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The Concept of Co-Pay and Voluntary Deductions in Health Insurance

As per Mr. Mukesh Kumar- Member of Executive Management & Head Strategy Planning & Marketing, HDFC ERGO General Insurance Company Ltd. the healthcare inflation has hit the roof with 18-20% year-on-year growth rate. The insurance companies are dreading it because their average cost of the premium collection is going down and so is their profitability.

According to a report by the World Health Organization, about 60% of hospitalization expenses in India are being paid out-of-pocket and insurance companies are being subject to only 40%! It is slowly increasing with the awareness amongst the urban Indians, but the health insurance policy is yet a farfetched thing in the villages which comprises of 70% of our economy. The WHO report states that 70% of the Indians spend a major portion their income on healthcare and medicine expenses and 3.2% of the population falls below the poverty line every year because of the high health inflation!

According to a survey conducted by ICICI Lombard, 53% of the insurance companies are worried about their Group Health Policies due to the rising cost contributed by higher claim casualties with parental coverage. In fact, the insurance companies have also decreased the parental coverage from 40% to 30% in the last 2 years and have introduced the option of co-payment. Critical illnesses have gone up by 65% in the year bracket of 26 to 30 years in the past few years.

Understanding Co-Pay and Deductibles

To explain it simply, co-pay is the percentage of the claim that insured agrees to pay from his pocket irrespective of the claim amount. It usually varies from 10% to 30% and group insurance policies insist on the same, especially for parental coverage. The insurer then steps in to make a payment for the balance.

For example, Mr. Mahesh Lamba has filed a claim of Rs. 2 Lakh

Policy Sum Assured Claim Amount Co-Pay Payable Amount Remaining Out of Pocket
Rs. 1 Lakh Rs. 2 Lakh 20% of Rs. 2 Lakh= Rs. 40,000 Rs. 1 Lakh Rs. 60,000
Rs. 2 Lakh Rs. 2 Lakh 20% of Rs. 2 Lakh= Rs. 40,000 Rs. 1.6 Lakh NIL
Rs. 5 Lakh Rs. 2 Lakh 20% of Rs. 2 Lacs = Rs. 40,000 Rs. 1.6 Lacs NIL

It would be simple enough if co-pay were the only payment that the insured is required to make. But the insured is additionally saddled with other insurance expenses such as deductible and co-insurance. Differentiating one from the other can be terribly confusing for a layman. These are murky waters, so let us first distinguish between co-pay and the other insurance costs.

The difference between co-pay and deductible is that the co-pay is a percentage of the claim amount whereas the deductible is a fixed amount. Both these costs must be paid before the insurance coverage kicks in. While the co-pay percentage is specified in the contract, the deductible is calculated on a yearly basis.

The difference between co-pay and co-insurance is that the co-payment is applicable for certain services- e.g. treatments that the insured would not undergo in the absence of insurance or going outside the insurer’s network- while co-insurance represents a percentage of the overall cost of medical care.

This brings us to the big question:

When Does Co-payment Come into Play?

To understand this, it is necessary to comprehend why people opt for health insurance plans. The insured person often opts for medical care that they might avoid in the absence of insurance because their insurance plan will cover the expenses. Aiming to reduce their costs, insurance companies seek to minimize their expenses by adding the co-pay feature.

Now you know why insurance companies add the co-pay clause in health insurance plans. This brings us to the second important question:

Does the Co-pay Clause help the Insured?

The answer is yes. The co-pay clause may indeed hike the medical premium, but it also encourages the insured to exercise restraint when availing healthcare services. Apart from ensuring that the insured does not opt-in for unnecessary procedures (if any), a high co-pay ratio also results in a lower premium. This is a big benefit especially for a healthy person as he/she will be able to avoid paying the co-pay.

Over to You

We hope now you have a basic understanding of co-pay and voluntary deduction. Now at the time of buying a new insurance plan or renewing the existing plan, you would be able to make an informed insurance decision.