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.

Health care costs for hospitalization in India have risen sharply in recent years in tandem with global trends. Many a family has seen their financial planning go for a complete toss due to unexpected costs on hospitalization of a family member. Also due to increasing exposure to media there is a far bigger consciousness about medical insurance. In fact the biggest question asked to us by first time mediclaim buyers is which is the cheapest mediclaim policy?

Unfortunately if this is the only parameter used by a consumer he is likely to end up making a wrong choice. An example will illustrate this point:

If you have diabetes, would you (all other things being the same) rather buy a mediclaim policy that may be a little more expensive but will immediately cover the hospitalization expenses arising from complications connected with this disease (heart problems, kidney or eye problems associated with diabetes) without considering them as pre-existing disease rather than a comparatively cheaper policy which treats all such diseases as pre-existing and hence not immediately coverable.

The following paragraphs lays down the broad parameters apart from premium which you must compare before you buy:

1) Pre-existing disease: This is probably the most important parameter. The relevance is because if a disease is treated as pre-existing then the policy normally provides no coverage or very restricted coverage for expenditure incurred due to that disease in the immediate future. The various things to be considered under this head are

a. Definition of Pre-existing disease: Most policies provide that any disease that was present at any time in the past (including any disease which the insured person may not have been aware of) is treated as pre-existing. But some have a narrower definition, which may extend to only diseases for which the insured person had sought consultation for or was treated for or he was aware of during say the last 4 years. The narrower the definition the better it is for the consumer

b. After how many years of continuous coverage by the company will the pre-existing disease get covered: This is important as after the expiry of the cooling off period even pre-existing diseases get covered. A fine point is to find out if the company you are considering allows your track record of continuous coverage from another insurance company for the purpose of calculating this cooling off period or insists only on continuous coverage with itself for this purpose.

c. Special dispensation for diabetes/hypertension: Diabetes and hypertension have acquired epidemic status in India with one estimate putting the figure at around 5% of India’s population. Also a host of illnesses/diseases such as heart disease, kidney failure, paralysis, stroke, eye problems can trace their root cause to either diabetes or hypertension or both. Since the definition of pre-existing illness includes any complications arising there from, this has been a major reason for disputes between the mediclaim providers and the consumers in the past. Now some insurers provide immediate coverage for at least complications arising from this (ese) disease(s) even though expenses on treating the main disease itself may not be covered. If you already have diabetes/hyper tension then this is a vital consideration for you. Off course it comes at an additional cost and may also involve pre-acceptance medical tests. All these factors need to be taken into account before taking a decision.

2) Sub- limits: Sub limits mean where the overall coverage is broken down into the maximum payable for a particular kind of expense. For eg. A few insurance companies now provide that room rent cannot exceed 1% of the covered amount or that doctors/consultants fees cannot exceed 20 or 25% of the covered amount. Whilst most of these sub-limits are reasonable it is better to take a decision after being aware of them.

3) Co-Pay requirements: Quite a few companies now require that the insured bear a certain percentage of the eligible expenses either unconditionally or under certain conditions. This is called a co-pay requirement. Some companies provide a discount in premium if you agree to co-pay. Some others might want a co-pay if you choose to get treated in a non network hospital or others may have a co-pay for choosing a single air conditioned room or for getting treated in a hospital in a higher cost city. The co-pay feature is built in to ensure that the insured chooses the appropriate hospital/room/doctor level relevant to his economic status and also watches the reasonableness of the charges levied by the hospital to ensure that there is no overspend or overcharge just because of the existence of the mediclaim policy. Again there is nothing inherently unfair about this provision as long as you take a conscious decision after being aware of it.

4) Specific Exclusions: Almost all policies have general exclusions such as costs incurred for Aids/Sexually transmitted diseases or congenital diseases, etc. However some policies have specific exclusions that may be relevant to you.

5) Maximum Coverage Amount: This is important, as a particular policy that suits you may not be available for the amount of coverage that you seek.

6) Maximum age at entry: This is relevant for senior citizens as quite a few policies may not be available to them.

7) Renewability upto what age: This is relevant for senior citizens as well as people in their 50s since they need to be able to enjoy the benefit of their track record

This is not a comprehensive list of parameters by far. Each policy may have specific positive or negative features that may be relevant to you such as restricted coverage for angioplasties or certain other kind of treatments or features such as free diagnostic tests offered after a certain number of claim free years, etc.

Now presumably it is far clearer why you need to study the policy features rather than just buy the cheapest policy available. The parameters listed have been summarized in the accompanying table.

In the next article in this series I will cover the debate on whether to go in for individual policies or for a family floater policy.

So best of luck with your hunt for the most suitable mediclaim policy.

In case you wondered why Indian Hospitals charge more for doctors fees, operation charges, etc. if you stay in the first class rather then their more economical classes. And how is the Indian insurance industry re-acting to these practices

http://www.apnainsurance.com/health-insurance-india/first-class-is-second-class.html