High health cover can still result in significant out-of-pocket costs due to customary charges

A recent case highlights how insurance companies using the ‘reasonable and customary charges’ clause can reduce payouts, leaving policyholders with unexpected expenses despite high coverage caps.

A health insurance policy with a large sum insured can still leave a patient with a much smaller payout if the insurer invokes the “reasonable and customary charges” clause. Business Today reported a case in which a ₹25 lakh policy faced a ₹12 lakh hospital bill, yet only ₹5 lakh was paid after the insurer assessed several charges as excessive or outside its benchmark for that treatment.

Health and life insurance expert Nikhil Jha said the clause exists because there is no single official price list fixing what every hospital may charge for a procedure. In practice, insurers compare a hospital’s bill with what similar providers in the same area typically charge, then trim amounts they regard as inflated. That approach is broadly in line with standard insurance practice in other markets, where plans use an allowed or customary amount to cap payment and patients may have to cover the difference if a provider charges more.

The deductions in the example were substantial. The insurer cut surgeon fees, anaesthesia costs and other hospital charges after comparing them with benchmark rates, while also excluding some consumables as not covered. The result was a much lower settlement than the patient may have expected from a policy with a high cover limit. The broader lesson is that the sum insured is only the maximum available under the policy, not a promise that every rupee on a hospital bill will be paid.

Industry guidance on usual, customary and reasonable charges shows why disputes arise. These limits are often used to prevent payment for fees deemed unnecessary or excessive, but the measure can vary by geography, hospital category, doctor experience, treatment complexity and technology used. In the United States, for example, federal consumer guidance says the allowed amount is the maximum a plan will pay for a covered service, and out-of-network patients may face balance billing if a provider charges more than that amount.

For policyholders, the practical response is to challenge every unexplained deduction. Jha advises asking the insurer which item was considered too high, what benchmark was used and what clause supports the cut. He also recommends checking claims-settlement reputation before buying a policy and paying close attention to room-rent limits, co-payments, deductibles and exclusions. High cover is useful, but only if the policyholder understands how the insurer will actually value the bill.