Sunil: My health insurance brochure mentions a co-pay of 5 per cent, which would lower the premium amount by 10 per cent. I am not convinced of the cost-benefit. Can you weigh in on this whole co-pay clause?

Vijayan: A co-pay is an arrangement where the policyholder meets a certain part of the treatment cost, typically between 5 and 20 per cent, after which the insurer will clear the remaining bill. Suppose you get admitted for a procedure costing ₹50,000. After you co-pay ₹2,500 (5 per cent) to the hospital, your insurer will clear the remaining bill of ₹47,500. In return you get a discount on premiums as you mentioned.

Sunil: Seems more like a way to put your skin in the game by the insurer.

Vijayan: Yes, for one, risk sharing is an important tool in risk management. By shouldering a portion of the cost, the policyholder is sharing the risk with the insurer. Second, the insurers believe it will lower the number of false claims. Third, there may be a propensity to avoid unnecessary procedures when your financial contribution is not zero.

Sunil: But my grandfather was also asked to pay a certain amount in his policy. I am not sure if he opted for a co-pay clause.

Vijayan: Yes, co-pay can be optional in some policies which then offer a discount on premium. In others, even without discount, co-pay clause may be included as a standard. This will apply to specific medical procedures undertaken by elderly policyholders. It will be mentioned boldly in the policy documents, even as other ages will not have any co-pay limitation.

Sunil: Where else can we find such co-pay clause kicking in automatically?

Vijayan: Policy bought in Tier-II/III zone but medical care taken from Tier-I/II zone. Cost-wise, policies sold in Tier-I/II/III will be in descending order, proportional to the medical costs in those zones. So a policyholder buying in a numerically higher zone (II or III) and getting admitted in lower zone (I or II) will have to bear a certain portion of the medical cost as co-pay. Also, some group health policies may have a co-pay clause as well.

Sunil: Got it. My takeaway from this is co-pay should be avoided if possible.

Vijayan: Yes. Insurance is meant to hedge unknown risks. Sharing a portion of unknown risk for a small discount seems inefficient from a cost perspective.