Health Insurance Out-of-Pocket Costs: Coinsurance, Copayments & Deductibles

Health, Managing Health Insurance
How Health Insurance Works: Your Cost Guide

Health insurance is unlike any other insurance you buy: Even after you pay premiums, there are complicated, continuing costs.

If you have life insurance, you pay your premiums and your beneficiary receives the payout. With auto insurance, you pay your premiums and sometimes a deductible for repairs after an accident, then insurance pays for the rest. You pay flood insurance premiums so you can cope financially in case a flood destroys your property.

But with health insurance, you pay premiums, a deductible, and then most of the time you keep paying each time you go to the doctor, pharmacist or hospital. And when it comes to your health, it’s not a matter of if you’ll need that insurance — it’s a matter of when. 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.

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.

Cost sharing definitions

Before you understand how it all works together, let’s brush up on cost sharing terms that apply specifically to health insurance.

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 you lose coverage. If you’re fortunate enough to have employer-provided insurance, the company picks up all or part of the premium.

Copay: Your copay is 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, 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. In federal Marketplace plans, the 2016 limits are $6,850 for an individual and $13,700 for a family, but yours may be different if you have an employer-sponsored policy.

How it all works together

Health insurance policies come in a wide variety of cost-sharing options. Whereas some policies have low premiums and high deductibles and out-of-pocket maximum limits, others are just the opposite with high monthly rates and lower deductibles and out-of-pocket limits. If you’re shopping for health insurance and aren’t sure which is right for you, this guide from NerdWallet may help you.

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 copays and coinsurance amounts outlined in your policy. Once the total of your copays and coinsurance adds up to your deductible amount in a year, your insurer starts paying a larger chunk of your medical bills, typically 60% to 90%.

You’ll continue to pay the remainder 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.

But there’s just one caveat: That’s how it works only if you always choose the right doctors, clinics and hospitals — those within your 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 you should understand:

Network: The group of doctors and providers who agree to accept your health insurance. Health insurers negotiate and contract rates for care with certain doctors, hospitals and clinics that are generally lower than their cash-pay prices.

Out-of-network: This refers to a provider with which your insurance plan has not negotiated a discounted rate. If you get care from an out-of-network provider, you may have to pay the entire bill yourself or just a portion. Your portion of out-of-network charges should be indicated in your insurance policy summary.

In-network: A provider who has agreed to work with your insurance plan and has negotiated lower payment rates. When you go in-network, your bills will typically be cheaper than if you go out-of-network and what you pay will count toward your deductible and out-of-pocket maximum.

Calculating the costs

To illustrate with an example, let’s use one 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 when facing a medical cost.

The basics: Prudence is single and has a mid-range deductible of $1,200. After the deductible, her insurer pays 80% of her medical bills, leaving Prudence with a 20% coinsurance.

The scenario: Prudence goes in for an annual checkup and some routine blood work, and because she goes in-network, this visit 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, and copays count toward her deductible, unlike some policies. The least expensive MRI provider in her area is 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 out-of-pocket because she hasn’t met her deductible yet. Her insurer will pay the rest of the neurologist’s fee, but none to the MRI facility.

  • Out-of-pocket costs: $50 for the copay + $1,000 for the scan = $1,050.

Much to her relief, Prudence’s MRI scan comes back normal. Later in the year, however, she falls while hiking and injures her wrist. Prudence knows which emergency facilities are in her provider network, so she heads to an in-network emergency room, for which she has a $100 copay. The total bill for the emergency room comes to $3,500.

Prudence has to pay the copay for the ER first, meaning she’s paid $1,150 of her $1,200 deductible, so she still owes another $50 of the ER bill. After she pays $150, the bill comes to $3,350; her health plan will pay 80%, or $2,680, leaving Prudence with the remaining 20%, or $670.

  • Out-of-pocket costs: $100 for the copay + $50 for remaining deductible + 20% of remaining ER bill ($670) = $820.

Prudence has now paid $1,870 toward her medical costs this year, not including premiums. If she’s injured again or gets sick, she will still have to pay 20% of her medical bills until she reaches her out-of-pocket maximum. If she renews the same policy next year, she will have to pay her deductible again should she need care.

Though the math may seem daunting, understanding how your health insurance works can really save you money and grief down the road — maybe at a time you’ll need it most.

Lacie Glover is a staff writer at NerdWallet, a personal finance website. Email: lacie@nerdwallet.com. Twitter: @LacieWrites.

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