What is a Copay?

What is a copay?  If you find yourself purchasing medical insurance for the first time, you need to find an answer to this question.  It is fundamental to understand how a copay works and what services it covers.

Insurance Fundamentals

To understand how a copay works in a medical plan, it is important to understand a basic principle of insurance: instead of an individual risking the chance of financial loss due to an unforeseen event, he or she can pay a price (called a premium) to an insurance company, and that insurance company will assume the risk of the financial loss.  The greater the risk of loss, the greater the premium.

One way to lower the premium of a health insurance plan is to take on some risk of the loss for yourself.  One way to accomplish this is by implementing copays.

So What Exactly is a Copay?

A copay is a flat dollar amount in a health insurance plan that a policyholder pays per event, such as visiting the doctor or filling a prescription.  Once the copay is paid, the insurance company (usually) pays the remaining cost of the claim.

A copay is different from a deductible by the fact that a copay is per event, while a deductible is a flat dollar amount paid just one time during the year.

Is Everything Subject to a Copay?

It depends on the health insurance plan that you have.  A typical major medical plan utilizes copays for things like office visits to primary care doctors, specialists, and the emergency room.  If you pay a copay for these visits, you usually will not be required to pay anything else, although some plans do require you to pay your deductible and/or coinsurance after you pay your copay.

The Patient Protection and Affordable Care Act (PPACA), more commonly referred to as Obamacare, sets a limit on the out of pocket expenses one person can incur.  Copays are counted toward this limit.  Once the limit has been reached, you will no longer be required to pay a copay during that year.

How Can I Know What is Subject to a Copay in My Medical Plan?

Carefully inspect the benefit summary of any medical plan you are thinking about enrolling in.  PPACA  requires insurance companies and group plans to provide a Summary of Benefits and Coverage (SBC) for medical insurance plans.

SBCs are designed to succinctly display the benefits provided by a medical insurance plan.  The SBC makes it easier to compare benefits between multiple plans on an apples-to-apples basis in plain language.

How Can I Know What Copay Level is Best for Me?

That really depends on the amount of risk you are willing to take.  Lower copays will require a higher premium.  For lower premiums, choose a plan that asks you to pay higher copays.

So what is a copay?  A copay is a flat dollar amount you pay for each applicable medical service.

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How to Calculate My Health Insurance Out of Pocket Expenses

One of the more daunting tasks associated with a medical insurance plan is keeping up with and calculating your out of pocket expenses.  This can be an especially worrisome task if you are new to the insurance game.  But take heart, it is not as difficult as it seems.

First a Word About Doctor Bills

Before you even begin paying doctor bills it is important to know what you are expected to pay.  If you have an insurance plan, and you have a medical service done at a doctor’s office or hospital (known as providers) that is in your insurance plan’s network, you will rarely pay the charge that the provider bills.

After your service the provider will file the claim and the insurance company will typically apply a discount to the charge.  This discounted rate is what the provider is allowed to be paid.  Therefore, if you get a bill from your doctor or hospital, do not pay anything if the claim has not been run through the insurance company.

What You’ll Need to Know In Order to Figure Your Out of Pocket Expenses

Before you can calculate the amount of money you owe in out of pocket expenses, you’ll need to know these four things.

  1. Your copays
  2. Your coinsurance
  3. Your deductible
  4. Your out-of-pocket maximum

You can get these from your plan’s benefit summary or your Summary of Benefits and Coverage.

Plans can vary of course, but most major medical plans make the policyholder pay a copay first, then deductible, and then coinsurance.  The total amount due cannot exceed the out of pocket maximum.

Plan Design Assumptions

For this discussion, lets assume that you have a plan design with the following benefit schedule.  We’ll also assume that the scenarios presented are the first medical services performed in the year.

Deductible – $1,000

Coinsurance – 90% (what the plan pays; you pay 10%)

Inpatient Hospital Copay – $250

Outpatient Hospital Copay – $0

Out of Pocket Maximum – $4,000

Scenario 1

You have a minor surgery in an outpatient center.  After network discounts (see above) are applied, the total amount due is $3,000.

  • Since this is an outpatient service, there is no copay.
  • Next, your deductible is due.  Since your deductible is less than the amount due, you will owe the entire deductible of $1,000. This leaves $2,000 left to pay.
  • You then owe your coinsurance, which means you will pay 10% of the remaining $2,000, which equates to $200.

Therefore, you owe $1,200 in out of pocket expenses ($1,000 deductible + $200 coinsurance) for this medical service.  The medical plan pays $1,800.

Scenario 2

Same as Scenario 1 except that the service is performed in an inpatient facility.  Total amount due is still $3,000.

  • Since this is an inpatient service, you owe a copay off the bat of $250.  The remaining balance is $2,750.
  • Your deductible is due next. You owe $1,000.  The remaining balance is $1,750.
  • You owe coinsurance next.  10% of the remaining balance of $1,750 is $175.

Therefore, you owe $1,425 in out of pocket expenses ($250 copay + $1,000 deductible + $175 coinsurance) for this inpatient medical service.  The medical plan pays $1,575.

Scenario 3

This time you have a serious illness that requires a lengthy inpatient hospital stay.  After the network discounts are applied, the total amount due is $100,000.

  • Since this is an inpatient service, you owe a copay of $250.  The remaining balance is $99,750.
  • You pay your deductible next.  You owe $1,000.  The remaining balance is $98,750.
  • Finally, your coinsurance needs to be paid.  10% of the remaining balance is $9,875.

So you’ll see that the amount due by you is $11,125.  However, you’ll notice that this amount is more than your plan’s out of pocket maximum of $4,000.  Therefore, you will only be required to pay $2,750 in coinsurance ($250 copay + $1,000 deductible + $2,750 coinsurance = $4,000 in out of pocket expenses).

Seems like a lot of money, and to most of us it is, but it is important to remember that for $100,000 of medical services, you only had to pay 4% of that amount.

Other Things to Note

The scenarios presented above are simple versions.  When you have a major illness or procedure, you will get probably get bills from several different providers.  Still, the method to determining your out of pocket expenses is the same.  Just make sure you keep track of all the money due.

Also, remember that for plans with networks, there are different deductibles, coinsurance percentages, copays, and out of pocket maximums for services provided in-network and out-of-network.

If you find yourself having trouble keeping track of your out of pocket expenses, remember most health plans have online tools and apps that keep everything organized for you.

You can also take some lessons on Microsoft Excel, which can be very handy when it comes to keeping track of expenses. I recommend this course. It’s easy to take, inexpensive, and is great for beginners.

It takes some work keeping up with your health insurance out of pocket expenses, but it can be done.

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