The Complexity of Health Insurance
“It’s an unbelievably complex subject, nobody knew health care could be so complicated.””
Looking at their explanation of benefits in their health insurance contract, many find themselves even more confused than when they started. Most insurance contracts have a single deductible, an amount you are responsible for before the insurance kicks in. With health insurance, however, you will find not just a deductible, but also copayments and coinsurence amounts within the policy along with an annual out-of-pocket limit. (The annual out-of-pocket limit is covered here)
Deductibles in health insurance work similar to any other insurance, except it is for the entire year rather than for an individual incident. Your deductible is the amount you are responsible to pay each calendar year before the insurance kicks in. If you have $5,000 of medical bills and a $3,000 deductible, you will be responsible for the first $3,000 and the insurance will start paying for the remaining $2,000.
Coinsurance vs Copayments
Even once your deductible is met, however, you will still have out of pocket expenses from your health insurance. The copayment and coinsurance features each will add to your out-of-pocket costs throughout the year.
Whereas the deductible applies to the entirety of healthcare you receive throughout the year; think of copays and coinsurance as mini-deductibles attached to the individual services you receive. Each represents a small amount you have to pay for an individual medical service, which the insurance doesn't cover. In this way, the copay is a dollar mini-deductible, whereas coinsurance is a percentage mini-deductible.
Copays
Most are familiar with the concept of copayments: a small dollar amount not covered by insurance, which the consumer is responsible for paying. Your doctor may charge $1,200 for your annual physical, but you are only responsible for a $35 copayment. The rest is covered by insurance.
Copays are most common with preventative care, routine healthcare visits, and medications. Depending on your policy, copays can be extremely small or relatively significant costs for each medical service. Hospitalizations and other medical procedures, however, may be subject to coinsurance.
Coinsurance
Coinsurance works in a similar way as a copay, only instead of a flat dollar amount, you are responsible for a percentage of the service costs. Your policy will either show a single coinsurance percentage (e.g. 60%), or a two-number ratio (e.g. 60/40). In both cases, this means the policy would pay for 60% of the cost of the covered medical procedure and you would be responsible for 40% of the bill.
As an example, instead of a preventative physical exam, assume the $1,200 medical procedure was subject to coinsurance. If you had a 70/30 coinsurance policy, the insurance company would pay $840 (70% of the $1,200 procedure) and you would be responsible for paying $360 (30% of the procedure cost).
Affordable Care Act policies have coinsurance splits ranging from 60/40 to 90/10, with the better coinsurance plans having considerably higher premiums. A quick stop at the California ACA marketplace (coveredca.com) showed monthly premiums nearly doubling between the 60/40 plans and the 90/10 plans.
The Risk of Coinsurance
Although most people are highly concerned with copayment costs, the coinsurance represents a much larger risk for your family. The difference between a $25 copayment and a $45 copayment can easily be managed by skipping ice cream after the doctor visit.
A $7,000 hospital bill subject to coinsurance, however, could cost you thousands of dollars more depending on your coinsurance ratio. A 90/10 policy would have you responsible for just $700 of the hospital bill. But a 60/40 policy would stick you with a $2,800 bill. The difference here is much more difficult to manage.
Of course, the better coinsurance policies also cost significantly more money. Although you are more often deal with copayments than the coinsurance provision, care should be taken when choosing a policy to ensure your family isn’t subject to a significant financial risk if a hospitalization happens.
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Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org