Co-payment in Health Insurance

What is Co-payment?

Co-payment refers to the amount of claim that should be borne by the insured during the settlement of a claim. The co-payment amount depends on the co-payment clause mentioned in the policy. Irrespective of the claim amount, the insured has to settle their part before the insurance company makes the final payment. The co-payment could vary between 10% and 50% depending on the health insurance plan chosen by you and the insurer. Even group health insurance plans have a co-payment clause to reduce the overall payable premium. Co-payment is a way of making the insured behave as the insurer so that the insured absorbs a part of the risk. There are two types of co-payment: Mandatory and Voluntary. Mandatory co-payment is compulsory for every customer taking the health insurance plan. For example, a senior citizen health insurance plan with a 10% mandatory co-payment is the same for every customer taking the policy. However, Voluntary co-payment is not compulsory. One can opt for voluntary co-payment to reduce the overall premium payable under the policy. Remembering that voluntary co-payment would be over and above the mandatory co-payment is important. Mandatory co-payment is applied at the time of claim settlement, and then voluntary co-payment is considered. Once the customer settles the mandatory and voluntary co-payment amount, the insurance company will settle the remaining claim amount up to the sum insured limit.

Example 1: Mr. Anand, aged 65, has taken a health insurance plan from XYZ insurance company for Rs. 10 lakhs sum insured. The plan came with a compulsory co-payment of 20% for every claim made during the policy period. One bad day, while jogging in the park, he was chased by a street dog and fell, leading to fractures in both limbs. He was urgently taken to a nearby medical facility, where he was operated for the injury. The final hospital bill came to Rs. 5 lakhs, and he was delighted that his health insurance plan covered the amount. But at the time of claim settlement, he was told that he had to bear Rs. 1 lakh, which is a part of the mandatory co-payment. Effectively, the insurance company would settle Rs.4 lakhs only after Anand pays the mandatory co-payment amount. This way, the mandatory co-payment would apply to every claim made during the policy period in a health insurance plan.

Example 2: Mrs. Anandita, aged 25, had taken a health insurance plan for Rs. 10 lakhs from ABC insurance company. Since she was young, she thought she wouldn’t use the policy much and, therefore, went for a voluntary co-payment of 20% of the premium. The policy came with an inbuilt mandatory deductible of 10%, thereby taking the total co-payment to 30%. One day, when she was traveling to work, she met with an accident requiring immediate hospitalization. The hospital bill came to Rs. 6 lakhs, of which she had to bear Rs.1.8 lakhs (30% co-pay) and the insurance company settled the remaining amount. She then understood the drawbacks of opting for voluntary co-payment to reduce the premium by a few bucks. She had to shell out nearly 20X the claim amount compared to the amount she saved by opting for voluntary co-payment.

How Does Co-payment Differ From Deductible/ Excess?

Co-payment is similar in terms and conditions to excess or deductible. Excess or deductible is another word for co-payment, widely used in other non-life insurance plans. Excess or deductible refers to the amount the insured customer has to bear at the time of claim settlement. Excess or deductible is used when the insurance company pays the claim amount to the customer, in which case the customer need not spend anything from his/her pocket to get the remaining claim amount. The excess or deductible mentioned in the insurance plan would be deducted and paid to the insured customer. However, in a cashless claim in a Medicare insurance plan, the insured customer has to pay a certain amount first, and only then will the insurance company pay the remaining amount and settle the claim. This amount paid by the insured is known as a co-payment, as the insured makes a part of the payment at the time of claim settlement.

If the insured pays a part of the claim amount, it is known as a co-payment, whereas if the insurance company deducts a certain amount and then pays to the insured, it is known as an excess or deductible. A co-payment is usually a fixed percentage of the claim amount, whereas a deductible could be either a fixed percentage or a fixed amount, whichever is lower. For example, the co-payment could be 10% of the overall claim amount, whereas the deductible could be 5% or Rs.2500, whichever is lower. A co-payment could apply to the overall claim payment or only to specific sections or covers, whereas deductible or excess would apply to the overall claim amount.

When Does Co-payment Come into Action?

Co-payment would come into play only at the time of claim settlement in a health insurance plan. Claim settlement could be on a cashless basis or a reimbursement basis. A co-payment would be calculated based on the final hospital bill and applied to the sections mentioned in the health insurance plan. The insurance company mandatorily deducts compulsory and Voluntary Co-payments before making the claim.

Advantages of Co-payment:

• Reduces Premium Payable: The major advantage of co-paying in a health insurance plan is that it reduces the overall premium payable by the insured customer. The higher the co-payment, the higher the discount on the premium. The insurer is offering the discount as the insured is taking a part of the responsibility. The insurer would mention the maximum premium that could be reduced under the co-payment. It usually benefits customers in their early 30s or those leading a healthy lifestyle. Opting for a higher co-payment would reduce the premium but, at the same time, would increase your liability. Hence, it is recommended to balance the co-payment limit and premium payable.

• Makes Insured Responsible: The other important advantage of co-payment is that it makes the insured responsible. The insured would now act as the insurance company responsible for sharing the claim amount with the insured. In such cases, the insured would be very careful not to engage in circumstances that could result in hospitalization. It would also prevent people from raising minor claims as they must pay the co-payment amount from their pocket for every petty claim. It would discourage people from filing for minor illnesses that could be treated at home without requiring hospitalization, such as fever, cough, cold, etc. People might also think of the lengthy process to go through for each and every claim, and it encourages people to become responsible.

• Reduces the Risk of Moral Hazard: The other important advantage of co-payment is that it reduces moral hazard by discouraging people from availing treatment in expensive hospitals. Without the co-payment clause, people might choose any expensive hospital as the insurance company would pay the claim amount completely. For example, suppose treatment for a minor illness is taken in a normal hospital. In that case, it might cost you Rs.10,000, of which a 20% co-pay would come to Rs.2000. Still if the treatment is taken in an expensive hospital, the final bill might come up to Re.50000, of which 20% co-pay would be around Rs. 10,000 which is a high amount for the insured to pay. The amount paid by the insured equals the hospital bill in a not-so-expensive hospital. This difference in the treatment costs is due to the facilities provided in the hospitals.

Dis-advantages of Co-payment:

• Reduces Claim Amount Receivable : The main disadvantage of having a co-payment is that it would reduce the overall claim amount receivable. The higher the co-payment, the lower the claim amount receivable and the higher the out-of-pocket expenses. A co-payment clause could spoil the main essence of taking a health insurance plan. Many of us take health insurance so that we need not run from pillar to post to arrange money in case of a medical emergency, but if we had to do so due to a co-payment clause, then the flavor of insurance cannot be enjoyed by people. For example, let us assume Mr. Hossain has taken a health insurance plan with a 30% co-payment. After a few years, he was diagnosed with a critical illness that requires constant treatment, for which he needs to pay from his pocket every time he undergoes the treatment. In such cases, having a co-payment clause could act detrimental to the policyholder’s interests.

•  Less Preference by Customers : It is to be noted that any health insurance plan with a co-payment clause would attract the least number of customers. Co-payment would be preferred only in 2 situations: When the customer wants to reduce the premium payable and When companies in the market offer health insurance plans co-payment. For example, most senior citizen health insurance plans come with compulsory co-payment, which customers cannot avoid. Customers would only be able to purchase the policy, including a co-payment. If competitive health insurance plans are without co-payment, customers would prefer it subject to its affordable premium.

• Beneficial Only for Young Customers: The other disadvantage of co-paying in a health insurance plan is that it benefits only young customers or people without serious health issues. If you are not going to make a claim, then you would be least bothered about the co-payment clause. But in this era, even young people and small children are suffering from long-term illnesses such as Diabetes, Joint pains, etc. It is slowly becoming less useful, even for young customers.

Conclusion:

Co-payment in health insurance can be beneficial and detrimental to customers, depending on the context of the situation. Co-payment clauses should be examined carefully before taking a health insurance policy. The co-payment amount should also be decided carefully before taking the policy, as it cannot be changed during the policy period. For more information on co-payment in health insurance policy, please book a call with our health insurance agents at Ethika Insurance.