Whether you are an employee of a small or large business, self employed, or if you are a freelancer, chances are you have come across these terms in your explanation of benefits. But what do these terms mean with regards to what you must pay out of pocket before medical insurance kicks in?
First off, it’s important to understand why a health insurance policy has copayments, deductibles, and coinsurance in the first place. Putting it simply, these are all forms of self-insurance (also known as “cost sharing health plans”). Meaning, you retain a portion of your medical expense exposure at the trade off of a lower premium. These are inversely proportional…the lower the out of pocket expenses you have (before coverage kicks in at 100%), the higher the premium. Depending on your financial & health situation (and the choices of coverage your employer offers you), it may be wise to consider a health plan with high out of pocket expenses…especially if it is HSA-qualified.
Now let’s break down each of these terms in detail:
Copayments (or “copays”) is a portion of a bill that the insured pays out of pocket for any medical service that is rendered. For example, if you have a $30/$60 office copay structure, you pay $30 for every primary doctor visit, and $60 for every specialist visit. Insured’s can also expect to be charged copays (which can/will vary in amounts) when they receive other medical services such as major diagnostic exams, blood work, emergency room visits, hospital admissions, physical therapy, as well as when one is dispensed prescription drugs.
A policy deductible (annualized) is the amount of money an insured must pay out of pocket before an insurance company starts paying claims on the policy. For example, if your health insurance policy has a $1000 deductible, your policy will not respond to any claims until you reach $1000 in rendered medical services for that plan year.
Once the annual medical policy deductible is met for the plan year, coinsurance now kicks in. Coinsurance is the joint assumption of risk between an insurance company, and the insured. Meaning, the insurance company pays a portion of your bills, and you pay the other portion. This occurs until the medical policy reaches its “stop loss” (a predetermined cost cap of rendered services). Once the annual stop loss threshold is attained, the insurance company then pays 100% of the insured’s bills for the rest of the year.
Typical carrier/insured coinsurance splits range from 90%/10%, 80%/20%, and 70%/30%, with the carrier paying the higher amount. So for example, if you have a health plan that has 90% coinsurance with a $10,000 annual stop loss, your maximum out of pocket exposure for the plan year would be $1,000.
Putting It All Together
Since a health policy can have copayments, a deductible, and coinsurance, it can get a little confusing for people to determine their maximum out of pocket exposure for the plan year. Here’s an example of a health policy where all cost sharing elements are present:
-$1,000 annual deductible
-$20,000 annual stop loss
-$20/$40 office copayments (after deductible & coinsurance)
For this plan structure, the maximum out of pocket exposure the insured has for the plan year would be $4,800 ($1,000 deductible + 20% of $19,000 coinsurance). However, since this particular plan has an office copayment structure after the stop loss threshold has been met, the insured would still be assessed office copayments, with the carrier paying 100% of all other bills.
Health carriers typically offer varying plan structures in an attempt to provide as many choices as possible for the insured. An insurance broker can help you identify the best plan to fit your particular needs.