Third party administrators (TPAs) in the UAE’s insurance ecosystem face an uncertain future.
It follows the insurance regulator stating that capitation schemes related to the health insurance industry are unlawful, meaning insurance companies are gradually eliminating the third-party role.
Through Circular 17 of 2020 for the Cessation of Violating Practices dated 2 June 2020, the Insurance Authority alerted insurance companies and third-party claims administrators of their respective legal obligations under the current insurance regulatory and legal framework and to cease certain practices which are in violation of the regulatory and legal framework.
As a result, capitation schemes related to the health insurance business in the UAE are unlawful and all insurance agents, authorised and licensed entities, such as TPAs, must immediately cease the operation of such schemes.
Capitation defined
In the context of medical costs, capitation is a common form of payment method related to health services.
Typically money is paid to medical providers in advance at a pre-determined capped rate for a fixed period based on the enrolled member’s medical needs.
Irrespective of whether that member utilises the benefit of care under a capitation model, payment is made to the medical provider.
So, instead of paying per visit, the insurance company would pay a fixed sum for the year for every person enrolled.
“The new circular effectively bans this practice, which means that the insurance company cannot pass on the risk to the TPAs as their role is to manage claims and not to underwrite insurance,” said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, Dubai.
It’s not insurance
Basically, what happens is the TPAs agree on a group insurance policy and premium and take the money.
The insurer will keep a very small portion, as little as 10%, of the premium and the rest goes to the TPA to pay the hospital and/or healthcare provider.
It is common practice for the TPAs to retain another small portion (10%) of the premium and pass on the major part to the provider who has to manage everything with this portion.
In the real sense, it is not insurance.
Singh added: “With the new development, it is not necessary for insurance companies to have TPAs.
“TPA business will be greatly affected and the third–party role will be gradually eliminated as the insurers can manage the claims on their own. Barring the large TPAs, the small players are on the verge of marginalisation and the new circular will speed up their eventual elimination.”
Muddy waters
The system works like this: In a basic package policy, the insurance company will take the premium and, in the event of a claim, pay the TPAs which in turn will pay the hospital.
One of the largest lines of the insurance business in the UAE is health insurance by virtue of the mandatory medical insurance for all residents in Abu Dhabi and Dubai. (The northern emirates are yet to implement it).
In most cases, these tend to be employer group health insurance schemes with a TPA involved as well as a local insurance company, broker, and reinsurance company in the insurance distribution chain.
It is understood that some TPAs were utilising capitation models with local insurance companies, where premiums were paid over to the TPA, which then would negotiate a member rate with the medical provider for the insured group effectively taking on the risk and transferring that risk from the insurer to the TPA.
Carry out audits
“While the Circular provides a warning to the market players, all concerned parties should be aware that Cabinet Resolution No. (7) of 2019 Concerning the Administrative Fines Imposed by the Insurance Authority lists down several fines applicable on violation of existing regulatory and legal framework by insurance companies and TPAs and this, of course, can be triggered at any point,” said Benoy Sasi, international lawyer at DIFC Courts, Dubai.
As a remedial measure, Singh said all insurers should carry out audits of their existing operations with their TPA partners to avoid any regulatory exposure and reputational harm.
This also includes following the local health insurance regulatory requirements under the Dubai Health Authority (DHA) and the Department of Health, Abu Dhabi.
