The Role of Co-Payments

Though many may not realize it. We are essentially providing coverage to ourselves through an insurance.

Medical insurance is considered as the most essential coverage for an individual or family to have some in the event of unexpected illness or accident. The primary purpose of medical insurance is to protect individuals and families from unexpected healthcare expenses by covering some or all of the costs of medical treatment, either by reimbursing the insured for expenses or by directly paying healthcare providers. In Malaysia, a typical medical insurance often include a cashless facility which does not require any out-of-pocket expenses by the policyholders most situations. While this feature provides worry-free coverage, it can lead to undesirable behavior which is overspending. ?

A co-payment is a condition where a policyholder is required to pay a specified amount or percentage of an incurred medical expense when the policy holder undergoes a medical treatment . The remainder of the expense will then be covered by the insurance company.

Co-payments are designed to help moderate the consumption of medical services. This encourages the "thoughtful and considerate" use of medical services and helps keep overall costs down.

Let’s see how does a medical insurance work typically - all premiums paid by policyholders are pooled together by the insurance company to cover claims for medical treatment. When a policyholder files for a claim, the insurance company will use the pooled fund to pay for the claim. However, if the total claims become higher than expected, the pooled fund will have insufficient resources to cover claims, which will lead to higher premiums for everyone in future (in order to make sure the fund is sufficient to pay future claims) It is the collective behavior of policyholders that will affect the overall risk of the pooled fund.?

To illustrate this, we can take the following example:

Mr. Ahmad needs to undergo a cataract surgery. The procedure will cost him RM7,000 at Hospital A and RM12,000 at Hospital B.?

He chooses to do the procedure at Hospital B because he feels that Hospital B provides a more premium service than Hospital A and his current medical card can cover 100% of the bill.?

If everyone were to make the same decision as Mr. Ahmad, the cost of insurance will become higher, which will put pressure on the pooled fund to pay claims to those who also require medical service elsewhere.?

By having a co-payment of 5%, Mr. Ahmad will likely reconsider his choice of hospital and may choose to do the procedure at Hospital A instead. If everyone made similar decisions, the overall medical expenses for the pool would remain manageable, subsequently preventing future premium increases for everyone.

Finally, by understanding how behavior can affect premiums, we can see how co-payments can play a crucial role in keeping insurance affordable.?

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