Co-pay in insurance and Capping on Room Rent in health insurance policy with example

Having skin in the game is a concept often supported by many people, most notably Nassim Nicholas Taleb, a Lebanese-American statistician. It is an idea that encourages balance and symmetry.

‘If you get hurt, I get hurt. If you succeed, I succeed.’

Applying this basic principle to any business relationship is likely to benefit all involved. Look around and you’ll see it in action everywhere. A pilot will follow safety guidance when their well-being is at stake. A chef will keep their workspace tidy knowing they’ll eat the food they prepare. With the general leading from the front, troops are more likely to heed instructions. 

Show that you’re invested too, with targeted incentives and punishments, and everyone has ‘skin in the game.’

When it comes to health insurance, the process is not as easy. You transfer your risk to the insurer and they are responsible for paying out in case of a medical emergency. It is up to you how much you would like to spend, without worrying about any personal expenditure, since your policy will cover it. However, from an insurer’s perspective, this presents a problem. They need people to be conscious of their costs and have “skin in the game”, even if there are no direct financial repercussions for them. Insurers have therefore come up with ways of protecting themselves from too much loss.

For example, this case can be examined.

When you’re about to purchase health insurance, the agent presents a policy with coverage of Rs 5 Lakhs at a cost of Rs 7000 a year. Wanting a discounted fee, you agree to his offer and try to haggle further, only for him to drop an unexpected surprise. He proposes a 25% reduction in premium (equal to approximately Rs 1800 per year) if you are willing to add a 20% co-payment clause – all without second thought. The attraction of such savings is too great, so you commit on the spot.

Tragedy strikes nine months later, when you find yourself hospitalised after an unfortunate accident. Although you have insurance to help cover the considerable costs associated with your care, they only pay out Rs 1,60,000 while the rest must be footed by yourself; a reminder of the co-payment clause in your policy.

When the contract was signed, a commitment was made to provide the insurer with assistance if you were hospitalised. This included taking 20% responsibility for the costs associated. Consequently, payment is now due.

When doing the math, it’s clear that this arrangement is far from fair. Your savings of Rs 1,800 are overshadowed by the Rs 40,000 you had to pay for the co-payment clause. This means it would take over two decades’ worth of premium savings to fix this error. 

On the other side of the coin, this means a huge win for the insurer. Not only were they able to save Rs 40,000 but they also took advantage of the frugality – once you understand 20% of bills must be paid by you, costs become much more restrictive. Expensive rooms in the hospital are no longer an option.

Unless you’re insuring someone who is elderly and has pre-existing medical conditions, co-payments are a bad deal. With that being said, if they are mandatory then they can be quite beneficial in terms of lowering premiums. All in all, it’s best to avoid this “bargain” unless it fits into the above criteria.

An insurer’s other ploy is with the room rent allocation. Policies can typically place a limit on the amount of hospital room rent you can pay – like if you have a sum insured of Rs 5 lakh and it has a room-rent cap of 1%, then you will be limited to Rs 5,000 each day. If your hospital stay requires you to select a more expensive room that costs Rs 10,000 daily, this might be an issue.

Staying here for the next couple of days requires an extra fee of Rs 10,000. Although it may not seem like much, you experience a shock after being released from hospital when your insurance provider informs you of their decision.

An additional Rs 25,000 is to be paid out.

Where did this come from?

The policy document states that the majority of services carried out in your room, such as surgeon and consultant fees and any diagnostic tests, are not eligible for full reimbursement. This is due to the choice of a costlier room type. Partial payment shall be made instead.

The cap set for renting a room was Rs 5,000, right? Since your room rent amounted to Rs 10,000, they will take care of half the sum. Similarly, they will pay half the cost of any services you may receive in your room. For example, if an operation costs you Rs 50,000 then they’ll give you Rs 25,000. The remaining amount you have to bear yourself.

Rental caps are now not recognised as a wise option, which is why insurance companies have had to be resourceful. As a result, they will now often put limits on the rooms available; usually just a single private room. Luxurious options are not available.

If you’d like to invest in an expensive option, you may need to pay part of the bill yourself. A single private room could be adequate but you might want to look into a comprehensive plan without such limits. Being placed in a luxurious area is beneficial as it provides more attentive care, round-the-clock assistance, and the possibility for a family member to stay with you. This isn’t mandatory, but it’s something that should be considered.

It is tempting to settle for a plan that offers co-pay and room rent caps in exchange for saving a few thousand rupees. Nevertheless, if you have the financial means, it is better to avoid such options.