What Is ‘Reasonable And Customary’ In Health Insurance? The Quiet Clause That Can Catch You Off Guard

If you have ever filed a health insurance claim and received a reimbursement that fell short of your hospital bill, you may have just brushed up against a quiet but important clause called “reasonable and customary charges.” It sounds benign enough, even fair sometimes. But depending on how it plays out, it can mean footing a far larger part of your medical bill than you would have expected.

On the insurer’s part, this clause essentially acts as a check against inflated hospital charges.

“It’s meant to keep treatment costs in line with standard medical rates across similar hospitals,” explains Pankaj Nawani, chief executive officer of CarePal Secure. “This clause is designed to prevent hospitals from overcharging or recommending unnecessary procedures simply because a patient is insured.”

But how do insurers decide what’s “reasonable” in the first place?

Turns out, there is a lot of data crunching involved. Insurance companies track historical pricing data, not just from one hospital but across hospitals of a similar grade in the same city or region.

For instance, if a particular knee replacement surgery usually costs around Rs 2 lakhs in tier-1 hospitals in Delhi, and your chosen hospital charges Rs 3 lakhs, the insurer might cap your claim at the lower end. “They basically take the average of the treatment costs from similar setups and reimburse accordingly,” Nawani says.

It is not arbitrary, but it might feel that way to a policyholder who did not see it coming.

To avoid surprises, especially for planned surgeries or procedures, insurers usually step in early through a pre-authorisation process. Before you go under the knife, the hospital sends an estimate to your insurer.

Says Nawani, “For planned treatments, the insurer reviews the surgery estimate and informs the customer if they believe the hospital is overcharging, providing written reasons for their assessment. This allows the customer to either negotiate with the hospital or opt for another hospital offering the treatment at a lower cost.”

If that estimate looks inflated compared to similar procedures elsewhere, the insurer may flag it.

You will get an explanation in writing; this sometimes comes with the suggestion to negotiate with the hospital or consider a more cost-aligned provider.

In emergencies, things get more complicated. There’s no time to look around for the most cost-efficient angioplasty when a loved one is wheeled into the ER. “In such cases, insurers may still negotiate with the hospital if they suspect overcharging,” Nawani notes.

If the hospital agrees, great. If not, the insurer settles the part it considers fair and informs the customer that the balance won’t be covered.

“This is shared through a formal Claim Settlement Letter,” Nawani notes. And if you think the insurer’s idea of what’s “reasonable” is far from it, that letter becomes your ammunition to challenge the decision. You can escalate to the insurance ombudsman, consumer court, or even the high court if needed.

Why This Matters

Most policyholders never read the fine print of their insurance documents, and clauses like this don’t really show up until it’s too late. But understanding them can be the difference between a claim that goes through smoothly and one that leaves you reeling from a bill that’s only partly covered.

It’s not about insurers being stingy, at least not entirely. But in the complex world of medical billing, fairness often feels like a moving target. And for patients or policyholders, that is a tough pill to swallow.

It is important for all policyholders to be aware of such clauses and act for their rights if things go sideways.