1. Problems and Prospects of TPAs in the Healthcare Industry IIRM National Seminar Mr. Girish Rao 24 th January 2012

2. 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

3. 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

4. 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

5. Health Insurance - Growth Source: IRDA, Company balance sheets, indiastat.comLong term projections@ approx 20% HI Market : Projections are at a long term growth rate of approx 20%

6. Source: IRDA, Company balance sheets, indiastat.com; WHO Health Statistics Health Insurance - Growth While the CAGR of premiums collected between 2001 and 2008 has been over 22%, the CAGR of insurance penetration has been only 12%

7. 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

8. 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

9. In sourcing of TPAs Structural shift in the market during 2007-8 when some insurance companies in- sourced administration

10. 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

11. In sourcing of TPAs Health 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

12. 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 Tiny Sector Small size and fragmentation created a “Tiny Sector” mindset *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 BarrierRevenue*

13. 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

14. 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.

15. 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

16. 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

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

18. 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

19. Summary Consolidation CompetenceScalability

20. Thank You! Mr. Girish Rao 24 th January 2012