Outsource the paperwork, never the refusal

Third-party administrators have been part of Indian health insurance since the early 2000s, when the regulator began licensing them to process claims on insurers' behalf. They grew because insurers, especially in group health, needed hospital networks, card issuance and claims processing at a scale few had built for themselves. I spent four and a half years running claims at one, Nirmayam Health TPA in Bengaluru, and I respect the work. I later spent eighteen months at Nilakhya moving our retail health claims away from three administrators to our own hub. Both experiences lead me to the same position.

An insurer can outsource most of the work of a health claim, but it should keep one thing in-house: the decision to refuse or reduce it. The paperwork can travel. The refusal should not.

What an administrator does well

Administrators are good at volume, and at relationships with hospitals in places an insurer's own staff rarely visit. A large administrator may handle claims for several insurers through the same hospital desk, which lets it build data on billing patterns and negotiate package rates that no single insurer could. For group health in particular, corporate clients value an administrator's staff on their premises, who help employees with enrolment, cards and claim forms. When we reduced our group administrators from three to one at Nilakhya, the head of our group business warned that clients would miss those desks. Some did, and two moved their cover elsewhere at renewal.

Administrators are also good at the steady work that surrounds a claim: collecting documents, checking that a policy was in force on the date of admission, coding diagnoses and procedures, and preparing the file for a decision. Much of this is skilled, and a good administrator does it more cheaply than most insurers can. None of it, in my view, needs to be done by the insurer's own employees if the administrator is well run and closely supervised.

The decision that should not travel

The difficulty lies in the moment a claim is refused or reduced. That is when the policyholder learns what the insurance was worth. It is when most complaints begin, and when an insurer's reputation is formed, one family at a time. It is also the moment at which the insurer's own judgement about its policy wording is exercised, and judgement exercised by someone else is not easily explained afterwards.

Indian regulation already makes the insurer answerable for what its administrator does, and treats certain functions as core to an insurer in ways that limit what can be handed to others. In practice, though, an administrator that processes a claim usually prepares the decision, writes the letter and handles the first conversation with the hospital, while the insurer approves in bulk or by exception. The insurer owns the decision on paper. The administrator owns it in fact.

At Nirmayam I saw the consequences from the other side. When an insurer's instructions on a procedure were unclear, our medical officers had to choose between delaying a patient's discharge to ask and making a judgement we were not entitled to make. Either choice could be criticised later. Patients did not know who had decided, and hospitals blamed whoever answered the telephone. At Nilakhya in 2021–22, with three administrators, we found that the same hospital's bill could be treated differently depending on which administrator handled it. Our data could not show us why, because it lived in three systems.

Bringing retail health claims in-house cost ₹62 crore to build and about ₹9 crore a year more to run, net of the fees we no longer pay. The return came in decisions we can stand behind. Every refusal or partial approval now carries a medical officer's signature and a reason in plain words. The median cashless decision fell from 3 hours 10 minutes to 41 minutes, which matters to a patient waiting on a trolley. And our medical audit found about ₹41 crore a year of billing outside agreed packages that had previously been paid, which no administrator paid per claim had a strong reason to find.

Writing a contract around the patient

Not every insurer can or should build its own claims hub. Smaller insurers, and those whose health business is mostly group cover, may reasonably decide that an administrator's scale outweighs the benefits of doing the work themselves. For them, and for our own group business, the contract is where the boundary is drawn. I would suggest three principles.

First, the administrator may approve a claim within agreed rules, but any refusal or reduction above a modest amount should be confirmed by the insurer's own medical officer before the letter goes out, and the letter should say so. Second, the administrator should be paid partly on outcomes the patient experiences: time to a cashless decision measured at the slowest tenth, decisions revised on complaint, and customers who had to call twice. A fee for each claim processed rewards volume and nothing else. Third, the insurer should receive the administrator's claim-level data every day in a form it can analyse across hospitals, so that patterns are visible to the party that bears the cost.

Our remaining group contract now follows all three, and it was not an easy negotiation. The administrator argued, reasonably, that confirmation by our doctors would slow some decisions, and that fees tied to outcomes would penalise it for delays caused by hospitals. We agreed to measure time from receipt of complete documents and to share the cost of disputes over hospital delays. The contract is longer and the fee slightly higher. The refusals are ours.

There is a wider point here about outsourcing in insurance. Contact centres, document processing, investigations and even parts of claims assessment can be bought from specialists, and often should be. What should never be bought is the authority to tell a customer that the promise does not apply. That authority carries the insurer's name, and it should carry an insurer's employee's signature.

The board question I would ask of any insurer is direct. When a policyholder's claim is refused, whose employee made that decision, and could the insurer explain it without first asking the administrator? If the answer to the second part is no, the insurer has outsourced more than paperwork.