Health insurance is unlike any other insurance you buy: Even after you pay premiums, there are complicated out-of-pocket costs like deductibles, copays and coinsurance. If you fall ill or are injured and don’t know how health insurance works, you could become one of the millions each year who are caught off guard by high medical bills.
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It’s important to understand the basics of health insurance so you can make the right financial decisions for your family before you need care. That way, you can focus more on healing when the time comes. Here’s our primer on how the costs of health insurance work.
Health insurance cost-sharing terms
Before you understand how it all works together, let’s brush up on some common health insurance terms.
Premium: A monthly payment you make to have health insurance. Like a gym membership, you pay the premium each month, even if you don’t use it, or else lose coverage. If you’re fortunate enough to have employer-provided insurance, the company typically picks up part of the premium.
Copay: A predetermined rate you pay for health care services at the time of care. For example, you may have a $25 copay every time you see your primary care physician, a $10 copay for each monthly medication and a $250 copay for an emergency room visit.
Deductible: The deductible is how much you pay before your health insurance starts to cover a larger portion of your bills. In general, if you have a $1,000 deductible, you must pay $1,000 for your own care out-of-pocket before your insurer starts covering a higher portion of costs. The deductible resets yearly.
Coinsurance: Coinsurance is a percentage of a medical charge that you pay, with the rest paid by your health insurance plan, that typically applies after your deductible has been met. For example, if you have a 20% coinsurance, you pay 20% of each medical bill, and your health insurance will cover 80%.
Out-of-pocket maximum: The most you could have to pay in one year, out of pocket, for your health care before your insurance covers 100% of the bill. Here you can see the maximums allowed by the government for private plans for this year.
How they all work together
Health insurance policies can have a variety of cost-sharing options. Some policies have low premiums and high deductibles and out-of-pocket maximum limits, while others have high monthly rates and lower deductibles and out-of-pocket limits.
In general, it works like this: You pay a monthly premium just to have health insurance. When you go to the doctor or the hospital, you pay either full cost for the services, or copays as outlined in your policy. Once the total amount you pay for services, not including copays, adds up to your deductible amount in a year, your insurer starts paying a larger chunk of your medical bills, typically 60% to 90%. The remaining percentage that you pay is called coinsurance.
You’ll continue to pay copays or coinsurance until you’ve reached the out-of-pocket maximum for your policy. At that time, your insurer will start paying 100% of your medical bills until the policy year ends or you switch insurance plans, whichever is first.
The catch: Your plan’s network
Here’s the snag: That’s how it works only if you always choose the right doctors, clinics and hospitals — those within your health plan’s provider network. If you use an out-of-network doctor, you could be on the hook for the entire bill, depending on which type of policy you have. This brings us to three new, related definitions to understand:
Network: The group of doctors and providers who agree to accept your health insurance. Health insurers negotiate lower rates for care with the doctors, hospitals and clinics that are in their networks.
Out-of-network: A provider your insurance plan has not negotiated a discounted rate with. If you get care from an out-of-network provider, you may have to pay the entire bill yourself, or just a portion, as indicated in your insurance policy summary.
In-network: A provider who has agreed to work with your insurance plan. When you go in-network, your bills will typically be cheaper, and the costs will count toward your deductible and out-of-pocket maximum.
Calculating out-of-pocket health costs
To illustrate with an example, let’s use a person — we’ll call her Prudence — to explain the basics of health coverage. Your costs would be different based on your policy, so you’ll want to do your own calculations each year when facing a medical cost.
The basics: Prudence is single and has an annual deductible of $1,200. Her insurance plan has some copays, which do not count toward her deductible. After she meets the deductible, her insurer pays 80% of her medical bills, leaving Prudence with coinsurance of 20%.
Scenario one: Doctor’s visits and an MRI
Prudence goes in for an annual checkup and some routine blood work. Because she goes to an in-network provider, this is a free preventive care visit. However, based on her physical, her primary care physician thinks Prudence 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, while her insurer will cover the rest of the neurologist’s fee. The MRI provider in her insurer’s network and will charge $1,000 for the MRI, including the radiologist fees for interpreting the scan.
Imaging scans like this are “subject to deductible” under Prudence’s policy, so she must pay for it herself, or out-of-pocket, because she hasn’t met her deductible yet. So her insurer won’t pay anything to the MRI facility.
Total out-of-pocket costs: $50 for the neurologist copay + $1,000 for the scan = $1,050.
Scenario two: A trip to the ER
Later in the year, Prudence falls while hiking and injures her wrist. She heads to an in-network emergency room, for which she has a $100 copay. After the copay, ER charges were $3,400. Her deductible will be applied next.
Prudence paid $1,000 of her $1,200 deductible earlier in the year for her MRI, so she’s responsible for $200 of the ER bill before her insurer pays a larger share. After deductible and copay, the ER charges total $3,200. Her health plan will pay 80%, or $2,560, leaving Prudence with a 20% coinsurance of $640.
Total out-of-pocket costs: $100 for the ER copay + $200 for remaining deductible + 20% coinsurance ($640) = $940.
Prudence has now paid $1,990 toward her medical costs this year, not including premiums. She has also met her annual deductible, so if she needs care again, she’ll pay only copays and 20% of her medical bills (coinsurance) until she reaches the out-of-pocket maximum on her plan.
Understanding how your health insurance works can save you money and grief down the road — maybe at a time when you’ll need it most.