Take the example of a medical benefits policy offered by a company. This policy covers all ailments related to the heart. To avail this policy, the employee has to present a proof of the ailment and a verified copy of the invoice which mentions the expense incurred during treatment. The expenses incurred during the treatment will then be reimbursed.
Suppose the employee is suffering for a clogged artery and requires a surgery. The employee has various choices of procedures – cost-effective and time-consuming or costly and highly efficient. The result of both the procedures is the same even if it is delayed. Under the Co-payment or copay scheme, a fixed payment for a covered service would be made when an individual receives service. In our example, if the fixed payment for a covered service (surgery for clogged artery) is set at $3,000 and the employee has two options – a $4,500, 15-day or a $20,000, 5-day treatment, the employee would be forced to choose the $4,500 treatment if he cannot afford the high cost of the 5-day treatment. In short, the underlying philosophy is that if there is no copay, the employee would consume much more care than he would if he were paying for all or a significant proportion of it.
Though copay is only a small portion of the actual treatment expense, it restricts the use of company benefits for treatments that might not be necessary. The word ‘copay’ essentially points out to the part-payment that needs to be made by the employee to avail a service. A high copay would mean that the employee would need to shell-out more even if he is covered by the insurance and therefore, the employee may not use essential medical services and prescriptions. A low copay would render insurance useless and encourage people to avail services that are not necessarily required
The difference between co-payment and co-insurance is that in co-insurance, the insured employee needs to pay a percentage of incurred expenses whereas in co-payment, the insured employee needs to pay a fixed dollar amount.