house," Wright said.
Also fueling the consolidation: Many TPA owners are nearing retirement age and winding down their careers, said R. Neil Ropp, president and owner of Fort Wayne-based Core Benefits Inc., an independent TPA that operates across the state.
Avoiding upgrades isn't an option.
"You don't have a choice," Ropp said. "You just can't keep writing things on 3x5 index cards."
Eliott Cooperstone believes businesses in the industry are undergoing a necessary transformation "from the old-style mom-and-pop shop to a true health care company."
Cooperstone is CEO of Amherst, N.Y.-based North American Health Plans, which bought Indianapolis-based Benefit Systems Inc. in 2004 and plans to buy the TPA business of another local firm, The Nyhart Co. Inc., this year.
The consolidation has caused angst among TPA customers like Perry Township, which manages benefits for 127 people through Crown Point-based American Health Care Partnership.
But township Trustee Jack Sandlin wants to look for a new business partner now that American is selling its TPA business to two out-of-state firms. He said he needs to find one that understands the township's relationship with St. Francis Hospital & Health Centers.
"I'm looking for another Indiana company," he said. "I want to be home-based."
Wright, a broker with Consolidated Insurance Services Inc. of Indianapolis, says customers service suffers when TPAs sell to out-of-state firms.
"You don't have the face-to-face relationship," he said. "You're a small fish in the big pond in many cases."
However, companies like North American and CenBen USA, which bought Indianapolis-based Morris Associates in 2004, have kept local offices open after they completed their deals.
"There are many, many things which can and should be done locally where there's no advantage in consolidating those activities in a single location," North American's Cooperstone said.
Baker & Daniels partner Michael Nader isn't writing off smaller TPAs. The Fort Wayne attorney has helped set up several in recent years. "I still think you'll see smaller TPAs continue to be established and giving very competitive services," he said.
Donley's HIPPA-compliant company survives by catering to small businesses providing benefits to fewer than 100 people.
"They want a lot of hands-on, highlevel service," he said. "They like to call into my office and speak to a human being. They hate voice mail."
Tracy Williams founded Wabash American Benefits in Indianapolis after North American purchased his employer, Benefits Systems. Williams said he didn't want to work in the branch office of an out-of-state TPA.
His niche is to provide more sophisticated and efficient technology than the competition. His company offers online enrollment and has 96 percent of its claims arrive electronically.
"I think there is always a place for good local firms that can provide service to people who are their friends and neighbors who own businesses in a local community," he said.
However, that doesn't mean the path to success is easy. Williams said at least six other TPAs started business in the United States around the same time he did.
Today, his is the only one still operating.