INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
Role of Third Party Administrators – An Approach Paper
The Indian health care system, one of society's largest and most influential institutions, is on the threshold of profound cultural and structural changes because large buyers of services are wresting partial control from providers in order to restrain escalating costs. Major corporations and insurers have been rudely awakened from the spiraling of medical expenses paid by them and are aggressively pursuing methods to curtail medical costs from continuing to rise at about twice the general rate of inflation.
These large purchasers are buying medical services in volume at wholesale prices and even dictating terms, a radical change from the long-held custom of individuals and/or their insurers paying for their care in retail on a case-by-case basis. Institutional buyers want to know what they are getting for their money, a simple question that has threatened the autonomy of physicians and hospitals to the core because the answers require detailed data, close scrutiny, and ultimately professional judgment of whether the services are worth their cost. The nature of insurance is being changed as buyers and insurers shift the risk of costs to patients and providers. Increasingly, the fiduciary relation between doctor and patient is being tested, by competition for business and prepayment, while before it was compromised by paying the doctor every time s/he did a procedure.
The corporate practice of medicine began in the public sector industries and large corporates, where remote locations, high accident rates, and the growth of lawsuits by injured workers called for some corporate form of health care. These industries contracted for medical services on a retainer basis or on salary; some even owned hospitals and dispensaries for their workers. Thousands of doctors were involved in these contracts or worked on salary. By the end of the 20th century, however, more and more businesses with none of these special needs also began to contract on a competitive basis for the health care of their employees. Commercial insurance companies of the day also got involved, putting together packages of services for a flat amount per person per year (capitation) or for a discounted fee schedule.
More widespread than early corporate health care plans are rapid comprehensive health care services offered for a flat subscription price per year to members of a group. This concept has proliferated rapidly in the recent past. Informal reporting attests to the prevalence of such plans and of "contract practice", as competitive health care. Practically all the large cities are fairly honeycombed with nursing homes, steadily increasing in number, with a constantly growing membership. The government has also become involved in organised buying near the turn of the century. Municipal and state agencies are thinking of putting out for bid service contracts for the poor, and also for civil employees.
In response to these developments, more and more physicians compete to provide medical services at discount fees or for a low capitation fee. This greatly threatens independent practitioners, who are already facing keen competition from the glut of doctors being trained at proprietary medical schools, and from other kinds of doctors such as homeopaths, osteopaths, naturalists, and chiropractors. Equally threatening to professional status, the institutions or organizations writing these contracts set the conditions under which medicine should be practiced.
Third Party Administrators have had a tremendous impact on the hospital industry and on the health care system in general. Hospital administrators seem so concerned that they quickly cut staff, reduce inventory, and have briefing sessions with physicians to encourage shorter stays. They establish internal monitoring systems to weed out or re-educate those providers who run up expenses with too many tests or procedures. Secondary industries arise around maximizing payments and around clinical management systems. Profits (or surpluses) subsequently reach an all-time high, but the era of dehospitalization has begun. Insurers responded to the profits by paying less. They do not give the insurers an increase as large as overall medical inflation. As a result, profits and surpluses have dropped to razor-thin levels, and many hospitals run deficits. Admissions and length of stay continue to decline.
Such integrated delivery systems bring all the components of health care delivery - such as physicians, hospitals, clinics, home health long-term care facilities and pharmacies into a single entity – and takes upon financial risk. Insurers expect the TPAs to deliver high quality health care and services at less cost; balance cost of treatment with the need to provide more comprehensive health promotion and disease prevention. The utilization of such a system encourages appropriate treatment, discourages over treatment, encourages preventive care, and attempts to promote cost containment and quality health care delivery.
These fundamental changes -- and the resistance to them -- are easier to describe than to analyze. The purpose of this approach paper here is to provide a framework for understanding the role of Third Part Administrators in the Indian health care system that is going to shape up tomorrow.
1.Definition: A Third Party Administrator (TPA) is an insurance intermediary licenced by the Authority who either directly or indirectly, solicits or effects coverage of, underwrite, collect, charge premium from an insured, or adjust or settle claims in connection with health insurance, except as an agent or broker or an insurer.
2.Eligibilty and capital adequacy norms: (1) A TPA should be a company formed under Companies Act, 1956 and must always be financially sound.
(2) The TPA shall possess a net worth of Rs. _______ when it applies for a licence from the Authority, and must maintain a net worth of Rs. _______thereafter at any point of time.
(3) In addition a deposit of Rs. --------has to be made with the Authority at the time when the TPA applies for a licence.
(4) It must also submit to the Authority before 30th September of each year an annual financial statement indicating its position.
(5) It must also have satisfactory administrative and managerial arrangements in place.
Explanation :—For the purposes of this regulation "net worth" means the paid up capital of such body corporate increased by its surpluses and free reserves and reduced by any losses carried forward. . Loans advanced to directors and shareholders shall not count as assets for the purposes of this computation and net worth should be in the form of easily realisable assets.
3. Responsibility of the insurer: The insurer will be responsible for determining the benefits, premium rates, underwriting criteria and claims payment procedures that shall be followed by the TPA. Additionally, any reinsurance requirements for this line of business carried on by it will be arranged by the insurer.
4. Agreement: (1) No TPA shall act as such without a written agreement between the TPA and the insurer, and such an agreement shall be retained as part of the official records of both the insurer and the TPA for the duration of the agreement and for five years thereafter.
(2) The written agreement shall include a statement of duties which the TPA is expected to perform on behalf of the insurer, and the types of policies of insurance which the TPA is authorised to administer.
(3) The agreement shall make provisions on underwriting or other standards pertaining to the policies underwritten which the TPA will adopt while acting so.
(4) The insurer or TPA may, by written notice, terminate the agreement for cause(s) provided in the agreement. The insurer may suspend the underwriting authority of the TPA during the pendency of any dispute between them.
(5) The insurer shall fulfill all lawful obligations with respect to the policies covered by the written agreement, regardless of any dispute between it and the TPA.
5. Application for licence: Every person seeking a licence to function as a TPA shall apply to the IRDA in the prescribed form along with an application fee of Rs ----- payable in the form of a Demand Draft drawn in favour of Insurance Regulatory and Development Authority and provide the following:
(1) On the application form provided by the Authority, information relating to the organizational structure of the applicant as follows:
(a) The name under which the applicant will transact business as a TPA;
(b) The principal place of business at which the applicant will transact business as a TPA, including the street and mailing addresses and telephone number;
(c) All assumed business names and other names under which the applicant will transact business as a third party administrator;
(d) Whether the applicant has ever had a decision or judgment entered against it for fraud, and whether any insurer, agent or any other person claims that the applicant is indebted to him and if so the details of any such indebtedness.
(e) Whether any license issued to the applicant by any authority, organisation etc. to act in any occupational or professional capacity has ever been refused, revoked or suspended, and whether the applicant has otherwise ever been the subject of a complaint to a professional licensing board or agency. (If the applicant's answer is affirmative, it must also provide the name and address of the licensing board or agency, the date of the complaint or the action taken against the license, a description of the nature of the complaint or the reason for the action taken against it and the result thereof).
(f) Whether the applicant has ever filed for insolvency or has been adjudged an insolvent;
(g) The names, addresses, official positions and professional qualifications of the individuals responsible for the conduct of affairs of the TPA, including all members of the board of directors, board of trustees, executive committee or other governing board or committee; its principal officers, shareholders holding directly or indirectly ten percent or more of the voting rights of the TPA, and any other person(s) who exercises control or influence over the affairs of the TPA.
(h) Names, addresses alongwith telephone numbers of the statutory and internal auditors of the TPA.
(2) Biographical information of each director and principal officer of the applicant.
(3) The following documents shall be furnished alongwith the application:
(a) Memorandum and Articles of Association, trade name certificate, trust agreement, share-holder agreement and other applicable documents together with corrections thereof, if any.
(b) The regulations by way of bye-laws etc. regulating the internal affairs of the applicant;
(c) Annual financial statements or reports for the two most recent years. The Authority may require the applicant to provide, by notice, additional information in order to review the current financial condition of the applicant;
(d) A statement describing the business plan, including information on staffing levels and activities proposed. The plan must provide details setting forth the applicant's capability for providing a sufficient number of experienced and qualified personnel in the areas of claims processing, record keeping and underwriting;
(e) Evidence of professional indemnity insurance throughout the validity of the period of licence granted by the Authority, in compliance with section 13 of this regulation;
(f) If the applicant will be managing the solicitation of new or renewal business, proof that it employs or has contracted to employ an agent/ broker licensed by the IRDA.. Any applicant that intends to solicit directly insurance contracts or to act otherwise as an insurance agent/ broker must provide proof that it has a license to function so.
(g) If the applicant has any arrangement or tie-up with an organisation outside India extending similar facilities, to furnish such details.
6. Consideration of application. (1) On receipt of an application for licence to function as a TPA, the Authority will conduct such enquiries as it deems necessary to assure itself that the applicant has sufficient financial and organisational strength to function as a TPA and the grant of such a licence will be in public interest.
(2) The Authority on being satisfied shall issue a licence to the applicant : the decision of the Authority to grant a licence or not to the applicant shall be communicated to the applicant within 90 days of receipt of application. In ordinary circumstances, the Authority, before rejecting an application, shall grant an opportunity to the applicant or its representative to be heard. The Authority while rejecting an application shall record its reasons for doing so.
(3) A licence granted by the Authority under the provisions if not utilised for starting operations as a TPC by the applicant within 120 days of its grant, will automatically lapse and the applicant will be barred from applying again to the Authority to act as a TPA for two years thereafter.
7. Amendment of information. A TPA shall notify the Authority in writing when it change in ownership takes place other facts or circumstances affecting its qualification for a licence, or changes in principal place of business shall also be communicated to the Authority. The notice shall among others indicate the following:
(1) the new street address, including city and state;
(2) the new mailing address, if different;
(3) the new telephone number.
8. Solvency requirements — (1) Every TPA shall, throughout the period of licence, either originally granted or renewed from time to time maintain a solvency position which will be an excess of the value of its assets over its liabilities of an amount – plus Rs._____ lacs or ___ percentage of the average of the commissions, fees and other charges received by it in the previous three years of its functioning.
Explanation :- For the purposes of this regulation¾
(a) "asset" means only those assets which are in the form of cash or can reasonably be expected to be turned into cash within one year from the date of the balance sheet;
(b) 'liability' means all liabilities of the business including contingent liabilities acknowledged by the TPA or not;
(2) If, at any time a TPA does not maintain the required solvency margin in accordance with section 8(1) above, it shall, in accordance with the directions issued by the Authority, submit a financial plan indicating the corrective steps that are proposed to be taken by it within a period not exceeding three months to put it in a sound position.
(3) A TPA, which has submitted a financial plan to the Authority, shall abide by the modifications to the plan suggested by the Authority.
(4) Every TPA shall furnish to the Authority a statement certified by a practising chartered accountant of the required solvency margin and the actual solvency margin at any point of time and alongwith the annual financial statements.
9. Validity of licence. A licence once issued shall be valid for a period of three years from its issue.
10. License renewal. (1) A TPA applying for renewal of the license must:
(a) Submit a completed renewal application in a form provided by the Authority before the expiry of its current licence. If mailed, the renewal application must be postmarked by the Post Office not later than the license expiration date;
(b) pay a renewal fee of Rs. ______.
(2) The Authority may require a TPA in not more than 30 days time to correct or supplement the renewal application, if the renewal fees have been submitted on or before the expiration date.
(3) The Authority may require the applicant to furnish it any details or information required in connection with the applicant and proceed to decide on the application in the manner laid down under regulation 6 supra.
11. Exemptions from TPA license requirements. (1) A health care provider that contracts with an insurer to provide health care services to holders of health insurance policies issued by an insurer and is compensated for such services in any manner is exempt from seeking a licence under these regulations if the insurer and the provider satisfy the conditions mentioned below:
Explanation: For the purpose of this section, a "health care provider" or "provider" means a licensed health care facility or group of such facilities or any similar health care organization, including a hospital group with a network of hospitals, with a minimum net worth of Rs. ____ to be maintained at all times.
(2) The conditions required to be included in the agreement are as follows:
(a) The primary contractual responsibility of the provider is the delivery of health care services to holders of insurance policies and the administrative duties performed by the provider for the insurer are in support of the delivery of health care services;
(b) The administrative duties performed by the provider for the insurer are limited to the adjusting or settling of claims for holders of insurance policies and the insurer retains the responsibility for providing competent administration of its insurance policies;
(c) The insurer performs all functions that pertain to soliciting and effecting coverage, underwriting, collecting of premiums, determining plan benefits, determining premium rates and securing any reinsurance for the insurer's obligations;
(d) The rules pertaining to the adjusting or settling of claims are provided in writing by the insurer to the provider;
(e) The insurer conducts atleast once a year or as frequently as it decides a review of the claims-related activities performed by the provider for the insurer to ensure that those operations are in compliance with subsection (b) of this section;
(f) The provider allows the insurer access to the relevant financial books and records at all times;
(g) The provider allows the insurer access to the documents, data, books and records maintained by it that evidence the activities performed by it for the insurer to ensure that a proper administration of the claims is taking place;, and the insurer shall give access to those books and records to the Authority whenever the Authority wants;
(h) the provider will enable the insurer to determine the financial ability of the provider to fulfill its responsibilities under the agreement, and both parties assure that confidentiality of financial and patient records is maintained in accordance with requirements of the law;
(i) The insurer makes certain that the administrative books and records of the provider that document the claims-related activities performed for the insurer are maintained by the provider in accordance with prudent standards of insurance record-keeping and that such books and records are maintained by the provider for a period of not less than five years and of the period to which they relate;
(j) the liability of the provider to maintain records and give access to the insurer or the Authority in terms of this section will not in any way be affected by the termination of the agreement between the provider and the insurer.
12. Exemption registration. (1) A health provider is exempt from the licensing requirements shall register with the Authority annually by paying a filing fee of Rs. _____. In its application, the it shall indicate clearly the reasons for seeking the exemption and specify:
(a) the names, business addresses, mailing address under which it carries on business as a health provider if it is different from the business address, and telephone number already given; and
(b) whether it is acting as a health provider for one or more insurer(s)
(2) If the Authority determines that a health provider does not qualify for the exemption it must obtain the license in order to transact business as a TPA.
13. Professional indemnity insurance: (1) The amount of professional indemnity insurance which a TPA must secure and maintain throughout its period of licence is Rs. ______ or _____
(2) A TPA may obtain such an insurance from an insurer other than the one with which it has an agreement to act as a TPA.
14. Insurance money segregation — Subject to the provision of section 64VB of the Insurance Act, 1938, every TPA shall :
(1) act as the trustee of the insurance money that is handled by it.
(2) ensure that 'insurance money' is held in an 'Insurance Bank Account' with one or more approved scheduled banks or with such other institutions as approved by the Authority;
(3) give written notice to, and receive written confirmation from, the bank, or other institutions that it is not entitled to combine the account with any other account, or to exercise any right of set-off, charge or lien against money in that account.
(4) ensure that all money received from or on behalf of an insured is paid into the 'Insurance Bank Account' which remains there until it is transferred on to the insurer or to the insured.
(5) remove from the 'Insurance Bank Account' charges, fees or commission earned and interest received from any funds comprising the account.
(7) take immediate steps to restore the required position if at any time he becomes aware of any deficiency in the required segregated amount.
15. Premium collection and payment of claims: (1) All insurance charges or premiums collected by a TPA on behalf of or for an insurer or insurers, and the return of premiums received from the insurer or insurers, shall be held by the TPA in a fiduciary capacity.
(2) The funds shall be immediately deposited in separate bank account maintained by the TPA with a scheduled bank.
(3) The written agreement between the TPA and the insurer shall provide for the TPA to render periodically an account to the insurer detailing all the transactions performed by the TPA pertaining to the business underwritten on its behalf. Separate escrow accounts have to be maintained in respect of each insurer if the TPA acts for more than one insurer
(4) The TPA shall not pay any claim by withdrawals from the escrow account in which premiums are deposited. Withdrawals from the account shall be made as provided in the written agreement between the TPA and the insurer.
(5) The written agreement shall address, but not be limited to the following:
(a) remittance to an insurer
(b) deposit in an account maintained in the name of the insurer
(c) transfer of deposits in a claim paying account,
(d) all claims to be paid from funds collected on behalf of for an insurer through demand drafts on crossed cheques of and as authorised by the insurer.
(e) payment to the administrator of its commission, fees or charges; and
(f) remittance of return premium to the persons entitled to such return premium.
(6) A TPA shall not enter into an agreement or understanding with the insurer which has effect of making TPA’s commissions, fees or charges contingent upon the savings effected in the adjustment, settlement and payment proof losses covered by the insurer’s obligations. This provision shall however not prohibit a TPA from receiving performance based compensation for providing services nor shall prevent the compensation of a TPA from being based on premium charges collected or the number of claims paid or processed.
16. Payment to TPA: The payment of return premiums or claim payments forwarded by the insurer to the TPA shall not be deemed to have been paid to the insured party or claimant until such payment is actually received by the insured party or claimant. Nothing in this section shall limit any right of the insurer against the TPA resulting from the failure of he TPA to make payments to the insured parties or claimants.
17. Approval of Advertising: A TPA shall advertise the business underwritten by an insurer that has been approved in writing by the insurer prior to its use. The insurer and the TPA will be governed by the regulations made by the Authority in this regard.
18. Maintenance of information: (1) Every TPA shall maintain and make available to the insurer complete books and records of all transactions performed on behalf of the insurer. The books and records shall be maintained in accordance with prudent standards of insurance record keeping and must be maintained for a period of not less than five years from the end of the period to which they relate.
(2) The Authority shall have access to the books and records maintained by the TPA for the purposes of examination, audit, and inspection.
(3) The insurer shall possess the records generated by the TPA pertaining to the insurer; however, the administrator shall retain the right to continuous access to books and records to permit the TPA to fulfil its contractual obligations.
19. Withdrawal/ Cancellation of licence: (1) The licence issued by the Authority to a TPA can be revoked, withdrawn or cancelled at any time during its validity period by the Authority giving the TPA a notice of its intention to do so. Before the Authority revokes, withdraws or cancels a licence the representations of the TPA, if it chooses to do so, will be heard and the Authority shall communicate its decision, soon after the hearing
(2) The Authority however, at its discretion and without any advance notice or hearing may suspend immediately the licence for one or more of the following reasons to be recorded by it in writing:
(a) the TPA is insolvent or impaired;
(b) the financial condition or business practices of the TPA otherwise pose an imminent threat to public health, safety or welfare of the public.
(c) the TPA has refused to be examined or to produce its accounts, records and files for examination, or if it has refused to give information in respect of its affairs, or comply with any other requirement of the Authority.
(d) the TPA has, without just cause, refused to pay proper claims or perform services arising under its contracts or has caused covered individuals to accept less than the amount due to them.
(3) Nothing prevents the Authority to levy a fine against the TPA, after giving it due notice, for any breach of or violation of the requirements of these regulations. Such a fine, however, may not at any one time exceed Rs._____
20. Annual Report Requirements. (1) A TPA shall include in its annual report a balance sheet and income statement for the immediately preceding financial year. The balance sheet and income statement must each be verified by two of its directors. Each annual report must be filed not later than June 1 of each year, or such extension of time as the Authority may prescribe grant on application to it by the TPA.
(2) The Annual Report shall include the complete names and addresses of all insurers with which the TPA had an agreement in the preceding financial year.
(3) At the time filing its annual report, the TPA shall pay a filing fee as prescribed by the Authority.