Now all of us know that Smoking is injurious to health (thanks to the government regulations that require a prominent skull and bones and a written warning to be printed on all cigarette packets). A somewhat less prominent written warning is also printed on all gutka pouches and packets. Apart from the direct money spent on purchasing these tobacco products (which anyway ranges from Rs. 1000 to Rs. 2500 per month for most tobacco slaves) the indirect costs in terms of health care and loss of productivity costs due to the various illnesses caused by tobacco usage is quite substantial. To that long list of expenses caused by use of tobacco please add the extra costs of Insurance. In fact the extent of such extra costs on Insurance came home to me when we received a query from a reader.

Here is that query: “I am 38 years old and am thinking of buying a 30 year Unit Linked Insurance Plan where I will pay a premium of Rs. 39,000 per annum for a sum assured of Rs. 75 lacs. After deducting all the charges including mortality, the indicative fund value at the end of 30 years comes to be around Rs. 4.50 lakhs at a gross return of 6% p.a. and Rs. 9 lakhs at a gross return of 10% p.a. If I invest the premium amount in a PPF for the same tenure the fund value would total to around Rs. 44 lakhs @ 8% p.a. Since I am getting such a poor return should I investing in PPF rather than buy this policy.”

For advising him we needed to work out the cost of a 30-year term policy for Rs. 75,00,000.

The below mentioned table is as per the above illustration for a male aged 38 years with a 30 year tenure for a sum assured of Rs. 75,00,000

On that basis at that time the cheapest premium worked out to Rs. 22,000. Assuming he invested the difference of Rs. 17,000 (Rs. 39,000 less Rs. 22,000) in PPF @ 8% p.a. it would accumulate to around Rs. 19 lakhs. So we advised him to take a term policy and invest the remaining amount in to various investment instruments depending upon his risk appetite to get better returns. Also his tenure for investment was quite long so we suggested him to go for a more aggressive portfolio that includes equity. But there was a sting in the tale. The customer came back and told us that in spite of excellent medical reports he was getting the term policy at a premium of Rs. 36,000 p.a. and not Rs. 22, 000 as we had told him. On further enquiry we realized that the additional premium was not because of any health issues but because he was a smoker and the premiums indicated were for non-tobacco users only. Now of course the equations changed completely. The money left from the premium payable on the ULIP plan was only Rs. 3,000 and the gross amount accumulated on that would be much lower than the fund value even at the lower return of 6%. This was happening because the ULIP plan did not differentiate between a healthy non-smoker and a healthy smoker. We asked him to take the ULIP policy immediately if it was still available.

But this episode bought home to me the financial costs of using tobacco. Here is an example to put the figures in perspective. Assume that the direct and indirect cost of smoking/gutka is around Rs. 3,000 p.m. on a very conservative basis. If the same money were put in a diversified equity plan for 20 years (and return is 15% p.a.) the funds would be enough to pay for a course that costs Rs. 14,00,000 in today’s money (assuming inflation at 6% p.a.). So the next time you light up that cigarette or reach for the gutka pouch please remember that the money for that is directly coming at the cost of your’s child’s higher education.

Our readers who are in their 30s and 40s and looking for sum assured of Rs. 75,00, 000 for a tenure of 30 years can refer the table below which compares the premiums for tobacco and non tobacco users.

But wait the story does not end here. I was using the same illustration with a young cousin of mine to convince him to give up smoking. Instead he sought my advise on an ingenious plan. What if he does not tell the insurance company that he is a smoker and uses the resultant savings in premium to build up the nest egg? I told him that plan would not work because firstly the insurance company would not pay on the policy in case he died but also they would anyway discover the fact that he smoked in the medical tests. But he refused to give up. He said he would give up smoking for a while before he applied for the insurance so that the medical tests will not reveal that he smoked. I pointed out that it will still not work as the premium he was paying would be completely wasted as the insurance company was not going to pay the claim on the policy if anything happened to him. It would be extremely irresponsible of him to take such a risk with his family’s future. Not one to give up easily he asked what would the insurance company do if a policy holder who was a non smoker at the time he took the policy started smoking later. Well I was stumped at that one. The Insurance Company would probably have to pay if a non-smoker (at the time the policy was taken) turns into a smoker later on. But I pointed out that this did not apply to him in any case since he was already a smoker. “Stop postponing the inevitable, Vaibhav and quit smoking now “ I advised him.

Hopefully he has taken the advice. What about you?

(Smoking and tobacco usage have been used interchangeably in this article – lower premiums are available only where the policyholder does not use tobacco in any form – smoking, chewing, snuff, etc.)

It is often said that the true character of a society is judged by how it treats its elders. The senior citizens of a country need to be taken care of by the society in general and by their children in particular.

Now a days lot of benefits have been granted to senior citizens in India so that they can live a fulfilled life. These are available in the form of special saving schemes, pension schemes, postal schemes, mediclaim policies and the likes which I have already written about in my earlier columns.

In this piece I would like to dwell on the income tax benefits available to senior citizens.

As described under Income tax Act, a senior citizen is a person who was of 65 or above of age during the year. It is worth mentioning that Income tax act contains many beneficial provisions for senior citizens. So what are these? Let’s understand.

Firstly senior citizens do not have to pay any income tax upto the income limit of Rs. 2,40,000 as against limit of Rs. 1,60,000 applicable for ordinary individual.

As a senior citizen you can claim deduction of upto Rs. 100,000 each year under Section 80C, in respect of money deposits made under Senior Citizens saving scheme rules, 2004. This provision is significant when other avenues for claiming tax deductions under Section 80 C like life insurance premium, payment towards pension plan, contribution to PPF account, ULIP etc. are no longer remain attractive to senior citizens. Though for income tax purpose you are a senior citizen if you have completed 65 years of age, however for the purpose of depositing money under the senior citizen scheme, the age limit is only 60 years and not 65. This age limit is relaxed to 55 years in case you have taken VRS and the retirement money is invested within a period of three months in the scheme. The rate of interest under this scheme is 9% currently which is higher than on any other risk-free investment avenue available today and that too with tax deduction.

The general deduction in respect of insurance premium for health insurance popularly known as Mediclaim is Rs. 15,000 for a family. However if premium is paid for senior citizen, the amount of deduction available goes up to Rs. 20,000. In case the premium is paid for the parent who is a senior citizen, the person paying the premium can claim a separate deduction of Rs. 20,000 in addition to claim of Rs. 15,000 in respect of premium paid for self, spouse and children. In case of the person paying the premium, as well as his parents who are senior citizens, the deduction available for each category will be up to Rs. 20,000 each.

The income tax also allows deduction for expenditures actually incurred for treatment of family members in respect of some specified diseases. Section 80DDB allows a deduction of Rs. 40,000 for treatment of self, spouse, siblings, parents, and children upto Rs. 40,000 for expenditure incurred for treatment of specified disease. However this deduction goes up to Rs. 60,000 in case the person to be treated is a senior citizen.

Senior citizens can submit Form no. 15H for no deduction of tax at source to the payer of money like interest, withdrawals from NSS account, and income from units of mutual funds and total tax liability is nil for the year in question.

As a senior citizen if you are not engaged in any business or profession, you will not be required to file a return of Income even if you fall into the criteria on ownership/occupation of immovable property or subscription of a telephone under the popularly known as one by six scheme. However, you will have to file a return of income under the scheme if you fulfill any of the other four criteria.  This exemption is available only if the senior citizen does not have any taxable income.

This way we find that Income tax act has provided quite a few benefits to senior citizens to help them wade through their old age, by way of higher benefit for Mediclaim when the medical cost constitute a significant portion of their budget.

The Income tax Act also treats the senior citizens fairly when it allows them to provide benefit of investing in senior citizen saving scheme at a higher rate of interest and at the same time let them claim the same as deduction under Section 80C.

As it is the rising inflation and higher costs of medical treatments have made life difficult for an average person. What to talk of woes of those who have handicapped person to support where he is concurrently spending on the treatment.

Thus to mitigate these financial hardships faced by the handicapped persons and their parents, Income Tax Act offers many benefits in the form of deduction from total income with reference to the handicapped person. Not only this, there are some insurance products which have been devised by insurance companies for the benefit of parents/ guardians of handicapped dependents.

Unfortunately many of us are not aware of these benefits.

So what are these benefits?

You can claim tax benefit under Section 80 DD which allows the deduction for money spent on maintenance of your handicapped dependent or for providing for your dependent through payment of insurance premium. You are allowed a deduction of Rs.50,000 in respect of any expenditure incurred for medical treatment, training or rehabilitation of your dependent with disability. In case of severe disability you are entitled to an enhanced deduction of Rs. 100,000.

In addition to deduction in respect of expenses incurred on the treatment of such a person, , Section 80DD also allows deduction in respect of any money paid to Life Insurance Corporation (LIC) or any other insurer for the purpose of buying specified scheme or insurance for the purpose of maintenance of such dependent. The aggregate deduction under Section 80DD in respect of treatment, maintenance as well for payment of money under the scheme approved can not exceed Rs. 50,000 in case of disability and Rs, 100000 in case of severe disability.

For claiming the deduction in respect of the above, you have to furnish a medical certificate from a Government Hospital certifying the disability of the dependent and a self declaration certifying the expenditure incurred on account of medical treatment (including nursing), training and rehabilitation of the handicapped dependant. You do not have to preserve the actual receipts for expenses incurred. However you will have to produce the actual receipts in case you claim payment to LIC, UTI etc for the purpose of buying insurance or other schemes for maintenance of such dependent.

Not only this, Income Tax also extends benefits to the handicapped person himself. The Section 80U of the income tax act allows a deduction of Rs. 50,000 from his income, provided the disability of the person has been certified by the medical authority. This deduction of Rs. 50,000 gets enhanced to Rs. 100,000 if the person suffers from severe disability. In order to claim this deduction, the person needs to obtain a certificate from one of the specified medical authorities and keep it up to date in case this needs to be renewed periodically.

Insurance companies have also come up with specialized schemes for those who have handicapped dependents. But not many of us are aware of them.

The health insurance cover provided by National Trust needs special mention. The trust has introduced “Niramaya” health Insurance Scheme for persons with disabilities like Autism, Cerebral Palsy and Mental Retardation etc. Under this scheme, for those who have family income of less than Rs. 15,000 per month, you need to make a payment of Rs. 250 per year. For the person having family income of more than Rs. 15,000 per month is required to pay an amount of Rs.500 per year. For the families which are Below Poverty Line (BPL) this scheme is free, provided the applicant holds the BPL card. This scheme covers health expenses up to a limit of Rs. 100,000 per year for the person suffering from these disabilities. The scheme is administered by National Trust in collaboration with ICICI Lombard. Under this scheme even existing disease are covered without any medical check up. Moreover this plan covers routine expenses like medical check up, transportation and corrective surgery etc. which are not covered under regular health insurance products.

Besides, , Life Insurance corporation of India also offers two insurance policies – Jeevan Aadhar and Jeevan Vishwas for the benefits of parents or guardian of person with physical disabilities which qualify for tax benefit under Section 80DD.

. These policies ensure that the dependent person with physical handicap does not have to depend on anybody for financial support in case something happens to his parent or guardian. The Jeevan Aadhar is a non- profit policy and is relatively cheaper whereas the Jeevan Vishwas is a policy which participates in profits.

Under both these polices insurance the life of the person, on whom the handicapped person is dependent, is insured. In case the dependent dies before the guardian/parent the policy the parent/guardian will have the option to either keep the policy for a reduced paid-up sum assured or entitled to receive the refund of premiums paid.

However if the parent/guardian dies before the dependent, 20% of the lump sum assured becomes payable for the benefit of the dependent. Moreover the balance is paid by way of monthly annuity for 15 years for sure and thereafter for life on the life of dependent.

In addition to income tax benefits available to the parents or guardian for maintenance and medical treatment of handicapped dependent, there are many affordable medical and insurance products specially devised for such handicapped person, which are a great help.

The physical and mental agony experienced by the parents/ guardian of such dependents cannot be taken away but Government of India, National Trust, LIC and other charitable institutions are doing commendable job to reduce the financial agony of such a family.

It is important that all of us look for such benefits available and talk these about in various media to take it across as many people as possible.

This is our bit of social work which can give relief to handicapped persons and their parents.

Taking into account the overwhelming response to my article captioned

“Benefits for Special Needs People” in DNA on June 15, 2010 having mention of Insurance scheme Niramaya administered by The National Trust, and subsequent requests for the details of the scheme, I am giving the details of Niramaya in this article.

Niramaya is the Insurance scheme specifically designed for the “Special needs people” who are suffering from Autism, Cerebral Palsy, Mental Retardation, multiple disabilities (sclerosis) and other similar diseases. The scheme has turned out be a real boon for the family of these people who have been financially burdened with medical costs. Around 85,000 people registered under this scheme are availing the benefit of this novel group health insurance scheme. The number is still very small considering the number of people who need to benefit, and this is due to very low awareness about this scheme in general public. Thus I felt it is important that all of us contribute in our own ways to create awareness about the scheme.

Salient Features:

This scheme covers existing disease without any medical check up and no premedical check up is required for enrolling under this scheme. This scheme is unique in the sense that there is no upper or lower age limits for enrollment. The other unique feature about this scheme is that the premium charged for coverage under this scheme is uniform across all the age groups.

What it covers:

The Niramaya scheme covers overall medical expenses upto Rs. One lac within separate sub limits, besides many other expenses, which are normally not covered under regular health insurance plans like OPD treatment, regular medical check up, corrective surgery for existing disability etc. in addition to the regular expenses on hospitalization. This scheme also covers expenses incurred for transportation of the patient as well as cost of alternative medicines.

The sub limits within overall cover of Rs. One lac are given below:

The sub limits within the overall cover for Rs. 15,000 for OPD are as given below:

How to get covered

The scheme is administered by The National Trust (www.thenationaltrust.in) in collaboration with ICICI Lombard General Insurance Company Limited. The applications for this insurance scheme are accepted through registered organization which are primarily trusts and NGOs. (The area wise list of registered organizations and the enrollment forms are available on the website of the National Trust mentioned above). The applicant is required to submit the fully filled in enrollment form to the trust along with the proof of payment of applicable fee. The families Below Poverty Line (BPL) need to submit the copy of BPL card as there is no fee payable in such cases. In case they do not have BPL card, they can obtain copy of income certificate from the authority which is competent to issue the BPL card.

The enrollment can be done throughout the year but the process of covering the patients under this scheme has two cut off periods. People enrolled from 1^st September to 28^th February under first phase are covered from 2^nd April and those enrolled from 1^st March to 31^st August in second phase are covered from 2^nd October. The registered organization furnishes the details to The National Trust. The details received from the NGOs are forwarded to ICICI Lombard who in turn issues the health card, which are forwarded to the concerned registered organization through which the respective applications had come.

The application for renewal should be done well in advance accompanied with payment of proof of appropriate fee. The fee is required to be directly deposited into the account of The National Trust.

Medical screening is not insisted for enrollment under the scheme. Every beneficiary is issued a Smart/biometric cards once he/she is covered which enables him in accessing the services in empaneled hospitals.

The costs involved:

A family having income of less than Rs. 15,000 per month needs to make a payment of Rs. 250 annually for the person inflicted. Families having income of more than Rs. 15,000 per month are also eligible but the insurance premium payable would be Rs. 500 for the patient. For the BPL families, this scheme is provided free of cost as the cost is borne by the Government. .

Earlier Niramaya like other regular health insurance plans used to offer cashless facilities which have been discontinued w.e.f. 11^th March 2010 and now only offers reimbursement facilities for expenses incurred. The cashless facility will be resumed once the deficit is covered.

This way we see that Niramaya can bring ray of life to the lives of special needs people with its novel features, nominal premiums and above all the genuine intentions.

I request you to take the message across amidst your family members and acquaintances and who knows you become harbinger of lighting up a person’s life whose life is special for all of us.

Not only this you will be lending a helping hand to The National Trust to save on the publicity costs which is around 40% of the overall costs , including servicing cost of this insurance scheme.

“I have a mediclaim policy for the last 5 years for myself and my wife. We were recently blessed with a child. The only thing that marred the joyful experience was the refusal of the TPA to reimburse the expenditure of Rs. 23,000 incurred during the hospitalization of my wife while giving birth. Is the TPA correct in refusing to reimburse this claim. How do I get this money? My agent had never told me that pregnancy expenditure is not covered. What is the use of a mediclaim policy that does not pay when you are hospitalized.”

This is one of many such emails that we receive at Apnapaisa daily from anguished mediclaim policy holders. Now pregnancy and childbirth related expenditure is permanently excluded from most individual mediclaim policies issued by the Insurance companies. Even in a few cases where it is allowed it is only for a limited sum of money (irrespective of the total sum assured) and that too after you have renewed the policy with the same company for quite a few years.

Similarly there are a host of other permanent (or temporary) exclusions that are not covered by most of the mediclaim policies such as :

• Wars, Invasion, Act of foreign enemy

• Nuclear weapons or radiations due to nuclear waste or fuel

• Circumcision unless necessary for treatment of a diseases or necessitated due to an accident

• Non-allopathic treatment

• Pregnancy and childbirth related complications

• Cosmetic, aesthetic and obesity related treatment

• Expenses arising from HIV or AIDS and related diseases

• Expenses arising due to misuse of liquor, intoxicating substances or drugs as well as intentional self injury

• Vaccination or Inoculation

• Vitamins, tonics, nutritional supplements covered only if needed as part of treatment.

• Any fertility, sub fertility or assisted conception operation or sterilization procedure.

• Cost of specs, lenses, hearing aids, crutches, limbs, artificial teeth

From the queries that we receive on our site it is clear that very few consumers are aware of these exclusions.

Clearly a lot of reasons exist for this ignorance :

First the consumers themselves :

For most people if you contrast the amount of time they spend on buying a pair of shoes versus buying a health insurance policy, the pair of shoes will show higher amount of time spent . Clearly unlike a pair of shoes that will be worn for maybe a year or at most a few years, a health insurance policy will be there with him for a substantial part of his lifetime. For that he will blindly depend on the suggestion of the agent without looking into the details himself. I think it is important enough purchase that he should spend some time to read the policy wording (or at least a detailed look at the brochure )

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There are two types of exclusions – permanent and temporary besides diseases covered with a limit.

Permanent Exclusions

• These are the main exclusions of the policy, which are never covered, in an insurance plan. These are the famous list of causes or condition because of which the claims are rejected and the company says that we don’t cover these diseases or we don’t cover these plans.

Temporary exclusions

• These are exclusions, which are there for some period of time say one year or two year. Diseases like cataract, hernia and many more come under this category. Other than that pre existing diseases if any are covered after certain number of years. This keeps on varying from policy to policy. It may start from completion of one policy year till five policy years.

Diseases covered with a limit:

• There are certain diseases which are covered within the policy but with a certain limit. Say for example a policy may say that it will cover Cataract but with a limit of only Rs. 15,000. This means that whatever cost you incur due to hospitalization for cataract, the maximum you can claim is Rs. 15,000.

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Second the Health Insurance Industry itself

A recent trend that has many disturbing implications for the future is the practice of having permanent exclusions that are worded very widely or sometimes specific exclusions that are particular to that company only. We tried to do the research on quite a few products available in the market. Some of the exclusions mentioned in the policy wordings took even us by surprise when we examined them a little deeply. This simply means how important it is to read these exclusions before buying the policy and how misleading it can be to buy a policy before understanding the exclusions of the policy.

Here is a partial list of such “surprising” and “individualistic” exclusions:

1. Injury caused due to the performance of hazardous sports of any kind

2. Act of terrorism

3. Puberty & ageing

4. Artificial life maintenance

5. Hereditary conditions

6. Treatment for any mental illness or psychiatric illness.

7. Treatment relating to birth defects and external congenital illnesses

8. Treatment by a Doctor which is outside his discipline; referral-fees or out-station consultations; treatments rendered by a Medical Practitioner who shares the same residence as an Insured Person or who is a member of an Insured Person’s family, however proven material costs are eligible for reimbursement in accordance with the applicable cover.

Lets take an example of hereditary conditions. So if any of my father or my grand father was suffering from heart disease and I happen to get the same long after I have taken the policy , it may not be covered even though it was not pre-existing at the time when I took the policy. Similarly, artificial life maintenance system forms a part of permanent exclusion of a particular policy where this is the most costliest part of the hospitalization expenses in today’s time.

There is a huge necessity for the regulator to look in to the same, as most of the conditions mentioned in the exclusions part of the wordings are too complicated to be understood by the common person (in fact it took our team of seasoned experts here about 2-3 days to make some sense of all the exclusions ). Secondly, if we pick up brochures of any of the company, then they mention a synopsis of the exclusions and not all of them. Lastly, any particular exclusion mentioned in two policies is different in wordings in both the policies. And it is very difficult for anyone to understand that both the exclusions effectively mean the same.

There is a huge need to standardize these exclusions. Any of the insurance company, which wants to keep exclusions over and above this list (or in a different wordings), should highlight the exclusions, which are not a part of those standardized exclusions. This will need to be enforced by IRDA – which is the regulator.

Contrary to popular opinion exclusions are not necessarily bad for consumers as most of them prevent the abuse of the system. If the abuse is allowed it will add to the cost of the cover and all consumers will suffer for the acts of a few. There is then a big need to carry out an extensive public awareness program about the standardized exclusions (and the need for them) as well as how to look at any exclusions that are different from the standard set of exclusions.

Let’s all hope that urgent steps are taken to make the health insurance policies more transparent and effective so that this essential pillar of social need can be spread far more widely.

I would welcome the views of the readers on this most vital issue.

Have you ever heard somebody saying, “ My hospital bill was Rs. 75,000 and my sum assured for mediclaim was Rs. 2 lakhs, but still the insurance company did not give me the claimed amount.”

A very common case in today’s world.

To understand why this happens we should first understand the whole concept of insurance. Simply put when a large number of people with similar profiles run a similar risk and where only a few will actually be affected then all the members of the group pool in the expected loss and the pooled amount is paid to the member(s) who actually suffers the loss. Let us take an example to understand this :

There is a group of 33 year old males with similar life styles and health status in a city who run the risk of incurring expenses on hospitalization due to illness, disease or accident. Now assume that statistics show that 2 people out of them will need to be hospitalized and on an average would incur an expense of Rs. 1.25 lacs each. That means the total expenditure of the group for hospitalization is likely to be Rs. 2.50 lacs for the year. If we divide that by 100 then if each member pays Rs. 2,500 (essentially a premium) then the total collection is Rs. 2.50 lacs which can be used for reimbursing to the members who actually suffer the loss. So the basic thing to understand in this example is that it is your own contribution (premium) that comes back to you if you suffer a loss. Thus it is in the interest of each member of the group to try and ensure that the people in the group have the least probability of incurring the loss and if at all they incur the loss then they should spend the minimum amount possible to recover from the loss. Theoretically lower the probable loss, lower will be the premium.

Now many things in this example are difficult to assume. Suppose if the probability is wrong and the number of people who need to be hospitalized are 4 instead of 2 and therefore the total expenditure on those 4 people is Rs. 5 lacs. The amount available in the pool is only Rs. 2.50 lacs which means only the first 2 gentlemen will get the claim amount and the last 2 will not get anything. Obviously this is unfair on people who fall sick later in the year. There is also a question of what to do with the money collected from the group at the beginning of the year before it is required for reimbursement to eligible members of the group. This is where the Insurance company steps in.

Firstly it markets the policy to a large number of people since insurance works on the principal of large numbers. Larger the number of people who pay premium lower is the probability that the assumed loss figure based on past experience will be exceeded. In any case the Insurance company bears the loss if it underestimates the amount of loss that will be incurred. Obviously while working out the premium it will keep a buffer. It also administers the reimbursement process to check on the genuineness of the claim and the amount of claim. Obviously it also has a profit margin for doing all this work.

Now let us understand the adjustments required to be made to the premium calculated in the above manner.

Firstly not everybody will have the same risk profile. For example not everybody will be aged 33 years as assumed in the above example. Other things remaining the same, somebody aged 40 years will have a higher probability of incurring hospitalization expenses as compared to a 33 year old. Thus the premium will need to be adjusted for such differences in risk profile whose impact on the probable loss is determinable. There could be differences in risk profile whose impact on the probable loss is not determinable. Best example could be a pre-existing disease. Whilst clearly it increases the probability of the loss by how much may be difficult to assess. Hence most companies would provide a buffer period before they accept risks arising from such pre-existing conditions. In some cases the risk profile may be so high that the person just cannot belong to the group. For example if somebody is already suffering from an organ failure, the probability of his incurring the loss is so high as compared to a healthy individual that it is not possible to include him in a standard group at all. In such cases the Insurance company will not provide the cover at all so as to not jeopardize the cover of the larger group.

Second adjustment required is on account of the expenses required to be incurred to make good the loss. Now typically when you are hospitalized for a disease then depending on which hospital, the class of room and the doctor you choose the actual expenses can vary by as much as 300-400%. Thus if you choose to get a heart bypass done by admitting yourself in a twin sharing room in a specific hospital it could cost you as low as Rs. 1.50 lacs but if you go to a plush hospital and get admitted in a suite room under a star doctor it may cost you upwards of Rs. 10 lacs also. So for the same disease the actual amount spent to make good the loss can vary significantly. If the entire loss is covered then the tendency for the insured is to go for the most expensive treatment possible thus increasing the burden on the pool. This is sought to be minimized by the concept of sub-limits and co-pay requirements. Nowadays quite a few mediclaim policies provide sub-limit for daily room rent at 1% of the sum assured and 2% of the sum assured for ICU.

Some policies also provide for sub limit for doctor’s fees. This is to make sure that you choose an option that is in line with the assumptions taken at the time of calculation of the premium. Of course you are free to use a room with a higher room rent or a doctor with a higher fee but would need to pay the surplus yourself. The second feature to limit the expenses is the concept of co-pay. All of us have heard (and have probably experienced) how some hospitals charge more if you are covered by Insurance or conduct unnecessary tests/procedures to puff up the overall bill. Now if the cost is to be met entirely by the Insurance company you may not have any incentive to make sure that such unnecessary charges are incurred/levied. Now if a certain percentage of the expenditure has to be paid by you (even if it is only 10-20%) you will make sure that such excess is not included in the bill thus bringing down the loss ratio for the entire pool. This is the rationale behind co-pay.

So sub-limits and co-pay are the two most common reasons for the full bill amount not being paid despite the overall amount of expense incurred falling well within the overall sum insured.

Then there is a list of items such as TV charges, telephone expenses, personal expenses such as shaving charges (unless required for medical reasons) , meals for patient or attendant, etc. that are in any case not covered by any Mediclaim policy.

In theory therefore a mediclaim policy that has sub-limits and/or co-pay requirements should be cheaper than a policy that does not have such requirements. However in practice it is not always so, as each insurance company works with its own set of probabilities on how many people will be hospitalized from the group and what will be the expenditure incurred to recover from the loss and the buffer required to be kept. So it is very much possible that a company that does not have any sub-limits or co-pay may still be cheaper than a company that has those features.

For a detailed comparison of all features visit this link http://www.apnainsurance.com/health-insurance-india/compare.html

Caution : The example worked out above has been simplified to make it understandable to a lay person and has several simplistic assumptions.

My friend Raj was staying in a 5-star hotel while on a trip to Mumbai from New York, invited me and two of our other friends over for dinner at one of its posh restaurants. We enjoyed an excellent dinner and all went fine till the time comes for paying the bill. The maitre-d comes over and asks you if we are staying with them and if so whether you are staying in their regular room or their suites or the presidential suite. When we asked him the reason for the question, he tells you that the charges for the dinner will depend on the class of the room that you are staying in.

Don’t you find that strange? I bet you do. After all, this service (the dinner) is outside the room you are staying in, the ambience is the same for everyone in the restaurant, the chef and his staff and the kitchen is the same, the food is the same and it is delivered by the same set of waiters in the same room irrespective of which class of room you stay in (or whether you stay in the hotel at all or not). You will no doubt argue that for the room itself you will be required to pay a daily charge in accordance with the class you choose to stay in and why should any other service not provided in the room be charged on a differential basis.

But strangely nobody argues when hospitals charge for everything based on the class of room that you stay in. If you choose to stay in single air conditioned room (called first class or deluxe or whatever) not only the daily room rent but even the operation room charges, medical procedure charges, doctors fees, etc. will be 2-5 times higher than if you were staying in one of their general wards. In fact, if you are unfortunate enough to be shifted to the ICU from your room, the charge in the ICU (which is exactly the same for everyone irrespective of which room you originally were in) also follows the same lop sided pricing pattern. The only reason hospitals have this pricing basis is because unlike the hotel (where the guest can go to another hotel/restaurants for dinner) they know that their consumer is captive and can not go anywhere else for his treatment. In fact for the only item where the consumer has some choice (medicines) most hospitals do not have this differential pricing based on class of bed. A quick check with medical practitioners reveals that this kind of differential pricing is unique to India and not practiced in any other major country. The only argument given in favour of this practise is that this is to cross subsidise the poor general ward patients who the hospitals are required to treat for free (or at highly concessional rates) as most of them (the hospitals) have got the land at a cheap rate from the government and/or have also availed other fiscal concessions from the government.

Most consumers may be forgiven if they think this only affects the rich people since they are the only ones wanting to stay in first class (or deluxe) rooms where such differential is the highest. However, as anyone who has had the unfortunate experience of trying to get an unplanned admission for a loved one will attest, invariably most hospitals will say that all beds are available only in the private first class rooms. Consumers have no choice but to accept that or do the round of the hospital administration pleading with them to give them rooms in the lower class, which are more affordable.

The Indian health insurance industry is becoming large and accounts for a significant portion (around 8%) of the hospitals billings and one would have thought that they would use their clout to get such practices changed. However, very clearly the health insurance industry has yet to acquire that much clout. Most insurance companies try to reduce the burden by restricting the daily room rents that they will reimburse under the health insurance plan. In such cases consumers have to bear the difference between the maximum room rent payable under the insurance plan and the actual room rent charged. However, in a worrying trend, at least one company has introduced a co-pay provision under which the consumer will pay for the higher expenses (on operations, doctor’s fees, etc.) charged due to the customer opting (or being forced to take) for a private air conditioned room even though the total expenditure may be well within the policy limits. Clearly the insurance company is transferring the entire burden arising from such differential pricing practices on to their consumers.

Health care reform, especially for issues that affect only the middle classes, is still not big enough to become an election issue in India. However with the growing assertiveness of the middle class which is no longer prepared to accept the below standard services in public hospitals and who bear the brunt of such differential pricing policies in the private health care hospitals will ensure that sooner rather than later these kind of practices will invite regulations from the government. Till then the consumers must take care to choose their insurance company appropriately or just grin and bear it.

The high decibel advertising by the Life Insurance companies have already created a market of fairly conscious individuals who start planning for their retirement even when they are in the middle of their working lives. Also, the newly set up Pension Fund Regulatory Authority of India (PFRDA – which hopefully will soon become a statutory body) has done lot of work towards designing an excellent pension product, which is already being used by the Government and select PSU employees.

However, even among all this newly found (and welcome) consciousness on planning for retirement, we normally miss out on planning for medical expenses after retirement. I am sure each one of us will know somebody whose parent was hospitalized and was put on life support system for days together. Apart from the emotional stress caused by the hospitalization of a loved parent the overwhelming financial burden of such an illness (bills of Rs. 15 lacs to Rs. 20 lacs are not unheard of) has put several middle class families financial stressed for at least a decade or so.

All of us know that as we age, the need for medical attention and hospitalization increases. Advancement of medical technology has also ensured that we will live longer than our forefathers. But unfortunately it comes at a very high cost. Medical expenditure has been galloping at a rate much higher than the average inflation rate due to shortage of quality hospitalization infrastructure and use of sophisticated technology. Therefore planning for medical expenses after retirement is vital as it will be impossible (or too expensive) to get a policy after you retire.

So don’t try to dig a well only when you get thirsty. Individuals in their 30s or 40s today need to plan now for the medical expenditure after they retire. In fact the best planning can be done by individuals who are still healthy and without any pre-existing diseases.

So before setting out to plan your post retirement medical expenses, you should know the three kinds of risks that you need to cover:

1. Your regular Mediclaim policy must not abandon you just when you need it the most.  So look at the maximum age up to which your current Mediclaim policy is renewable. As per the data available from the Apnapaisa Research Bureau only three companies offer policies that are renewable up to the lifetime - Apollo Munich Easy Health policies, United India Insurance - Mediclaim Policy Platinum and Oriental Insurance - Health Insurance. Additionally the following plans will renew the policy till 80 years of age.

1. As inflation rises your existing Mediclaim policies will become inadequate to handle the medical expenditure that arises after retirement. A mediclaim plan currently for Rs. 5 lacs may look adequate but this will become grossly inadequate after 15-20 years due to sheer rise in inflation and medical costs that have historically outstripped inflation by several multiples.

To cover for this risk you should go in for high deductible medical expenses reimbursement expenditure policies such as United India Insurance Super Top up policies. (See my write up in DNA of April 18, 2009). These will offer fairly high coverage of up to Rs. 15 lacs after deducting the first Rs. 3 - 5 lacs of hospitalization expenditure (which will get covered by your regular mediclaim policies). These plans are relatively cheap because of the high upfront deductible. In the current years these will help you cover against catastrophic medical expenses but as the years go by this policy (in combination with your regular mediclaim policy) will be just enough to cover your regular hospitalization expenses. Even here you must take polices that cover you when you need them the most – that is the age upto which the policy is renewable needs to be the highest. (Refer table below for details)

For both 1 and 2 above it is better to pay a slightly higher annual premium today to get renewability till a higher age (as per IRDA guidelines insurance companies cannot deny renewal unless it is on the grounds of fraud, misrepresentation or moral hazard).

1. You also need a cover for medical expenses that are not covered by either of these policies. Say for example, the amounts incurred for :

   1. Diagnostic tests (which regular policies normally cover only if they lead to hospitalization in 30 days) which are increasingly becoming very expensive,

   2. Treatment of chronic diseases such as lifelong medicines for organ transplants (not covered beyond 60-90 days after hospitalization) or

   3. Expensive implements (e.g. CPAP machines for obstructive sleep apnea)

It may be alright to leave these uncovered currently when you are still earning but after retirement it will become a big burden. A good way to plan for these expenses is through a separate nest egg for medical expenditure for yourself and spouse (your children should be planning this for themselves) through the regular route like diversified equity fund or an index fund. The target amount for this can be based on your current medical cover adjusted for inflation.

Some experts suggest using the Unit Linked Health Insurance Plans offered by Life Insurance companies for this purpose of creating a nest egg for such expenses, as you can utilize any left over tax deductions under section 80D (for payments made on Health Insurance covers) that may otherwise lapse. I, personally, do not recommend them due to the high costs associated with these plans including the high insurance costs that are deducted from the fund value which more than negate any tax advantage that contribution to these schemes may bring.

To summarize, plan now for your medical expenses in the old age and don’t let your retirement plan go awry.

Pointers:

• Medical expenses after retirement can derail your retirement planning

• Go for high deductible (top up and super top up) policies cover that will provide cover for catastrophic medical expenditure in current years and still is enough to cover regular hospitalization expenditure after retirement.

• Use the regular method of SIP in a diversified equity fund or index fund to create a nest egg for your non-covered medical expenses.

A small headline in a leading paper caught my eye. A “Right to health bill” has just been introduced in the Assam state assembly. In any case we have a draft National Health Bill 2009 that has been open for public debate for the last several months. Clearly the long neglected health sector is finally seeing some much needed attention from the Central and State governments.

It is in this context that one is surprised to see the proposal in Pranabda’s budget which seeks to impose service tax on the services rendered by the hospitals where the payment is made to them by the Insurance companies and/or the TPAs directly. This happens on what is popularly called as “cashless” facility under the health insurance facility.

I have already written about how hapless “mediclaim” (as hospital expense reimbursement policies are popularly known) consumers are already being denied the cashless facility (see my column in DNA on February 20, 2010 weblink: http://blog.apnapaisa.com/2010/02/19/will-the-health-insurance-imbroglio-ever-get-solved/) due to the problems between the Insurance companies/TPAs on the one side and the hospitals on the other side. If Pranabda’s proposal service tax proposal is approved even in the cases where this facility is available it will become far more expensive. This is adding salt to injury since the consumer has already paid service tax on his insurance premium. And the irony is that, this levy is unlikely to yield a single rupee in extra revenue to the government.

Consider this example. The Insurance Company approves the cashless facility for a particular patient to the hospital for treatment costing Rs. 2 lakhs. In such a case the hospitals will have to charge a service tax of 10.30% on the total bill amount (that is the bill amount will be Rs. 2 lakhs plus Rs. 20,600 as service tax) and the Insurance Company will pay Rs. 2,20,600 to the Hospital. Now the Insurance company is likely to have the right to set off this service tax amount of Rs. 20,600 against it’s own liability to pay service tax on the Insurance premiums that it collects from all its consumers. This in effect will mean that the government is actually collecting this service tax amount from the Hospitals as against collecting it from the Insurance companies with zero increase in overall service tax revenues. Meanwhile the consumers are likely to suffer, as the amount of service tax paid to the hospitals is likely to use up their claim amount limit even though it may not result in a net cash outflow for the Insurance Company. To summarise the end result will be – Hospitals – not affected because they will collect it from the Insurance companies, Insurance companies not affected because this will not result in any additional cash outflow for them due to adjustment against their service tax liability but consumers can be the only ones who are affected as this is likely to reduce the amount of their health coverage. Of course the Hospitals and Insurance companies cannot rest easy till the rules (most experts Apnapaisa spoke to were not sure about them) are clear that this levy will follow the basic principle of allowing input credit that is a cornerstone of the modvat and service tax regime (as well as the GST that is slated to take over next year).

Given this situation of no extra revenue accruing to it, it is unclear why the government has chosen to impose this tax in this manner at this stage.

The Draft National Health Bill 2009 states that health is a fundamental human right indispensable for, and intricately linked with, the exercise of all other human rights. It is also a fact that India is among the bottom 5 countries in the world (that’s right we are in the bottom 5 countries) in terms of public health expenditure as a percentage of the total health expenditure. So given that the government is unable to provide this basic human right to its own citizens and he is forced to turn to private insurance providers and what’s more is already paying service tax on such premiums, the imposition of this tax in this manner is rubbing salt to the injury.

Nobody can argue with the government’s need to raise more resources but in this case, if the tax is imposed in a reasonable manner, no additional revenue can result as discussed above. One only hopes that better senses will prevail and the tax in its current avatar will be dropped. If that is not possible then a quick clarification on how it will work may also ensure that the fallout from this levy causes the least amount of damage to the consumers.

The situation on the Health Insurance claim payment front has deteriorated significantly over the last few months. While everybody is aware about the turf war which is going on between IRDA and SEBI over ULIPs, only consumers who have the misfortune to fall sick and get hospitalized are realizing the significant issues with claim settlements on mediclaim plans.

Let me narrate my own personal experience to illustrate the point.

I had the misfortune to slip and fall at home as a result of which I was advised minimally invasive surgery to repair a tear in the shoulder sometime in mid December 2009. I was smug at the fact that I had adequate medical insurance and hence I would at least not have to worry about the hospitalization expenses. My first shock was when the doctor hiked the estimates for the procedure after finding out that I had medical insurance. It was only when I refused to pay anything additional and threatened to shift to another doctor that wiser counsels prevailed and he agreed to abide by the original estimate of around Rs. 2 lakhs. The second shock came when I realized that this very reputable hospital had blacklisted all TPAs/Insurance companies and I would have to pay the bill first and seek reimbursement from the insurance company later. On enquiry I learnt this was because of the bad experience that the hospital had with TPAs (as well as Insurance companies) who delayed payment even after providing approval for cashless settlement.

The last shock was reserved for when I put in my claim with the TPA for reimbursement of the expenses that I had incurred. Firstly the TPA allotted by my insurance company had given a 1-800 telephone number, which was never picked up. So for any queries I had to send a messenger over. The people at the TPA were extremely rude to my staff that went personally to their office for enquiries. I was at a wits end as to the status of my claim when I discovered, almost by accident, that the TPA had an online status check facility (this facility is not advertised anywhere in the policy documents). I began checking the status on the website on a constant basis and hence was able to find out, in early Jan 2010, that the TPA had raised several queries including requiring a copy of the FIR filed for the accident (who on earth files a FIR for a slipping incident at home) and a copy of the indoor case papers of the hospital. This query was only updated online and I have yet to receive the actual physical letter containing the query. In any case I got together all the documents and submitted them in mid-January 2010. After that it took them almost 4 weeks (they updated the approval on the site yesterday) to approve my claim after making some nonsensical deductions. To enable you to judge the merit of these deductions here is a sample list of what they have deducted - Rs. 100 for shaving (they have claimed it is for head shaving though no where in the bill is it mentioned as head shaving – it was actually chest and shoulder shaving to prepare for the operation) and Rs. 200/- warming blanket – used in the operation theatre where the temperature is kept very low thus necessitating the use of this disposable blanket which is filled with warm air to keep the patient warm. I know the amount of deduction is extremely small and hence I do not plan to contest them but the pettiness really rankles. Again true to form I have learnt all this from their online status site. I now anticipate a struggle to get the actual cheque for the approved claim.

So what are my learnings from this episode?

Firstly the health care industry (especially the larger hospitals) is clearly a law unto itself. With a tremendous shortage of quality health care facilities they clearly have no push factors for pricing the services reasonably for their consumers (yes patients are also consumers after all). In fact, but for a few notable exceptions, most of them possibly see an easy money making opportunity when they are treating an insured patient. The absence of competition ensures that patients have a Hobson’s choice in terms of medical personnel and hospitals and the ability of even large Insurance companies to lay down some standard payment systems is very poor. The hospitals and doctors off course have their own woes with the health insurance industry. Ambiguous terms attached to cashless pre-approvals mean that the hospital is not sure if the payment will actually come or not. Secondly there are very long delays in payment even after a claim is admitted and approved.

Off course some players in the health insurance industry contribute their own share to the consumer’s woe by denying/reducing claims on flimsy grounds, delay in decision making, etc. to make this a very hassle some process for consumers.

The health insurance industry also re-acts by pushing the onus on to the poor patients (sub limits, co-pay requirements, etc) who are the grass that gets trampled upon between this fight between a two elephants (the health care industry and its relatively tinier counterpart - the health Insurance industry).

Given the fact that public spending on health insurance as a percentage of the total healthcare spends in India is one of the lowest in the world, the health insurance industry has a very important role to play in ensuring the availability of quality health care to the population.

It might be interesting to see the history of the stand off between the health care and the health insurance industry. There had been stand off between TPA (Third Party Administrator) and Hospitals, few years ago after which IR DA and others had intervened to set up an arrangement which had been working reasonably well till about 6-9 months ago. This is when the arrangement broke down again, especially where handling is done by TPAs. A large number of very reputed hospitals have refused to entertain cashless approvals by TPAs and now the whole sector is crying out for the urgent intervention of Government authorities.

The lack of standardized charges among the health care sector is the biggest impediment to the spread of health insurance in India. In fact the lack of standardization in so rampant that charges for consumables particularly expensive ones like stents vary from patient to patient. In fact charges may vary considerably for the same procedure in a similar room class depending on whether the patient is insured or not. The question here is why can these charges vary from patient to patient in this manner. The health care sector clearly has a lot to answer, and the Government’s recent move to accredit hospitals and to have standardization in some of the charge structure is most welcome and needs to be implemented with full speed.

IRDA also needs to intervene to make sure that similar standardization happens in the health insurance industry to make sure that the newly acquired confidence of the health insurance customer does not dip significantly.

Till both these events happen the consumers have no other choice but to grin and bear it.

I hope Finance Minister comes up with some proposition on this when he gets up to present the budget next Friday. After all health is an important service for the “aam aadmi”.

Please write to me about your own experiences with Health insurance as well as any counter points to this article.