A case study on

the recent
discontinuation of
cashless Service by
Various Insurance
Companies

Dr. Amit Murarka

PRN:09040141027
2009-11 Batch
MBA-HHC
 PURPOSE
Recently the tussle between public insurance companies and corporate hospitals turned out to
be a nightmare for medical insurance holders entitled to cashless treatment. Big private
hospitals received denials from public insurance companies for pre-sanctioning of cashless
treatment facility. All are for individual, not corporate claims.

This case study takes a kaliedoscopic view on this issue of discontinuation of cashless
Service by Various health Insurance Companies. An effort has been made to bring out the
concerns of the various stakeholders and how they tried to resolve this issue.
 OVERVIEW OF THE HEALTH INSURANCE SECTOR IN INDIA

Insurance companies have been providing cashless services at over 3,000 hospitals across the
country. People having cashless health insurance policy do not require paying any amount for
treatment at the hospitals covered under the scheme as the hospitals get the cost of the
treatment from the insurance companies.

There are 4 Public sector insurers namely New India Assurance, United India Insurance,
National Insurance and Oriental Insurance and 14 private sector insurance companies. The 4
big public sector companies have almost 60 per cent share in the health insurance market.

There has always been a need to control the claims payout in health as the loss ratio in the
health insurance segment is as high as 120-130 per cent. As against Rs 8,000 crore earned
from health insurance policies, the insurers settled claims worth Rs 11,000 crore in the year
to March 2010. The four general insurance PSUs have losses worth Rs 2000 crore on their
books from the mediclaim segment alone.

The private health insurance sector had been suffering losses in the region of 90% in the retail
segment. In the corporate segment, the average loss is believed to be 125%. In some cases,
the corporate loss is nearly touching 200% mainly because all forms are illnesses are covered
in the insurance package.

The industry is likely to suffer further more because of the absence of stringent law

Insurance
Companies

Industry Body
Regulator (IRDA)
(CII, FICCI)

Health
Insurance
or
Mediclaim
Third Party
Service Provider
Adminstarators
(Hospitals)
(TPAs)

Insured or
Public

Various Stakeholders of Health Insurance Industry

 ISSUES AND FINDINGS

Recently General Insurance Public Sector Association (GIPSA), a parent body of four public
sector health insurance firms, decided to take corrective measures to cut down mounting
losses owing to fake claims including inflated bills or excessive hospital stays due to nexus
between hospitals, patients and third party agents (TPAs). Not only this but it seemed to be
because of higher awareness about insurance benefits and also because of the fact that
operating and capital costs for hospitals in these regions were huge.

They withdrew the cashless Mediclaim policy facility and stopped direct payment of
treatment charges to about 150 high-end hospitals in Delhi (NCR), In Mumbai, the list of
800-plus hospitals was reduced to mere 90 and other metros like Bangalore, Kolkata and
Chennai were also affected. According to the new policy that came into effect from July 1,
2010 Preferred Provider Network (PPN) of hospitals in these cities was prepared. Only those
hospitals willing to adhere to the rate card finalised by the insurance companies could be a
part of the PPN. Earlier, each third party administrator had its own network of hospitals. Now
with the agreement among the four public sector players, the 20-22 TPAs servicing the four
PSUs will have a common list of hospitals in these four cities.

The fall out was primarily the outcome of a recent study carried out by the TPAs where it was
found that only 350 of over 3000 hospitals which were empanelled for cashless service or
roughly 11% were consuming more than 80% of the total claims. It was found that they were
overcharging customers, thus leading to inflated bills. The PSU insurers wanted these
hospitals to fall in line with the rates prescribed to them to check their losses.

News even came out that the Insurance firms were engaging detectives and super-speciality
consultants to examine bills in detail.

This move by insurance companies left the middle-class patients who usually do not have
ready cash available with them in a lurch. Mediclaim policy holders, who wanted to avail the
facilities at these hospitals had to pay out of pocket and could then claim the amount from the
insurer with no guarantee that the entire amount would be reimbursed.
 DISCUSSION AND SOLUTION
In this section we will take the views of all stakeholders regarding this issue and have a look
at how this issue was solved and further course of action planned.

Provider’s View:

One of the representatives from the provider side described the steps taken by the PSU
insurance companies as "retrograde". He questioned how the best private hospitals in the
country could suddenly become bad and taken out of the network of entities providing
cashless treatment facility to insured persons.

Public Opinion

They felt cheated and were fuming. One of the views was that it’s a breach of trust. How can
the insurance companies write-off the agreed contract and What's the point of paying
premiums for a cashless policy if they have to pay during an emergency?

FICCI view
The Federation of Indian Chambers of Commerce and Industry was also critical. Pointing out
that private insurance firms are managing to offer cashless services to policy holders, it
wanted public sector firms to review their decision to suddenly withdraw this facility. They
said that Withdrawal of an important component of a financial contract without sufficient
notice is not fair and just.
Insurance company’s view
Insurance companies said that many leading hospitals were charging exorbitantly for
treatments offered to insurance-protected patients. They felt that overcharging was seen even
after TPAs had worked out differential costs for the same treatments, after segmenting the
hospitals on the basis of location, infrastructure and facilities. They said that for every Rs 100
premium, they have a claim of Rs 140. They claimed that cashless facility was withdrawn
from these high-end hospitals in order to standardize the cost of healthcare and make it
affordable. They further said that hospitals know that they are going to get away easily even
though they may be caught committing fraud. The most one can do is to take them off the list,
which anyway does not affect them much.
They suggest of having tighter scrutiny over the billing pattern of hospitals which charge less
for cash payment and charge more for insurance reimbursements.
Hospitals’ View
The hospitals say the problem is not with their fare structure, but with the policy packages
offered by the insurance firms. How can someone unilaterally claim the price points to be
high without having any scientific evidence? They blame insurance companies of not even
attempting to understand the cost involved in setting up a world-class facility.
Hospitals say the insurance companies do not have a system to offer differentiated products on
risk basis; the fundamental problem is that all insurance policies are value-based and not
ailment-based. As a result, people with the smallest ailment often have the tendency to go for
the most expensive treatment and bill it to the insurance firms. They are suggesting the TPAs
and insurance firms put their desks and representatives inside the hospitals to process each
claim of a doubtful nature. Hospitals even urged insurance companies to re-design Mediclaim
products which were more conducive to both insurance companies as well as service
providers.

In defence to the allegations put by insurance companies regarding the unnecessary referral
hospitals say that If a patient requires examination by a team of doctors then they can't deny
him the care simply because the policy doesn't allow it. If TPAs feel that certain hospitals are
overcharging, they should select hospitals clearly.
The hospitals justify the stand on the down-payment of cash, alleging TPAs of taking up to
six months to clear hospital bills. They even consider insurance companies expecting private
hospitals to provide treatment at CGHS rates irrational.
TPAs View
TPAs blame hospitals of subjecting patients to unnecessary diagnostic tests to inflate the bill.
As a result, only a few medical insurance claims actually get settled. Further they blame
hospitals of making more than three consultants visit the patients twice and also the most
expensive room is offered to policy holders for which they have to pay from their own
pocket.

Above all that, in most hospitals the consultant's visit charges are linked to the room rent.
Higher the room rent, more the consultant's visiting charges and in some hospitals, the cost of
diagnostic tests also varies with the room rent. The interesting part is that a private hospital
gives the same facility at two prices to different set of patients. For example, it has lower
rates for patients who come through the Central Government Health Scheme (CGHS), which
provides healthcare to central government employees and their family members.

It is another known fact - the hospitals donot have any standard rate list for hospitalization.
That leaves them full freedom to quote and charge anything and everything. No one can
verify the standard rates. For the same diseases or surgery, the hospitals are charging different
rates to different patients - especially the ones who are having insurance are charged a lot. If a
lady goes for maternity hospitalization. The same delivery will cost her 25-30K if the amount
is paid from her pocket. However, if it is known that she is covered under insurance, the bill
might as well exceed 50-60K. These extra charges come from the "Extra" Treatment given to
these insured patients. There will be 2-3 doctors visiting her throughout the day and each will
charge a good amount for their visit. There will be extra treatments given. The room charges
will be higher and so on. What may not be known by the patient is that even though she has a
total cover of 4 Lakh, but the amount for maternity claim is restricted to 50K. Hence, if the
hospital charges a total of 60K, she will be required to pay that extra 10K from her own
pocket.
 SOLUTION
The Insurance Regulatory and Development Authority of India (IRDA) interfered by
examining the issue of insurance companies withdrawing the cashless facility for
hospitalisation of patients to Mediclaim policy holders. Whether there had been a breach of
trust between the Mediclaim policy holders and the insurers

The need for a dialogue was precipitated by the 13-day-long gridlock in the insurance sector.
Officials from various insurance companies, healthcare providers; third-party administrators
(TPAs who liaise between hospitals and insurance companies) met under the aegis of the
Confederation of Indian Industry.

At the meeting PSU companies refused to roll back their Preferred Provider Network which
was effective from July 1 onwards but agreed that In next one week Third Party
Administrators would individually meet big healthcare providers in the country to discuss the
finer financial details for restoration of the cashless treatment facility and in 90 days would
work with CII and other stakeholders So that there can be a dialogue to create products and
re-look at products and refine the products so that they become far more effective from all the
stakeholders' view point. They underlined that any hospital willing to adhere to the terms and
conditions were welcome to join the PPN and they showed willingness to deviate by 2 to 3
per cent on the issue of rates. They even identified standard procedure to be followed in 41
types of surgeries in consultation with the doctors and third party administrator (TPAs).

The insurers and the healthcare industry also agreed for gradation of hospitals for the purpose
of mediclaim facilities. According to which hospitals would be graded in three categories
(A,B and C) on the basis of infrastructure facilities and specialities and the Pricing of
surgeries and procedures will depend on the category of hospital. Following this gradation,
there will only be a change in contract between the insurers and the hospitals". For instance,
hospitals that are part of the big chains charged Rs 58,000 on average for a gall bladder
operation. Now, according to the new package deal, a hospital would be offered anywhere
between Rs 30,000 and Rs 48,000 for the same. Similarly, for a cataract operation, the
average payout was Rs 35,000. The new deal provides for a maximum of Rs 24,000, while it
would be Rs 14,000 if the surgery is done at a smaller set-up.

As a result of this meeting a large number of hospitals agreed to provide cardiac treatment
at CGHS rates.

Once the issue is settled between public sector insurers and hospitals, General Insurance
Council could help the private companies by giving them collective guidance. “A basic
framework could be evolved by the industry that hospitals would have to agree to for being a
part of the PPN.
 DISCUSSION

The stand-off between the four state-run insurance firms and leading hospital chains like
Apollo, Escorts/Fortis and Max, is inconvenient for patients. But the decision by insurance
companies to withdraw their cashless payment facility was inevitable, given the evidence of
vastly inflated bills from these hospitals.

“In order to keep Health insurance premiums affordable and viable, all stakeholders including
consumers have to respect and maintain the integrity of the system

That the private hospitals may have been padding bills is entirely believable; corporate
hospitals are not the best examples of patient-centric conduct, and there is no shortage of
anecdotal evidence of doctors ordering superfluous tests in order to raise the billing level. But
these problems are not unique to India, they have been experienced in other countries as well,
and the insurance sector has come up with a variety of responses. One is co-pay — the
insured person has to pay an agreed percentage of all bills and, therefore, has an interest in
keeping bills low.

The hard fact is that corporate hospitals, whose business is paid for by insurance companies
catering to relatively affluent patients, are no substitute for public hospitals, which are few,
under-funded, under-staffed and over-crowded. Indeed, even government employees covered
by the Central Government Health Scheme (CGHS) are now encouraged to go to the
corporate hospitals, with the CGHS picking up the tab (said to be lower in most cases than
what is billed to the insurance companies!). Governments have tried to bridge the gap by
giving private hospitals subsidised or even free land, in return for the promise that a specified
percentage of beds would be reserved for poor patients who would get subsidised or free
treatment. The scandal is that the corporate hospitals have invariably reneged on such
promises, and not been held to account. The other malpractice, on which the Medical Council
of India or its successor should crack down, is the business of giving doctors a percentage cut
on the bill, thus incentivising doctors to become party to the price-gouging. So, it is just as
well that the four state-owned insurance firms have decided to form a Preferred Provider
Network of hospitals which agree to charge patients within a price band for various medical
procedures.

“Today most of the products are based around the total sum insured. So people who have
coverage, they basically believe that 100% of that coverage can be spent on one
hospitalisation around one treatment protocol, whereas the ideal thing would be. It becomes
more procedure based, there is a cap on the procedure, again based on the category of
hospitals, based on a room category and so fundamentally what we really need to look at is
redesign of the entire product which becomes more procedure based rather than sum insured
and sum covered based.”
 RECOMMENDATIONS

Firstly, insurance companies need to design products which have sub-limits. Another way is
that the insurance company and the customer share some part of the claim (as is a practice in
more advanced nations).

Customers should become more prudent with their choice of hospitals and rooms. They
should question hospitals as to how billing is being done. If customers do not have a stake in
the control of costs, no model will work.

Insurance companies need to start comparing cost of various treatments across hospitals and
fix the maximum amount that will be paid to hospitals for a particular procedure. This cost
across hospitals should be widely published. The Government should start investigating
hospitals where cost is continuously high and take action for over-charging.

Group policies need to move to self-insurance by corporations and management by either

Third Party Administrators (TPAs) or insurance companies so that companies become lot
more careful in offering benefits (this has already started in the last one year).

Few Examples:

New insurance companies are now experimenting with a 'No TPA' model to ensure hassle-
free claim settlement to their consumers. The Max Bupa health insurance policy has done
away with TPA. The company feels that TPAs take a lot of time to settle claims. The
company also claims to be taking stringent measures to ensure its empanelled hospitals don't
overcharge, Before they include any hospital in their network, they visit them to know the
facilities available, check the published rate card and details regarding the claims etc.

HDFC-ERGO General Insurance has identified 700 hospitals across India that were either
hiding material facts or submitting bogus or inflated bills. Apollo Munich Health
Insurance has blacklisted 123 hospitals in the country after its probe revealed that many were
indulging in dubious practices.

Star Health Allied Insurance identified nearly 20% of the hospitals in Mumbai that were
indulging in practices that can be termed unethical. Apart from common types of frauds,
some of these hospitals had dual billing policy—one for the insured and other for non-
insured.
 CONCLUSION

The recent decision of insurance companies and TPAs to stop extending cashless mediclaim
to patients in some cities looks hasty and uncalled for. Agreed that some hospitals (often in
collusion with patients) are inflating bills or indulging in fraudulent claims (which is
estimated at 10 to 15 per cent of total claims), and that besides motor, health insurance is
most prone to insurance-related frauds, but penalising policy holders for misdeeds of some
healthcare institutes has been an erroneous decision and a regressive move. Differences are
bound to surface in the fledgling health insurance sector between insurance companies, TPAs
and hospitals. After all, it's just a decade that private players were allowed to enter the
insurance industry. What may have evaded our observation is that the Government has
introduced a service tax of 10.30 per cent on insurance companies for cashless claims from
July this year and that could well be the reason for insurance companies' reluctance on
cashless claims.

It's indeed a good tiding that some hospitals, TPAs and insurance companies are in discussion
to devise a viable tariff card for medical procedures, but some long-standing concerns need to
be addressed, immediately. The basic concern is that general insurance companies are
bleeding in health insurance portfolio. But the irony is that health insurance sector is showing
a steady growth. Estimates state that the medical insurance sector, which collected a premium
of Rs 8,100 crore in 2009-2010, would account for $ 3 billion in the next three years, up from
the estimated current size of over $ 1 billion.

So, what can be done to ride the growth and reverse losses? The first step would be to design
and sell the right health policy, to understand risks properly and not be in a hurry to
underwrite policies to just meet targets. Some hard-hitting questions like: Are all medical
officers in charge of doing risks assessments of potential policy holders doing their job
properly? Are the medical tests one is supposed to undergo fool-proof enough to expose the
risks? How is that potential policy holders are getting away with hiding risks? Why is that
GICs selling health insurance as a rider and then claiming that their health portfolio is in a
loss?

A lot more work is needed in not just designing the right policy, but also in tightening the
loopholes to stop fraudulent claims. It's estimated that the Indian health insurance sector is
losing approximately Rs 1,000 crore on false claims every year. Besides depleting the
insurance companies, fraudulent claims also impact policy holders, as the latter have to pay
higher prices for insurance products. So, preventing fraudulent claims should be addressed
urgently. India should take a leaf out of the US, where to prevent losses over $ 30 billion
annually to healthcare insurance frauds, the Government has introduced Health Insurance
Portability and Accountability Act (HIPAA) that makes insurance frauds a criminal offence
liable to imprisonment of over 10 years and financial penalties, depending on the nature of
the crime. Besides stringent laws, we also need to create awareness about the dangers of
committing frauds; we need to mainly address the smaller healthcare institutes, where such
incidents are reported more often. Some studies have shockingly revealed that people feel
that there is nothing wrong in inflating bills, as insurance companies/TPAs would anyways
reject some of the claims. Such misguided notions need to be corrected. We also need to have
more qualified people in detecting fraudulent claims.
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