Why you don't get reimbursed fully for mediclaim

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

A very common case that you may have come across these days.

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 lifestyles and health status in a city who run the risk of incurring expenses on hospitalisation due to illness, disease or accident. Now assume that statistics show that two people out of them will need to be hospitalised and on an average would incur an expense of Rs 1.25 lakh each.

That means the total expenditure of the group for hospitalisation is likely to be Rs 2.5 lakh 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 2.5 lakh, an amount needed to reimburse 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.

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Now many things in this example are difficult to assume. Suppose if the probability is wrong and the numbers of people who need to be hospitalised are four instead of two and therefore the total expenditure on those four people is Rs 5 lakh.

The amount available in the pool is only Rs 2.5 lakh which means only the first two gentlemen will get the claim amount and the last two 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 our example.

Other things remaining the same, somebody aged 40 will have a higher probability of incurring hospitalisation 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 clear it increases the probability of the loss by how much and is 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 her/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 jeopardise 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 hospitalised for a disease then depending on the hospital, the class of room and the doctor you choose the actual expenses can vary by as much as 300 to 400 per cent.

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 1.5 lakh 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 lakh 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 minimised by the concept of sub-limits and co-pay requirements.

Nowadays quite a few mediclaim policies provide sub-limit for daily room rent at one per cent of the sum assured and two per cent of the sum assured for ICU.

Some policies also provide for sub limit for doctors' 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 to 20 per cent) 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 hospitalised from a particular 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.

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