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Health Insurance in the UAE - Capitation Schemes Confirmed Unlawful by the Insurance Authority

The United Arab Emirates (UAE) Insurance Authority (IA) has confirmed that capitation schemes related to the health insurance business in the UAE are unlawful and all IA, authorized and licensed entities must immediately cease the operation of such schemes.

Circular No (17) of 2020 for the Cessation of Violating Practices dated 2 June 2020 (the “Circular”) alerts insurance companies and third-party claims administrators (TPAs) 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.

Capitation originates from the Latin word “caput” referring to “head” thus meaning headcount of members in the group entitled to the medical benefits. Capitation, in the context of medical costs, is a common form of payment method related to health services, typically 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 utilizes the benefit of care under a capitation model, payment is nevertheless made to the medical provider. While capitation models are common in other jurisdictions to facilitate health benefits and services such as the US and the UK, for all intents and purposes, these transactions do not constitute an “insurable risk” and are more akin to self-insured plans.

Capitation models can be successful in the right legal framework minimizing overutilization of medical benefits and often provide a useful alternative to traditional charging of medical costs such as a “fee for service”. Set against the backdrop of traditional health insurance practices and operations, capitation schemes can provide complexity and uncertainty to insurers and insured members in the absence of proper structures being put in place. Often, capitation models work best with self-insured schemes, an administrator, and a reinsurer or stop loss cover sitting behind the scheme within the right legal framework. This is not the case with the UAE legal framework, which does provide regulation for self-insured schemes and capitation medical insurance models.

In the UAE, one of the largest lines of the insurance business is health insurance due to the mandatory requirements for residents to have in place. In most cases, these tend to be employer group health insurance schemes with a third-party claim administrator (TPA) involved as well as a local insurance company, broker, and reinsurance company in the insurance distribution chain. Over the last several years, we understand that some TPAs were utilizing capitation models with local insurance companies, where premiums were paid over to the TPA, who 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. Such conduct contravenes the current legal framework and specifically, the Insurance Authority Board of Directors Decision No (9) of 2011 regarding the instructions for licensing health insurance claims management companies (“TPA Regulations”).

Article 15 of the TPA Regulations provides and sets out the TPAs’ role and its operational limitations. That is simply to provide claims management and claim administration services and not deal with risk or operate as a risk carrier. For example, TPAs can only settle claims to insured members when authorized to do so under instruction from the insurance company.

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.

We would recommend that all insurers 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.

Authored by Partner and Head of Insurance/Reinsurance Simon Isgar and Senior Associate, Anand Singh
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