Medi Assist Healthcare Services Limited

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:

  1. 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.

  2. 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.

  3. 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.

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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?

  1. 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.

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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.

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