Updated: Jul 22, 2020
Copays, Coinsurance, and Deductibles are all different types of out-of-pocket costs for healthcare, but the details are different according to the health plan.
Health insurance isn’t like any other type of insurance that you buy because even after you have paid the premiums, there are going to be complicated out-of-pocket costs such as copays, coinsurance, and deductibles. You don’t want to become one of the millions of people each year that get caught off guard by high medical bills because they didn’t know how their health insurance worked when they got ill or injured.
You must have a firm understanding of the basics of health insurance so that you can make the right financial decisions for yourself and your family when they need care. That will allow you to focus more on healing when the time comes and not worry about anything else. To help you out, we are going to be sharing a primer on how the different costs of health insurance work.
Terms for Health Insurance Cost-Sharing
To put everything into perspective, we will start by brushing up on some of the standard terms used in health insurance.
It is a monthly payment you need to make for health insurance, just like a gym membership, and you must pay the premium every month, or else you will lose coverage. If you have been provided insurance by your employer, they will cover part of the premium.
This is a predetermined rate that you will pay for healthcare services at the time of care. For instance, you may have a $10 copay for your monthly medication, a $25 copay whenever you see your primary care physician and a $250 copay for a visit to the emergency room.
The deductible is the amount you must pay before your health insurance covers the rest of your bill. So, if you have a $1,000 deductible, you need to pay $1,000 for your own care out-of-pocket before your insurer starts to cover a high portion of costs. The deductible will reset on a yearly basis.
Coinsurance will be the percentage of a medical bill that you must pay, while the rest will be paid by your health insurance plan, which will apply after your deductible has been met. For instance, if you have a 20% coinsurance, you must pay 20% of the medical bill, and your health insurance is going to cover 80% of the bill until you meet your out of pocket limit.
This is the maximum amount you will need to pay in one year, out of your pocket, for your healthcare before your health insurance covers 100% of the bill.
How They Manage to Work Together
Health insurance policies can have different cost-sharing options. Some policies have lower premiums and higher deductibles and maximum out-of-pocket limits, while the rest may have higher monthly rates and lower deductibles and out-of-pocket limits. It works like this in general, you pay a monthly premium for health insurance, and when you go to the hospital or the doctor, you pay for the full cost of the services or for copays that are outlined in your policy.
After you’ve paid the total amount for the services, not including copays, they will add up to your deductible amount in a year, and your insurer will pay a major chunk of your medical bills, generally 60% to 90%. The remaining percentage that you must pay is known as coinsurance. You will continue to pay the coinsurance or copay until you have reached the out-of-pocket maximum for your policy. It is at that time that your insurer will start to pay 100% of the medical bills until you switch insurance plans or the policy year ends, whichever comes first.
The Catch: Your Plan’s Network
Here is the difference-maker - it will all work as planned if you always choose the right clinics, doctors, and hospitals, which are all within your health plan provider’s network. You may have to pay the entire bill if you use an out-of-network doctor, depending on the type of policy that you have. That brings us to three more related definitions you must understand:
The group of providers or doctors who have agreed to accept your health insurance. Health insurers tend to negotiate discounted rates for care with doctors, hospitals and clinics that are in their network.
These consist of providers your health insurance plan hasn’t negotiated a discounted rate with. If you get care from an out-of-network provider, you need to pay the entire bill yourself, or a portion as indicated in the summary of your insurance policy.
These are providers who have agreed to work with your health insurance plan. When you opt for in-network, your medical bills will be cheaper, and the costs will count towards your deductible and out-of-pocket maximum.
How to Calculate Out-of-Pocket Health Costs
To give you an example of how to calculate out-of-pocket costs, we’re going to show you a person – let’s call her Judith – to explain the basics of health coverage. Your costs are going to be different based on your policy, so you will want to do your own calculations every year when facing a medical cost.
Judith is single and has an annual deductible of $1,200. Her insurance plan has some copays, which don’t count towards her deductibles. After she meets the deductible, her insurer will pay 80% of her medical bills, which will leave Judith with 20% coinsurance.
Scenario: Visit the Doctor and get an MRI
Judith goes for an annual checkup and some routine blood work, and as she goes to an in-network provider, this is a free preventive care visit. After her physical, her primary care physician thinks Judith should see a neurologist and the neurologist recommends an MRI.
Copays for an in-network specialist on her plan are $50, which she must pay, and her insurer will cover the rest of the fee for the neurologist. The MRI provider in her network will charge $1000 for the MRI, including the fees for the radiologist for interpreting the scan.
Imaging scans like this one are ‘subject to deductible’ under the policy of Judith, so she must pay for it herself or out-of-pocket as she hasn’t met the deductible. So her insurer isn’t going to pay anything to the MRI facility. Total out-of-pocket costs: $50 for the neurologist copay + $1000 for the scan = $1,050.
It’s important to understand how your health insurance works as it will help you save money and a lot of grief further down the road, at a time when you need it most.