“She has a really low premium and her copay for the doctor was only $25, but she found out she has to have surgery and hasn’t yet met her $3000 deductible. Her 80/20 coinsurance will kick in, though, and she’ll probably meet her out-of-pocket maximum.”
….does that sentence have you staring at your screen with a confused look on your face? If so, you’re with the the other 86% of individuals who have health insurance but are baffled by what those concepts mean.4 Even the most intelligent of people have trouble understanding their “explanation of benefits” that accompanies their insurance policy, but really all it takes to understand your policy is getting familiar with five little words.
The terms premium, copay, deductible, coinsurance, and out-of-pocket maximum are the most common words that are associated with health insurance plans, and understanding what they means is critical in understanding how your health insurance works. We’ll go through each of these words and what they mean, and work with some examples to hopefully shed some light on the most confusing insurance words.
Premium: A Fancy Word for Your Bill
You know that bill that you get from your insurance company every month? That is what is referred to as your premium. Typically this is paid monthly, but can also be paid quarterly and annually with many plans.3 The money that you pay for your premium is not applied to anything else in your policy, like your deductible or other costs. The purpose of your premium is to keep your policy active.
Copayment: A Set Amount for Services
A copayment is a pre-determined amount that you pay for certain health care services, typically due at the time service is rendered. If you go see your primary doctor and they tell you that you owe them an amount, $35 for example, that money they’re asking you for is probably your copay. This amount is pre-set by your insurance company based on the health plan you purchased. The doctor might normally charge $100 for an office visit, but with your $35 copay, you are not required to pay the full amount and your insurance company will pay the $65 difference. Many insurance policies also have copays for urgent care visits, specialists, and prescriptions.
While many plans utilize copayments, it is important to note that not all plans function this way. Some plans do not offer a copayment at all and require you to pay the full price of the doctor visit, prescription, or other service until the deductible is met.
Other plans may offer medical repricing when copayments are not a part of that plan. Medical repricing essentially requires you to pay less than full price for a service.
Though not all plans will offer copayments, not all plans without copayments will offer medical repricing either. To be sure, it is always best to consult your explanation of benefits and consult a licensed agent with any questions.
Deductible: Not Just for Taxes!
Your deductible is the amount that you are responsible to pay out-of-pocket for health care services before your insurance company will begin to pay for anything.2 Depending on your policy, deductibles can be per individual, or may be for the whole family. Deductible amounts can also vary depending on whether or not you seek care from a network-provider. Receiving care from in-network providers will require you to meet a deductible specified in your policy. If you use an out-of-network provider, however, you may have to pay a higher deductible or possibly have no out-of-network coverage at all.3… Again, to find the specifics on your individual policy, always read the explanation of benefits provided by your insurance carrier.
If you find out that you need to have a surgery that will cost $4000, you must first meet your deductible. If your deductible is $3000 and no money has gone toward it previously in the year, you will need to pay that $3000 out-of-pocket in its entirety. If you have already paid $500 dollars toward your deductible previously in the year, then you would pay $2500. What happens to that remaining balance though after you have met your deductible? That’s where coinsurance comes in.
Coinsurance: A Shared Percent of Your Expenses
Suppose you have not had any medical services that applied toward your deductible for the year, and you pay the $3000 to meet your deductible when you have surgery. Your coinsurance is what will help you pay for the remainder of the $1000 difference between your deductible and your bill. Coinsurance is usually figured as a percentage of what you are responsible for paying and what your insurance company is responsible for paying.3, 1 Some common examples are 70/30 and 80/20. If you think back to our example that still has $1000 that needs to be paid and your coinsurance is 80/20. You would pay 20% of that $1000, leaving you responsible for $200.
Out-of-Pocket Maximum: No More Charges!
You might be wondering “when does it stop!?” When do YOU get to stop paying for these medical expenses and when does your insurance pay for everything? The answer is once you meet your out-of-pocket maximum. This is the pre-determined dollar amount that you are required to pay during a policy period (typically a year).5 This amount is specified by your policy and once the maximum amount has been paid, your insurance company will pay for covered essential health benefits in their entirety. Copayments, deductibles, and coinsurance must all go toward this amount.5, 3
In 2015, for any plan purchased through the Marketplace (healthcare.gov), is not permitted to exceed an out-of-pocket maximum of $6,600 for an individual plan, or $13,200 for a family plan.5
So refer back one more time to our surgery scenario. Let’s say that after all is said and done with the surgery, hospital stay, and medications, your total hospital bill is $18,000, and your insurance policy has a maximum out-of-pocket of $6,000. You pay your $3,000 deductible, plus your 20% coinsurance of the hospital bill less your deductible (hospital bill minus deductible is $15,000), equaling another $3000. Once you have reached your maximum out-of-pocket, your insurance covers the remaining balance of your hospital bill- $12,000.
Now that you have read this break down of the health insurance lingo, you should find yourself feeling a little bit more confident in your ability to understand how health insurance works. This information can help you understand your insurance policy that you pay for every month or assist you when you seek out a new policy this year. Let’s test your knowledge now- go back to the beginning of this article and re-read that first paragraph. Hopefully that confused look on your face doesn’t come back!
- Coinsurance. (n.d.). Retrieved September 14, 2015, from HealthCare.gov website https://www.healthcare.gov/glossary/co-insurance/
- Deductible. (n.d.). Retrieved September 14, 2015, from HealthCare.gov website https://www.healthcare.gov/glossary/deductible/
- Definitions of health insurance terms. (n.d.). Retrieved September 14, 2015, from Bureau of Labor Statistics website: https://www.bls.gov/ncs/ebs/sp/healthterms.pdf
- Loewenstein, G. (2013). Consumers’ misunderstanding of health insurance. Journal of Health Economics, 32, 850-862. doi: 10.1016/j.healeco.2013.04.004
- Out-of-pocket maximum/limit. (n.d.). Retrieved September 14, 2015, from HealthCare.gov website https://www.healthcare.gov/glossary/out-of-pocket-maximum-limit/