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Don't let high medical bills kill you
Sunil Dhawan, Anagh Pal & Bridget S Leena, Outlook Money | May 29, 2007 12:42 IST
Manish and Seema Jain are middle-income professionals just like a lot of us. Four months after their daughter, Mansee, was born, she was diagnosed with a heart problem that could be corrected only through surgery.
Since January 2005, she has undergone four operations, including open-heart surgeries. She will need one more major operation to put in a second valve. Her father hopes it can wait till her late adolescence.
But, he says, it might have to be done tomorrow, or next week, or. . . At today's prices, it would cost over Rs 7 lakh (Rs 700,000).
After Mansee's illness was diagnosed, the Jains found six-figure medical bills flying at them. And they were not ready for this. With hardly any government health system worth speaking of, the entire amount will have to be privately funded. In 15 years, that number could go well past Rs 25 lakh (Rs 2.5 million).
Healthcare costs in India today are not only high, but also rising fast. Binaifer Jehani, a research analyst who tracks hospital companies for economic research outfit Crisil Research and Information Services, says that hospitalisation costs have gone up by 15 to 20 per cent in the last one year alone. This rise appears to be part of a trend (See below: The cost of the right remedy).
A recent study by Ficci and consultancy company Ernst and Young (E&Y) says that over the next 10 years, healthcare spending in India will double, that is, show a CAGR of over 7 per cent. If the population grows at a little over 1 per cent, per capita expenditure on this front will increase.
Drivers of inflation
There are two broad reasons why the costs are going up.
1. Demand for better services: The first is that Indians, mostly the urban mass affluent, are demanding better services. Utkarsh Palnitkar, industry leader (health sciences), E&Y, says, "As nations become wealthier, consumers demand more and are willing to spend more on healthcare."
According to the Ficci-E&Y report, from 1993-94 to 2001-2002, aggregate household expenditure on health services increased at 9.3 per cent CAGR.
Rana Mehta, vice-president and head of healthcare practice at consulting firm Technopak, says: "Hospitals have to bear the high costs of technology."
Mukesh Shivdasani, executive director, Max Healthcare, says high-end specific technologies such as brainSUITE (image guided neurosurgery system), and 64-slice CT in the field of diagnostics have improved the quality of treatment dramatically, but have increased costs too. He adds that a hospital now is not only about clinical services, but needs to rope in a host of professionals from other industries, leading to an increase in costs.
2. Changing nature of diseases: "Another factor impacting the costs is the shift from infectious to lifestyle diseases," says Palnitkar. An E&Y survey in 2006 for inpatient treatment in 18 hospitals across five major cities points out that the average spend on lifestyle diseases is Rs 40,500 per treatment, while that on infectious diseases is Rs 5,520.
Adds Mehta, "An acute disease like malaria is cured at one time. But the cost of treating chronic diseases (most lifestyle diseases are in this category) is higher. Take diabetes. It affects all parts of the body. The treatment is ongoing. So costs go up."
Lifestyle ailments such as cardiovascular diseases, cancer, diabetes and asthma are increasing and the trend will continue, raising healthcare costs.
Indians are still not savvy about ways to fund medical treatment. Most of it is still borne out of their own funds. According to the Planning Commission, even as recently as 2002, less than 10 per cent of the population was covered by health insurance. A recent study by the Insurance Regulatory and Development Authority (Irda) and National Council for Applied Economic Research (NCAER) says that even in urban India, health insurance penetration is about 25 per cent.
Per capita insurance premium is Rs 1,800, which, for someone in his mid-30s would mean a cover of about Rs 1.25 lakh (Rs 125,000). In 2003, going by World Health Organisation data, private health expenditure was 75.2 per cent of the total health expenditure, and 97 per cent of that was out-of-pocket private expenditure. With rising healthcare costs, this reality will have to change. Otherwise, wealth accumulated over a lifetime could be lost in a single episode of expensive illness.
All is not lost
Now that you know what you are up against, what can you do about it? In the following paras, we will talk about ways in which you can foot your bills without feeling too much of a pinch. You could face two kinds of healthcare problems: the first is insurable, the second isn't. In the next section, we will look at what health and other insurance can do for you. The last part will deal with situations where insurance cannot take care of the expenses.
Forget an apple a day, try insurance
The problem with illness, be it the result of disease or an accident, is that it squeezes you from two directions. On the one hand, the treatment substantially pushes up your expenses, on the other, the illness hampers your ability to earn. In such situations, insurance can cushion much of the shock.
However, the need for health insurance is not the same for everybody. It depends on factors such as your age, dependents and income. Besides, numerous products are available in the market. Which one will give you the most bang for the buck? Here is a closer look, followed by five strategies for various stages of life.
What's on offer
The oldest health insurance scheme available in India, the mediclaim, retains much of its popularity. Two more variants on the theme are available now. The first is group mediclaim that can cover a group of people. The second is the floater plan meant for families. Then, insurers are providing health plans through 'hospital cash benefits'.
Next, there are narrower offerings. Plans that insure only against specific illnesses are called critical illness plans. Also available are hospital-centric health plans.
To figure how much cover to buy, we look at five strategies for different stages of life and check out the products that fit the bill.
Stage I: Single, not eligible
In the early days of your career, when you are young and single, you would need medical insurance primarily to cover the expenses that you would incur if you fall ill or meet with an accident. The probability of major illnesses is still low, so you do not need a huge cover. Nowadays, most employers provide group insurance cover to their employees. Take it if it is available.
There are two reasons why, despite that, you should have an individual mediclaim. The first, of course, is to supplement the amount of cover. The second is to stay covered in between jobs. It is common to go through two or three jobs before you hit 30, so there are likely to be periods when you would not be covered by employer-provided insurance. At this stage, also ensure that your parents are covered by their own mediclaim plan.
While the cover you take might not be too high, there is another reason why it is important to be covered apart from the fact that you never can say for sure when something will strike. You will be buying the cover before you develop any disease.
Remember, mediclaims do not cover what insurance companies call 'pre-existing' diseases, that is, those that you are known to be having at the time of taking the cover. If you do develop something later, it will be during the time when you are covered and, thus, the cover will be extended to it.
While a plain vanilla mediclaim will cover a wide swathe of diseases, it will by no means cover everything. Except for accidental claims, your mediclaim plan gets activated after the first month. Certain ailments will not be covered in the first year. These diseases will be covered from the second year if you renew your insurance with the same insurer.
An important reason to buy mediclaim early is that the chances of making a claim are low in the early years. If claims are not made in a particular year, the insurer is likely to either increase the cover or reduce the premium automatically in the next year.
So, if you start early, you can benefit from the automatic increase of cover, and bring the overall cost of insurance down.
Health cover premiums come with big tax relief
Health cover premiums you pay for insuring yourself, your spouse, your dependent children or dependent parents qualify for tax breaks. Under Section 80D of the Income Tax Act, a maximum of Rs 15,000 paid as premium in a financial year is deductible (up to Rs 20,000 for senior citizens). Premiums paid for all health cover plans, including mediclaim from non-life insurance companies or health- related or critical illness riders get the tax benefit.
You can get the charges deducted from the fund value of a Ulip towards a health rider attached to it from your insurer at the year-end. Only individuals who pay premiums from their own sources and through a cheque can get these tax benefits. If a young person buys a mediclaim in the names of his parents, he would not qualify for deduction applicable to senior citizens and would still have the cap at Rs 15,000.
Illustratively, at 30.9 and 33.99 per cent tax rates, the saving would be Rs 4,635 and Rs 5,085, respectively, for premiums paid of Rs 15,000 (for self and family).
Stage II: Still footloose and fancyfree
Whether you get married or not, you will still grow older. And with the years, you should keep increasing your cover. To find out by how much, you should first reassess your medical requirements. If you feel the need, enhance the cover.
The glitch is that all insurers have restricted the cover amount to Rs 5 lakh (Rs 500,000) . ICICI Lombard has an even lower limit of Rs 3 lakh (Rs 300,000). Cholamandalam MS is perhaps the only insurer that gives you higher covers of Rs 7.5 lakh (Rs 750,000) or even Rs 10 lakh (Rs 1 million).
So, to stretch the cover, buy two separate plans from two companies. Both the companies will pay the claim equally. For smaller claims, make the lower denomination plan pay for your expenses. Make sure to disclose this to both the insurers.
Stage III: Double insurance, no kids
After you get married, you need to change your health cover to get your spouse insured. By this time, you are likely to have a few years of health cover and no-claim bonuses behind you. If he or she is employed, make sure your spouse is covered by his or her office's employee group insurance, if available.
Remember, group insurance covers also pay for maternity expenses. So, don't miss out on it if it is available. Except for Royal Sundaram, no individual or family mediclaim provides maternity cover. Even this is under specific circumstances. If your wife isn't working, there's no choice but to foot the maternity bill.
Besides, check if your respective employer's group insurance covers the spouse as well. If it does, get that cover too.
You also have the choice of taking a floater mediclaim. In a floater, the sum you choose to be insured can be used to cover all the members of the family, or any one of them. For example, if you have bought a Rs 5-lakh cover, either or both the members of the family can use it to the full amount.
The premium that one pays is slightly higher than the normal individual mediclaim plan. Reliance General Insurance, a new entrant in the health segment, has come out with premiums considerably lower than those of other players.
Stage IV: The family way
You do not need to make any dramatic changes to your insurance cover after the birth of your children. You can add the name of your kid in the floater policy that you already have. Just make sure that the floater plan is no different from a normal mediclaim plan when it comes to inclusion and exclusion of ailments.
Rather than buying individual mediclaims of Rs 1 lakh (Rs 100,000) for, let's say, four members of your family, it is better to buy a floater of Rs 4 lakh (Rs 400,000). The probability of all the members of the family falling ill at the same time is remote and in case any family member develops a problem, the higher limit could be put to use.
Stage V: The sandwich generation
It is around the age of 40 that many of the lifestyle diseases start rearing their ugly heads. This is the time when you need to build that second wall of defence to cushion yourself from a major financial setback. Aptly called the 'sandwich generation', those in their 40s tend to carry a lot of dependents -- both their family and their parents. So, it is imperative that any illness that you may develop does not break the family budget.
Getting hospitalised for common ailments or sicknesses may not cause much financial distress. What may jolt your finances are illnesses that drain out a lot of money and take time to heal. These usually fall in the critical illness category and there are separate polices to take care of them.
A critical illness policy is designed to provide a lump sum payment if one is diagnosed with one of the illnesses covered by the policy.
The main difference between a critical illness policy and a mediclaim is that under the critical illness benefit one gets an amount equal to the sum assured, irrespective of the medical expenses incurred to treat the critical illness.
Under a mediclaim, one receives a reimbursement on producing the bills and the amount is limited to the medical expenses incurred.
They are often available as a rider with a life insurance policy, but it may not be advisable to take the rider route since the cover amount would be linked to the main policy. Buying it from a non-life insurance company is more useful as it gives the required cover.
Insurance broking company Optima Risk Insurance Services's CEO Rahul Aggarwal says, "Your main policy might end when you invoke the critical illness rider with a life insurance company." Even if it doesn't end, look at the extra cost of attaching the critical illness feature to your life insurance policy. Mayank Chauhan, territory manager with Birla SunLife Insurance, says, "We normally do not recommend attaching critical illness riders to Ulip plans to our clients unless the sum assured of the base plan is high. Also, the cost is higher compared to normal mediclaim."
Tata AIG Life Insurance has a unique plan called Health Protector, wherein one can opt for covers for critical illness, cancer, disability, or even hospital cash benefit -- all available under one plan. The next step after buying a critical illness plan for yourself could be to get a critical illness cover for your spouse as well. Birla SunLife Insurance has women-specific critical illness plans that are worth examining.
Extra cover health plans
All those who have a family history of specific diseases may as well take an extra guard. Diabetes is just one of the ailments that are inherited. "Insurers had a blanket ban on individuals with sugar problems," says Sandeep Nanda, director of Security Investments, a Delhi-based financial consultancy firm.
Changes are happening in insurers' own risk profiles and they are coming forward to at least medically cover the lives of their customers. ICICI Prudential Life Insurance has a cancer plan. It covers most forms of the disease and in case cancer is diagnosed, the benefit amount is paid as both early and advanced stages begin.
At the moment, only ICICI Prudential Life Insurance and Bajaj Allianz General Insurance provide diabetes covers. The rest do not cover it if it is a 'pre-existing' disease, but cover it if you develop diabetes after you have bought the policy. In terms of premiums, ICICI Prudential's policy, ICICI Diabetes Care, is more expensive, but pushes the policyholder to control the disease. It covers six critical illnesses -- heart attack, coronary artery bypass surgery, kidney failure, stroke, cancer and major organ transplant.
The entire sum assured is paid on the first diagnosis of any of the critical illnesses.
Bajaj Allianz covers all the diseases associated with diabetes under its critical illness policy. Before giving diabetes cover, Bajaj Allianz puts a patient through a medical examination and charges extra over the premium for the critical illness policy.
Your retired years
Medical care during this period is becoming one of society's largest and most complex issues. Yet, few individuals on the verge of retirement actually plan for it. This is the time when income inflows are static or falling, and illnesses and medical expenses tend to climb.
The problem is becoming even more complex as life expectancy has gone up to around 65 years. There is also hardly any insurance cover the elderly can buy. Most companies have fixed the maximum entry age at 70 years or less and give cover up to 80 years, provided the plans are renewed religiously.
The premiums are high as the likelihood of illness is high. And that, too, becomes a concern at a time when the income is limited. Varishtha Mediclaim from National Insurance Company is the only policy available to an 80-year-old and is renewable till the age of 90.
Other than normal medical insurance, it covers critical illnesses. But the sum assured is fixed at Rs 1 lakh for mediclaim and Rs 2 lakh (Rs 200,000) for critical illness. Under Varishtha Mediclaim, pre-existing diseases are covered after a claims-free year.
How to buy health cover
With a product as complex as a mediclaim or critical illness cover, one should never buy on the basis of price alone. Optima's Aggarwal says, "In the last one year or so, there have been restrictive practices in the health insurance industry, with some firms hiking the premiums and even restricting the services."
It is important to check out which illnesses are included and which excluded, and understand the legalese in which these are mentioned.
If you are a salaried person, use up your tax deductible medical reimbursement provision of Rs 15,000 before you touch your mediclaim. Also, choose wisely and stick with an insurer as policies become more favourable as they age.
Royal Sundaram managing director Antony Jacob suggests: "Renew the health insurance policy year after year without any break as one does with life insurance. Review the adequacy of sum insured at every renewal and act accordingly."
Remember, an insurance company would want you to stay with it without making any claim for at least three years. Thereafter, most of the excluded benefits are yours to enjoy.
Covers that you need but have not reached India
Grandmother's wisdom revisited
If you select medical cover smartly, you will not have to pay for treatment in most cases. But by no means can you cover all situations. Take the case of a temporary disability. It could prevent you from working, but is not covered by medical insurance or critical illness cover. In fact, these situations are probably worse, for all along you had thought that you had covered all the bases. There are many such gaps. Take a look at the prominent ones.
Chinks in the armour
Pre-existing diseases. The first things you need to create provision for are diseases "pre-existing" at the time of buying the health cover. They will not be covered in the first few years of the policy.
Upper limit of health cover. It is important for you to remember that you will need to supplement your medical cover. Even for floater plans, most insurers would provide a maximum cover of Rs 5 lakh. If two people covered under the floater fall ill, or someone develops cancer, the treatment costs would easily exceed this amount.
Disease-related disabilities. Among these disabilities is paralysis as a result of stroke. This is different from disability through accident, which is normally covered through a separate disability insurance plan or sometimes included in the health plan itself. Tata AIG, for instance, covers disabilities arising out of specific critical illnesses under its Health Protector plan. Even so, the risk remains and cannot be insured.
Cost of diagnostics. Costs of ultrasound and clinical tests as well as other diagnostic expenses are not covered unless incurred within 30 days prior to hospitalisation and 60 days afterwards and unless the stay in the hospital is at least 24 hours.
Old-age health costs. As we said earlier, few insurance covers are available during your twilight years. Even those that are have limited cover. So, unless you have your cash stash, you are really living dangerously. And that is where emergency funds come into the picture.
How to build an emergency fund
This fund is conceptually different from your savings. It should not be touched unless there is a medical emergency. Don't lock these funds up as you may suddenly need cash. So, they will have to be in savings accounts or, may be, in liquid funds. But how much should you put aside? Since these are low-return avenues, you will lose out on income if you put in too much in them.
Financial planner Gaurav Mashruwala says the rule of thumb is to keep three months' regular expenses in an emergency fund and 15 per cent of your net worth in income-generating assets. Your money should be at a place which has ATM and multi-city facilities.
Financial planner Lovaii Navlakhi agrees. "One can also be invested in debt funds, which can be liquidated at short notice and which are not prone to high volatility," he says. While savings accounts carry a fixed return of merely 3.5 per cent, a liquid fund is delivering around 7 per cent at present.
If at the end of it all, the funds do not cover the expenses, you will perforce have to break your investments. If it comes to that, break them in the order of increasing returns. Some banks provide an overdraft facility to access the funds only at a time of need. Even though you will have to repay, it gives you quick and easy access to funds at short notice.
And even as you are preparing for the unforeseen, try to stay healthy. In retirement, it is not the bank balance, but your health that will be your biggest asset.
With reports from Nikhil Menon.