How Your Health Insurance Pays Healthcare Expenses
Getting your health insurance claim paid isn’t as straightforward as it might seem. Find out more about what dictates how much both you and your insurance company actually end up paying.
Depending on the specific terms of your policy and the type of service you receive, you will likely be required to pay a portion of your healthcare costs.
In addition to the premium you pay every month, there are three main ways you might participate in paying for your own medical expenses. Below is a brief overview of how your deductible, co-payment and co-insurance figure into paying for individual claims.
Most policies require that insureds pay a deductible before the insurance company begins paying claims. The deductible is simply a set amount that you must pay toward your own medical care before your insurance company contributes, which can range anywhere from $100 to thousands of dollars. If you haven't met your deductible for the year, any claims submitted for covered services will count against your deductible, but you will be responsible for paying the bill.
Say you have a $1,000 deductible, for example, and receive a service that costs $400. The doctor’s office bills your insurance for $400, but because you haven't met your deductible, the insurance company passes the bill along to you and reduces your deductible to $600.
Some services are not subject to the deductible requirement, but you might still be required to foot a portion of the bill upfront. Many policies require only a small co-payment for regular doctor visits, often $10 to $30 per visit. You pay this flat fee directly to the service provider at the time of your appointment. The provider then bills your insurance company for the remainder of the service price.
Even if you have fulfilled your deductible requirement, your insurance company probably still pays only a portion of the cost of service. The portion of your medical expenses that you are responsible for is called your co-insurance rate, which is generally around 20 percent. This means that your service provider bills your insurance company for 80 percent of the cost, and you pay the remaining 20 percent.
For example, for a service priced at $500, your insurance would be billed for $400, and you would pay the remaining $100.
What Gets Paid
While your deductible, co-payment, and co-insurance requirements dictate the portion of your medical expenses you are responsible for, they don’t completely determine how much your doctors actually get paid after all is said and done.
In the United States, medical service providers can generally charge anything they like, meaning that the same service can be priced very differently depending on where you go. If you have ever had the misfortune of requiring medical treatment while uninsured, you know that many places charge exorbitant fees for even the most basic services.
So, are these lofty prices what the insurance company actually pays? As with most insurance questions, the answer is a resounding "maybe." Both the amount your service provider charges and the amount they are paid depend largely on whether they are considered an in-network or out-of-network provider with your insurer.
In either case, your contribution is billed by and paid directly to the service provider. Though your insurance company will send you an Explanation of Benefits (EOB) outlining the charges and applicable coverage so you can verify that you are billed for the correct services, you do not remit payment to the insurance company.
Allowed Amount: In-Network Coverage
An in-network provider is a medical provider that your insurance company has a contractual agreement with. One of the chief benefits of seeing one is that your insurance company negotiates reduced rates for services, called allowed amounts or eligible expenses. If you receive services from an in-network provider, the allowed amount negotiated by your insurance company is the maximum fee that provider can receive. Even if they bill for a larger sum, you are not responsible for paying the difference.
Assume your policy has a 20 percent co-insurance rate and you receive a service that normally costs $1,000. Because the provider is in-network, your insurance company has negotiated an allowed amount of $800. The service provider then bills your insurance company for 80 percent of $800, or $640, and bills you for the remaining $160. The $200 difference between the allowed amount and the cost of service is not paid because the provider is contractually obligated to honor the discount.
Allowed Amount: Out-of-Network Coverage
If you must seek medical care from an out-of-network provider, you will likely end up paying more. Because your insurance company has no contract with these providers, they can charge whatever they please for services.
Your insurance company, of course, still puts a limit on how much they will pay. While this figure is also called an allowed amount, it should not be confused with an in-network allowed amount because it offers no protection for the insured. If your out-of-network service costs more than the allowed amount, you are responsible for the remainder regardless of how much it may be. In addition, your insurance company calculates your co-insurance payment based on the allowed amount, rather than the billed amount. Furthermore, many policies have higher coinsurance rates for out-of-network services, which further increase your contribution.
Let's say you have to use an out-of-network provider in the example above. The service costs $1,000, but the allowed amount is only $800, and your out-of-network coinsurance rate is 50 percent instead. Your insurance company now pays only $400, and you are responsible for both the remaining 50 percent of the allowed amount and the $200 difference between the allowed amount and the billed amount for a total of $600. The same service ends up costing nearly four times as much, simply because you used an out-of-network provider.
A firm understanding how your health insurance pays your health care expenses is integral to ensuring that you choose a policy that meets your needs. Even with solid health insurance in place, many factors affect your out-of-pocket medical expenses. This means it is vitally important that you accurately assess your potential healthcare needs and select an insurance plan that provides manageable deductible, co-insurance and co-payment terms as well as a broad network of service providers. Especially if you have doctors or specialists who provide ongoing care, ensure that they are in your plan’s network to avoid paying more than necessary (for a more comprehensive explanation, see All the Ways You Pay: The Basics of Premiums, Deductibles, Co-pays and Coinsurance).