Medi Assist Healthcare Services Limited

Anonymous · July 20, 2021, 6:57am

I was excited when Medi Assist filed its IPO papers. I thought it could be a good proxy for growth in the health insurance space in India, and within that space, TPAs provide a mission-critical service. However, as I read more and spoke to more people in the industry, it seems that perhaps TPAs are not the most exciting long-term bet in the healthcare space. I am summarizing my thoughts below in the note. It’s a small write-up focusing on the qualitative aspects – first covering the basics of the TPA business and then reasons why I will not invest in the sector.

What does a TPA do?
A TPA, in simple terms, processes insurance claims filed by policyholders (retail policyholders – like you and me – or corporate policyholders – who buy a group insurance policy for its employees) on behalf of insurance companies (likes of ICICI, Religare, etc.). In return, it receives a fee (which serves as revenues for TPA companies) from insurance companies.

Who is involved in the value chain?
There are largely five parties involved in the insurance claim processing process – (1) insurer - public and private insurance companies which pays out the amount charged by hospitals, clinics, etc.; (2) payor - people who pay the insurance premiums – retail customers, corporate customers or government for insuring low-income group people; (3) intermediaries – TPA, insurance brokers, etc.; (4) care providers such as hospitals, clinics, diagnostic centers, nursing homes, etc.; (5) beneficiary – people who eventually receive the care such as you and me, our family members, group members, etc.

How does the business work?
TPAs receive money from insurance companies for processing the claims i.e. when a patient avails any healthcare services from a hospital, TPAs help to organize a cashless treatment, collects bills from the hospital, checks the bills for accuracy, sends the same to insurance companies. In return for providing the abovementioned services, it receives fees from the insurance companies. It has people on its payroll, who help in carrying out the abovementioned functions.

How do TPAs add value?
Claim processing (checking the bills, ensuring they are not fake, matching these bills against the policy) is a commoditized service. TPAs add value to different stakeholders in the value chain by (1) insurance companies by providing analytical services such as trends in medical expenses claims by an individual policyholder, detecting fraud bills, etc. and by negotiating with hospitals for preferred rates for various treatments (2) Hospitals - flow of patients and (3) patients - cashless services to the payor of the policy.

So, with the basics out of our way, I will summarize the reasons why I will not invest in Medi Assist:

The changing nature of the TPA industry – when TPAs started in 2001/02, they used to provide a suite of services such as negotiating with hospitals on behalf of the insurance companies for preferred (read discounted) treatment rates (key value add by TPAs – healthcare inflation in India is ~8-9% while TPAs controlled healthcare inflation is 4-5%), collecting bills from hospitals, ensuring the accuracy and even making the payment on behalf of insurance companies. However, over a period of time, regulators have restricted the role of TPAs, and as such now insurance companies are directly negotiating with hospitals and making payments to hospitals (two of the main important functions of the TPAs). Currently, TPAs are only taking care of processing the claims and making sure they are correct. As a result, the fees for TPAs, which used to be as high as 5.5% in past have gradually come down to 2-3% of premiums.
Tech advancement – slightly longer term, but tech could automate the claim processing functions. As per one of the industry veterans, about 85% of the total claims are plain vanilla in nature and can be automated, and do not require intervention by TPAs. There are a few start-ups in the South East Asia market, which are developing tools and software to automate the same – Smarter Health, DocDoc, etc. Sooner or later, the same tech would come to India (if I am not wrong i3systems is already doing that) and if successful, it would reduce the role of TPAs significantly.
Incremental growth is from the private players – health insurance is served by two types of insurers – (1) public health insurance companies (40% share in FY20; 11% CAGR in premiums compared to the industry growth of 18% CAGR over CY17-CY20) and private insurance companies (60% share; 23% CAGR CY17-CY20). Private health insurance companies are taking the claim processing function in-house by setting up their in-house claim processing teams. It gives them more control over the claim data, helps them price the premium, and reduces the time to pay the hospitals. On the other hand, the public health insurance companies are currently using TPAs, but they have also set up the Health Insurance TPA of India (HITPA) for their claim processing. As the incremental growth will come from the private health insurance companies and HITPA would continue to scale, it would make lives difficult for the TPAs (which is kind of reflected in the numbers of Medi Assist – its revenues growth is declining on a y-o-y basis and EBITDA margins have also come down from ~30% in FY28 to 23% in 9MFY21).

These are the three primary macro reasons for me to be not very excited about Medi Assist IPO. I believe macro headwinds to the sector could be a bad recipe for good stock returns. Of course, I don’t believe that TPA business would come down to zero – there will always be a need for TPAs in the system especially in group insurance policies (55% of the total premiums) and government-sponsored insurance plans but those pockets are extremely competitive and TPAs primarily compete based on prices (heard that for Ayushman Bharat, TPAs bid as low as INR 2 per family) – but perhaps there are better opportunities in the healthcare sector than investing in TPAs.

Rushikesh_Kulkarni · July 21, 2021, 3:43am

Can we compare TPA to insurance industry to CAMS to Mutual fund industry. TPA will continue to be there, they will be part of back end data processing. Only question that I have is, is there stickiness to MediAssist or any other TPA. Will ther be any consolidation of number of players?

Anonymous · July 21, 2021, 5:46am

There is stickiness for sure - about 99% of contracts are renewed but the size of those contracts is declining. In addition, the fees charged by TPAs are also declining. There are three ways to increase revenues for this business - (1) increase the number of policyholders you serve which is dependent on the overall growth in the industry and sub-segments of the industry. As the incremental growth is coming from the private insurance companies (60% share) that have their in-house claim processing capabilities, the overall TAM growth for TPAs industry is lower than the industry growth. But it will continue to grow - lets say at 10-12% per annum. (2) revenue charged per policyholder (ARPU equivalent in the telecom industry) - now this has been declining over the years as services provided by the TPA is declining - it used to be 5-5.5% of the premium and now it has come down to 2-2.5%. Would this increase - I doubt. (3) Consolidation in the space which I will cover in the next point. Just to close the loop on stickiness - there is stickiness in terms of number of companies you work with but the volume of business you get from customers is coming down.

(2) Consolidation in the space - I feel this is inevitable. There are about 23-24 players in the industry. This is a scale game and the way the industry is moving in terms of digitalization, TPAs will have to invest in their digital capability. Purely because of the size - smaller players won’t be able to afford and they would be up for grab. It’s a good roll-up play. Historically, there has been fairly decent consolidation but the top 4-5 players own about 55-60% of the market. Any incremental consolidation will not materially change the outcome of the business for any of the TPA.

Anonymous · August 4, 2021, 2:15am

Some additional information on the TPA sector from Star Health Insurance DRHP:

Reimagining claim settlement process
The share of TPAs in total health insurance claims paid has decreased from 74% in Fiscal 2016 to 69% in Fiscal 2020. This has largely been on the back of various private insurers enhancing focus towards in-house claims processing. This is because In-house claims processing is relatively faster as the insurer is better equipped to explain expenses that are not covered directly to the policyholder, enabling redressal of grievances quickly. Over the years, insurers have reimagined the claim settlement process for policyholders by accepting digital documents without human intervention, providing real-time tracking of the claim status and cashless settlement to ensure quick and efficient claims processing.

The DRHP also confirms that the insurance companies are entering into partnerships with hospitals directly these days, which is reducing the role of TPAs significantly. In general, I am not a big fan of an industry that is losing market share and therefore would be watching the IPO from the sidelines.

dhairyatrivedi · February 21, 2024, 7:37am

While the Star Health DRHP mentions that the share of TPA’s in total health insurance claims paid has reduced over the last few years, the Frost & Sullivan report says that the premiums serviced by TPA’s have grown at a CAGR of ~20% between FY’17 and FY’23 and are further likely to grow by about 24% CAGR for the next few years. The report also highlights that the share of TPA’s in servicing overall premiums is likely to increase from the current 59% to about 65% by FY’28.
The thesis here is that in the last five years, the dependence on TPAs has increased with insurance companies focusing on the primary business of underwriting risks and marketing policies and outsourcing the claims processing function to TPA.

Medi Assist currently works with 27 of the 28 insurance companies in India and 21 of the 28 insurers use their network to process claims.

The Medi Assist management had the below response to a question on how insurance companies are acquiring TPA’s and the potential impact it would have on a company like Med Assist.

"So, even today, whether it was through an acquisition route or built homegrown, every single
insurer that we work with has the TPA capabilities today across the board and all 27 of them.
And we continue to win business based on the core value proposition that we’ve always
articulated in terms of our ability to understand group benefits better, drive superior retention
for the same insurers and bring in technology, expand cashless and more importantly be with a
neutral party. That actually focuses on balancing all the different perspectives that need to be
brought together across the insurers, policyholders and the network. And that’s where we’ve
consistently grown because of our focus on the core value proposition and being neutral."

The above is one of the key questions that merits a lot of thought.
Bajaj Finserv Health recently acquired Vidal Healthcare Services, a leading healthcare administrator and TPA servicing premium of 5000 crore. What happens in this case going forward?

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Does Bajaj Finserv Health exclusively work with Vidal henceforth? I am guessing not, since the latter manages premiums of 5000 crores. If Vidal is going to work with other insurance providers as well, how comfortable will insurance companies be to work with a TPA which is owned by a competitor?

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If other insurance companies, choose to not work with Vidal, does it not open up a big opportunity for Medi Assist to increase their market share?

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How does Bajaj Finserv Health stay unbiased when it comes to processing claims since they now have vested interests for obvious reasons to not approve them?

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What is the regulator doing in this case to ensure a fair and unbiased claim process?

Would be great to get informed views from people within the industry or otherwise.
Disc: Studying- Not invested yet.

Girish_Kolari · February 21, 2024, 9:57am

On your last 2 questions - As I know there is no restriction Insurance provider should use 3rd party TPA, insurance can have inhouse TPA.

TPA’s don’t introduce fair ness of the claim - most of the time insurance company opt for TPA to reach maximum reach and possible surge in sudden claims like COVID.

drjpatwa · February 21, 2024, 10:16am

I would see this company in a different view. Majority are seeing it as proxy to Indian health Insurance sector. I would say, it is rather proxy to Indian corporate sector.

Rationale -

After covid, people understood & taking separate health insurance policy which reflects sharp rise in Health insurance business etc. But here Medi Assist would not gain much (because majority of private Insurance company have In-house claim settlement team particularly for individual policy).

However, for group insurance business is mainly sources throguh TPA & also majority of PSU individual policy also.
So, as India will have more Organized sectors - They will opt for Group Insurance for their employees which will be source through TPA. So more & more Organized sector jobs (In any sector - IT, BFSI etc.) will lead to more business for such TPA indirectly.

Ayananta_Chakraborty · April 14, 2024, 8:14pm

True, most of the corporate employee’s claims processed through TPA( mostly via mediassist). They get most of the revenue from corporates through group policy.

Tech will be used to automate few dull tasks or will enhance productivity but scrutinizing small things will require human. I don’t know much about the complexity of processing a claim but Health insurance companies will try to outsource this kind of task so they can focus on the core business.

Gautam_Gosar · April 19, 2024, 5:53am

My understanding on why Companies opt for Third Party Administrators (TPAs) over in-house processing are as follows:

Cost Advantage: TPAs offer cost savings for insurance companies. Processing claims in-house can be expensive, especially for smaller insurance companies with health portfolios under Rs 5 billion. In-house processing can cost around 10-12% of the premium collected, whereas TPAs typically cost only 3-5%. Even for larger health insurance portfolios of Rs 10-20 billion, the cost of in-house processing remains higher than using TPAs.

Why TPAs have cost advantage over inhouse processing?
Insurance companies will process claims only for their company. However, as TPA all 32 life insurance and all 30 general insurance companies are open to you. Hence, the scale is very different for TPAs .

Risk Appetite: Insurance companies may not have the appetite to underwrite large corporate policies, such as those with annual premiums ranging from Rs 800-1200 crore, especially for sectors like IT. In such cases, TPAs enable insurance companies to manage these large policies by partnering with government insurers or other companies with the capacity to handle them.
Continuity of Policy: Large organizations value continuity in their insurance coverage and prefer not to change their insurance provider frequently. By using TPAs, companies can maintain a consistent experience for their employees or members, even if they switch insurance providers. This continuity helps in ensuring a seamless transition and maintains the relationship between the organization and the TPA, regardless of any changes in the underlying insurance provider.