What is Coinsurance for Health Insurance?

If you find yourself purchasing medical insurance for the first time, you need to know a lot about how a medical plan functions.  One of the things that is most important to understand is how coinsurance for health insurance works.

Fundamentals of Insurance

To understand how coinsurance for health insurance works in a medical plan, it is imperative to understand a basic principle of insurance: instead of an individual risking the chance of financial loss due to an unforeseen event, that person can pay a price (called a premium) to an insurance company, and that company will take on the risk of the financial loss.  The greater the risk of loss, the greater the premium.

A way to lower the premium is to take on some risk of the loss for yourself.  One way to accomplish this is to implement coinsurance.

So What is Coinsurance for Health Insurance?

Coinsurance is when a health insurance policyholder pays a percentage of the covered medical claims.  The coinsurance is usually expressed as the percentage that the insurance plan pays, so if you see a plan has 80% coinsurance, that means that you will pay 20% of the claim amount, and the insurance company will pick up the remaining 80%.

There are other factors involved, such as a deductible and out of pocket maximum, but for now, just understand that for medical claims subject to coinsurance, you and the insurance plan split the cost of the claim.

Is Everything Subject to Coinsurance?

It depends on the 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 coinsurance on top of the copays, although some plans do actually require a copay plus a coinsurance for emergency room visits.

Most medical plans also have a limit on the total amount of out of pocket expenses one person is required to pay in a year.  If you reach this limit, then no further coinsurance is required.

How Can I Know What is Subject to Coinsurance for Health Insurance Plans?

Make sure to carefully read the benefit summary of any medical plan you are thinking about enrolling in.  The Patient Protection and Affordable Care Act (PPACA), more commonly referred to as Obamacare, 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 that a medical plan provides.  The language is easy to read, and an SBC makes it easier to compare benefits between multiple plans on an apples-to-apples basis.

How Can I Know What Level of Coinsurance is Best for Me?

That really depends on the amount of risk you are willing to take.  A plan that requires less coinsurance from you will require more money paid in premium.  For lower premiums, choose a plan that asks you to pay more coinsurance.  If you do not want to take the chance of paying more out of pocket if you need medical services, then you’ll want a less coinsurance for you.  Just know that you’ll be paying more in premium.

But if you want more money for the rest of your daily expenses, coinsurance for health insurance is a great way to lower your monthly medical insurance premium.

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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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