Proportionate deduction in health insurance, the formula and a worked example

What proportionate deduction is

Your policy may cap the room rent it pays per day. If you stay in a room that costs more, a proportionate deduction clause lets the insurer pay some other charges at a reduced rate too. The reduction follows the gap between the room you were eligible for and the room you took.

IRDAI calls the charges that can be reduced "associated medical expenses". Its circular of 11 June 2020 required every policy that uses this clause to define that term in its terms and conditions.

The formula

Eligible room rent a day divided by Actual room rent a day=The share paid on each associated medical expenseExample₹4,000 divided by ₹5,000=80%

Find the ratio. Divide your eligible room rent per day by the actual room rent per day.
For each associated medical expense, amount paid equals amount billed multiplied by that ratio.
Room rent itself is paid up to the eligible limit.
Protected heads are paid in full, subject to the policy's other terms.

A worked example

The numbers here are a round example, not any real bill. The sum insured is ₹4,00,000 and the room rent limit is ₹4,000 a day. The patient stays 5 days in a room costing ₹5,000 a day. The ratio is 4,000 divided by 5,000, which is 80%.

Example bill, head by head: ₹2,15,000 billed (example)Room, 5 days at ₹5,000₹20,000 of ₹25,000Up to the limitSurgeon and anaesthetist fees₹48,000 of ₹60,000Paid at 80%Consultant visits₹8,000 of ₹10,000Paid at 80%Nursing₹4,000 of ₹5,000Paid at 80%Operation theatre₹16,000 of ₹20,000Paid at 80%Medicines and consumables₹30,000 of ₹30,000ProtectedImplant₹50,000 of ₹50,000ProtectedLab tests and scans₹15,000 of ₹15,000ProtectedInsurer pays₹1,91,000Cut₹24,000

The ₹24,000 cut in this example: ₹5,000 of room rent above the limit, and ₹19,000 from the 80% ratio on the other linked heads.

Example bill head	Billed	Insurer pays
Room, 5 days at ₹5,000	₹25,000	₹20,000 (limit)
Surgeon and anaesthetist fees	₹60,000	₹48,000 (80%)
Consultant visits	₹10,000	₹8,000 (80%)
Nursing	₹5,000	₹4,000 (80%)
Operation theatre	₹20,000	₹16,000 (80%)
Medicines and consumables	₹30,000	₹30,000 (protected)
Implant	₹50,000	₹50,000 (protected)
Lab tests and scans	₹15,000	₹15,000 (protected)
Total	₹2,15,000	₹1,91,000

In this example the deduction is ₹24,000. The extra room rent accounts for ₹5,000 of it. The other ₹19,000 comes from the 80% ratio applied to fees, visits, nursing and theatre charges. Co-payment, deductibles and non-payable items, if your policy has them, come off after this.

Which bill heads it can touch

Only the heads your policy lists as associated medical expenses. The June 2020 circular said insurers "shall not recover any expenses towards proportionate deductions" other than those defined heads. Look for that definition in your policy wording before you check any deduction.

Which bill heads it must not touch

The June 2020 circular listed these:

Cost of pharmacy and consumables.
Cost of implants and medical devices.
Cost of diagnostics.
ICU charges, because different categories of ICU do not exist.
Any expense the hospital does not bill differently by room category. If the theatre fee is the same in every room, no ratio applies to it.

Where the rule stands now

1 Oct 2020
The June 2020 rule applied to products filed from 1 October 2020. Existing policies had to be changed at renewal from 1 April 2021.
29 May 2024
IRDAI's Master Circular on Health Insurance Business of 29 May 2024 lists the June 2020 circular as item 19 in Annexure 6, the 55 circulars it supersedes. We read that master circular and the September 2024 master circular on policyholder protection, and found no replacement text on proportionate deduction in either. Some web pages say the 2024 circular limits proportionate deduction to room rent alone. The circular's text does not contain that rule.
Now
Policy wordings written to the 2020 rule still carry these protections, and the wording is your contract. If you bought or renewed a policy recently, read its clause rather than relying on the old circular alone.

How to check a settlement

Read the settlement letter. Under the 2024 policyholder master circular, any partial disallowance must come with reasons that cite the specific policy terms. Under IRDAI's 2016 TPA regulations, a TPA letter must show the amounts disallowed and why.
Redo the formula with your own bill.
If medicines, implants, diagnostics or ICU charges were scaled down, write to the insurer's grievance officer and quote your policy's definition of associated medical expenses.

Have a hospital stay coming up? Send your policy on WhatsApp and a person checks it for you.

Questions

What is the proportionate deduction clause in health insurance?

It is a policy clause that lets the insurer pay room-linked charges in the same ratio as your eligible room rent bears to the rent you were charged. It applies only when you stay in a room above your policy's room rent limit.

Can proportionate deduction apply to ICU charges?

IRDAI's June 2020 circular said no, because ICUs do not come in different categories. Check that your policy wording carries this rule.

Does proportionate deduction apply if the hospital charges the same fee in every room?

The June 2020 circular said insurers must not apply it to any expense the hospital does not bill differently by room category. The policy terms had to say this clearly.

How is proportionate deduction calculated?

Divide your eligible daily room rent by the actual daily room rent. The insurer pays each associated medical expense at that ratio, and pays protected heads such as medicines, implants and diagnostics in full.