The concept of co-pay and voluntary deductions in health insurance


voluntary deductions in health insuranceThe Health Inflation has hit the roof with 18-20% year on year growth, says Mr. Mukesh Kumar – Member of Executive Management & Head Strategy Planning & Marketing, HDFC ERGO General Insurance Company Ltd.

The insurance companies are dreading it as well because their average cost to the premium collected is going down and so is their profitability.

According to the World Health Organization report amongst the hospitalization expenses in India, about 60% of it is 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 health insurance is yet a farfetched thing in the villages which comprises of 70% of our economy, in terms of census.

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The WHO report says that 70% of the Indians spend their entire income on healthcare and medicine expenses and 3.2% of the population fall below the poverty line every year because of the high health inflation!

According to a survey done by ICICI Lombard, 53% of the Insurance companies are worried about their Group Health Policies due to the rising cost due to 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 co-pay in the same.

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 mandatorily needs to be paid by the insured 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.

Let me take an example to explain. For example, Mr. Mahesh Lamba has a claim of Rs 2 lac

Policy Sum Assured

Claim Amount


Payable Amount

Remaining Out of Pocket

Rs 1 Lac

Rs 2 Lac

20% of Rs 2 Lacs = Rs 40,000

Rs 1 Lac

Rs 60,000

Rs 2 Lac

Rs 2 Lac

20% of Rs 2 Lacs = Rs 40,000

Rs 1.6 Lacs


Rs 5 Lacs

Rs 2 Lac

20% of Rs 2 Lacs = Rs 40,000

Rs 1.6 Lacs


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 deductibles and co-insurance.

Differentiating one from the other can be terribly confusing for the layperson. These are murky waters, so let us first distinguish between co-pay and these other insurance costs.

The difference between co-pay and deductibles

It is that the co-pay represents a percentage of the claim amount whereas the deductible is a fixed amount.

Both these costs must be paid before the insurance kicks in, but while the co-pay ratio is laid out in the contract, the deductible is calculated yearly.

The difference between co-pay and co-insurance

It is that the co-payment is made 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 the motivations of the insurer. Insured parties often opt for medical care that they may have avoided in the absence of insurance because ‘my insurance plan will cover the expenses’.

In striving to reduce their costs, insurance companies seek to discourage their customers from availing of such care by adding the co-pay feature.

Now that the insured has to pay a percentage of the costs on certain services, they will think twice before seeking medical care at a high-end hospital or going in for an optional surgical procedure.

Note that the co-pay feature is not applicable every time you file a claim; the insured may be able to avoid the co-pay cost at least some of the time.

However, the co-pay clause tends to apply to most medical care for senior citizens because the latter represent a high-cost group to insurers.

We now understand why insurance companies levy the co-pay clause on health insurance plans. This brings us to the second important question:

Does the co-pay clause help the customer?

The answer is yes. The co-pay clause may indeed hike the medical bills of an insured party, but it also encourages him/her to exercise restraint when availing of healthcare services.

Apart from ensuring that the customer does not go in for unnecessary procedures or seek admission in particularly expensive hospitals, a high co-pay ratio also results in a lower premium.

This is a big benefit especially since a healthy customer will be able to avoid incurring the co-pay levy much of the time.

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