All The Ways You Pay: Premiums, Deductibles, Co-pays, and Coinsurance
In general, the price the insurance company charges each year for the privilege of being insured is just the tip of the iceberg. This article breaks down four types of health insurance costs and how they relate to one another.
There are a number of ways different ways you will pay for health care under the standard health insurance policy. This article covers the basics so you can understand each payment method and find the right health insurance policy for you.
The most basic health insurance expense, the premium is the annual amount you pay just to have coverage. Generally, premiums are what people think of when they refer to the "cost" of health insurance. They vary based on the quality and extent of the coverage offered by your insurer. Plans that cover a broad range of services or have low deductibles, co-pays, or coinsurance rates carry higher premiums. Policies that only cover basic services or require you to cover a large portion of your expenses are generally cheaper (before opting for a more affordable policy, make sure you can do without the extra protection afforded by Critical Illness Insurance and other additional coverage).
If your employer provides health insurance, your premium may be partially or completely covered (learn more about Group Health Insurance for Small Business Owners). However, employers are often motivated to keep insurance costs as low as possible, so you may find that your employer-sponsored plan carries other hidden out-of-pocket expenses.
If you pay for your own health insurance, you have more control over the type of plan you purchase and, therefore, the premium you pay. Keep in mind, however, that plans with lower premiums are often best for those who do not require regular medical care. If you see the doctor more than a few times a year or have an ongoing health problem, paying a higher premium may be less expensive in the long run (to see if it's right for you, consider these 4 Signs You Need Long-Term Care Insurance).
As referenced above, the deductible your plan carries has a lot to do with your premium. While the premium is the annual cost of coverage, your deductible represents the amount of money you must pay out of pocket for health services before your insurance policy will pay. This means that if you have a $2,000 deductible, your health insurance policy will not pay for covered health services until you have paid $2,000 on your own.
In some cases, certain services are excluded from the deductible requirement. For example, preventative care, such as your annual physical, is often covered, even if the deductible has not yet been satisfied.
Because the insurance company does not pay for most claims until your deductible is satisfied, plans with higher deductibles often carry lower premiums. These plans are best for those who don’t require regular care but want coverage for emergency situations, such as becoming seriously ill or injured.
A co-pay is a flat fee paid directly to the service provider at the time of your appointment. For visits to your regular doctor, it generally ranges from $10 to $30, but it can be much higher, around $250, for emergency room visits. Some insurance plans also require it for prescription services.
Some policies allow for a certain number of regular visits prior to satisfaction of your deductible for which you only pay your co-pay. This can be a useful option for those who only need health services a few times a year but want coverage for any large, unexpected expenses.
When selecting a health insurance plan, carefully review the types of services that require a co-pay and any exceptions that might be granted for basic care. Remember that it does not count toward your deductible.
After you have satisfied your deductible, your health insurance policy begins to pay for some, or all, of your covered health expenses. The amount that your policy pays for a given service is dictated by your coinsurance. Expressed as a percentage of the service price, it can vary depending on the type of service received.
For some basic care, your coinsurance may be as low as 0 percent, meaning that the insurance company covers the entire cost. However, other services may have rates of 50 percent or more, which means you must pay for the majority of your expenses. Many plans offer coinsurance rates around 20 percent so your insurer would cover 80 percent of covered expenses after you meet your deductible.
What a Relief: Out-of-pocket Maximum
With all these different ways to pay, health care can be expensive, even if you have insurance. Luckily, health insurance policies sometimes include an out-of-pocket limit or maximum, which caps the total amount that you have to pay for your health needs in a given year.
If your policy’s maximum is set at $3,500, for example, your insurer completely takes care of any health expenses you incur for covered services beyond this limit. This limit includes any amount paid toward your deductible, co-pays or coinsurance, but it does not include your premium.
For example, assume you purchase a policy that costs $200 per month and has a $1,000 deductible. The plan requires a $20 copay for doctor’s visits after your deductible is met, has a 30 percent coinsurance rate for covered services, and a $6,000 out-of-pocket maximum. Once you pay your deductible, and your total expenses for your deductible, co-pay, and coinsurance reach $6,000, your insurer will cover the costs of all subsequent covered health services for the policy year. While the cost of your health care for the year is lower than what it would be without insurance, it is certainly more than the simple monthly premium would imply.