Problems and Prospects of TPAs in the Healthcare Industry

IIRM National SeminarMr. Girish Rao

24th January 2012

Why were TPAs created?

Health Insurance was introduced in 1986 and was sold by the 4 state owned non life insurance companies

The industry had grown at 22% CAGR in the first decade. It was still being viewed as ‘accommodation business’

Even in 2001 HI was less than 5% of total premium – this also meant that skills did not get institutionalized

Source: WHO – Health Insurance in India – 2006

The Government’s strategic objective of providing access to a financing mechanism was being fulfilled at a slow pace

Why were TPAs created?

In 2001, the Insurance was set to be privatized. There was a need to create specialized health insurance capacity in order to ensure adequate participation

Health Insurers need to monitor a variety of factors which drive the cost of claims – these require specialized medical and analytical skills

As compared to both, Life Insurance and Non Life Insurance – the interplay of skill bases in the case of Health insurance also included clinical skills

Why were TPAs created?

Source :TTKH TPA

For retail customers – access to “cashless” hospitalization was created via the institution of TPAs

Providing cashless facility helps customers access care at the point of need

Cashless facility significantly contributes to ensuring that latent demand is converted into consumption

Health Insurance - Growth

Source: IRDA, Company balance sheets, indiastat.com Long term projections@ approx 20%

HI Market : Projections are at a long term growth rate of approx 20%

'2001 '2002 '2003 '2004 '2005 '2006 '2007 '2008 '2009 '2010 '20110

10

20

30

40

50

60

70

80

90

100

0

2000

4000

6000

8000

10000

12000

14000

488 676 892 12001612

2221

3209

5125

6625

8305

11627

92.2

74.4

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enta

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f Priv

ate

Expe

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re

Prem

ium

in IN

R Cr

ores

Penetration – 1% Penetration - 2.3%

Out of pocket expenditure

Source: IRDA, Company balance sheets, indiastat.com; WHO Health Statistics

Health Insurance - GrowthWhile the CAGR of premiums collected between 2001 and 2008 has been over 22%, the CAGR of

insurance penetration has been only 12%

Impact of TPAs on HI

Market growth before and after TPAs were introduced

TPAs were instrumental in providing cashless services and networked access to care – which

helped catalyze market growth

Impact of TPAs on HI

•More than 25,000 hospitals and nursing homes all over India, who provide cashless facility to patients*

Creation of a Provider Network with cashless

access to care

•Standard reporting across all TPAs has helped the Regulator create its “Insurance Information bureau” with more than 1 mio records for health insurance

Data Repository

•TPAs have partnered in the rollout of various Social insurance schemes such as RSBY

Administration of Social insurance

schemes*Source: WHO presentation on the Health Insurance Market – June 2010, Asscocham

In sourcing of TPAsStructural shift in the market during 2007-8 when some insurance companies in-

sourced administration

In sourcing of TPAs

Both “INSCO1” and “INSCO2” are large private sector insurers INSCO1 in sourced administration in 2006-7 & INSCO2 had

inhouse TPA

In sourcing has not improved cost containment, if any, it has stifled growth

Source : IRDA

In sourcing of TPAsHealth Insurance Value Chain

TPA skill baseInsurer skill base

In the above value chain – TPAs bring economies of scale across multiple clients and also learnings in areas such as fraud management and tariffing

When Insurance companies build these skills from scratch – they must re-learn these. The operational complexity distracts them from pursuing top-line opportunities

Challenges : Tiny Sector Mindset

Entry Barrier

• Very low and therefore attracted several players

Revenue

• In the first 5 years of operations average top line for each TPA was under Rs 5 crores

Volatility

• Revenue volatility was high and shareholders were not willing to invest

*Source: IRDA Annual reports for the health insurance premium; TPA mkt size is estimated at 5.5% of health insurance market; No of players is based on press clippings and mentions in the IRDA circulars; Average revenue per player is a mathematical average.

Entry Barrier Revenue*

Challenges : Evaluation

Insurers do not price rationally – studies suggest that group insurance premium rates need to increased by 50 to 75% - so that they are rational

Medical inflation is 12 to 15% per annum but premium rates are reset sporadically

Claims management can at most impact the claims ratio by 2 to 3% - It cannot make up for a market deficiency

TPAs are held responsible for the claims ratio which they can influence only marginally and are evaluated on price alone

In the Indian market, premiums are structurally under priced

Future Focus : Network Management

Create preferred provider network of hospitals with specific tariffs

Tariff designed linked to claims pattern and different categories of providers

Utilise core strength of TPAs for customised solutions of network management

Source: TTK Data. Note: A1 to A4 represent different hospital segments however all of them have the requisite clinical skills to carry out complex procedures.

Future Focus : Integrated Partnership

• Large bancassurance portfolio of >100,000 credit card holders

• Claims data available from 2003 onwards. • Adverse claims ratio from 2003 to 2005

(>105%)• Analysis of claims patterns and disease

profiles showed the need to change product features.

• Sub-limits for specific disease and cost elements introduced based on TPA advice.

• Claims ratio improved and since then has been profitable.

Enough evidence to show that TPAs can help change the trend of adverse claims ratios

Future Focus : Long term Partnership

TPA skill baseInsurer skill base Government

Social Health Insurance Value Chain

Social Insurance will be an area of focus in future

There is a case to create a variant of self insured model

Future Focus : Standardisation

Internationally, long term contracts are signed between administrators and insurers

Such an arrangement reduces revenue volatility and enhances capacity / capability of administrators

Payors need to consider TPAs as long term strategic partners to achieve standardization and consolidation

Standardisation across

Ecosystems

Need of the hour is to direct capital towards structures which will help with standardization

Future Focus : Consolidation

Source : IRDA Annual Reports

Scale is a prerequisite for the industry’s survival

Skill sets have been established

Social Insurance (which is TPA administered) requires scale

Consolidation to be actively pursued

Summary

Consolidation

CompetenceScalability

Thank You!

Mr. Girish Rao24th January 2012