Health Care 101 – Coinsurance, Deductibles, Copays – Oh My!

Part 4 in our series to introduce you to some basic concepts about your health care.

It wasn’t too long ago that, if you had decent health insurance, you left the doctor’s office with a $25 copay or maybe no cost at all. While that’s still a possibility, more than likely you receive benefits from a health insurance plan that has introduced the terms “deductible” and “coinsurance” into the equation. These are confusing terms to some, and when you factor in other items such as “billed charges” and “allowables”, it becomes even more confusing. Let’s take a quick look at some of these terms:

• Billed charge. We like to look at this as the “retail price” for the medical service you are receiving, or the number on the price tag. Every provider has a “billed charge” that they send to your insurance company, or you, for the service you are receiving. This most likely is not what you or your insurance company pays, but is the basis for the service you receive and can be used to compare the cost between providers for the same service.
• Allowable. This number is what you or your insurance company ultimately agrees to “allow” the provider to charge the patient or the insurance company, and is normally figured out in the contract between the provider and the insurance company. For instance, the provider might charge $100 for a service (the “billed charge”), but the insurance company and provider have agreed to pay the provider $60 for the service. This is what is called the “allowable”. The allowable is then either paid by the insurance company to the provider, or the insurance company shares that cost with the patient, either through a copay, deductible or coinsurance.
• Co-pay. This is normally a set dollar amount for a specific service that the patient pays. Most common is an office visit. In the example above, the office charges $100, the insurance company agrees to pay $60, and the insurance company and the patient share in paying that $60 to the provider ($25 from the patient, and $35 from the insurance company).
• Deductible. More common these days, the deductible is an amount of money that the patient has to first pay of all allowables incurred up to a certain amount. For example, a patient has a $1,000 deductible; this means that every time they incur a service, an allowable is determined and the patient has to pay the full amount of the allowable until they reach their $1,000 deductible. So, in the example above, rather than the insurance company and patient sharing the cost, the patient would pay the entire $60 for that visit, and all other visits, until the $1,000 deductible is met. What’s important to remember is that deductibles are determined on the allowable (or what the insurance company allows) and not what the providers office bills.
• Coinsurance. This is normally reflected as a percentage cost sharing of the allowable once the deductible is met. If a patient has met their deductible, often the next dollars paid are shared in some fashion (80% insurance company, 20% patient), up to a certain dollar limit. For example, if a patient has met their $1,000 deductible, and they have an office visit of $100, the $60 allowable is shared – $48 (or 80%) by the insurance company and $12 (20%) by the patient.
• Out of Pocket Maximum. At the end of the spectrum, the out-of-pocket maximum is the total amount you, as the patient, have to pay in any one year under your plan. So, when you add up all of your deductible, copays and coinsurance, if they reach the out of pocket maximum, the insurance company will pick up 100% of the cost after that, for the remainder of that year. These maximums, along with the deductible, reset each year to zero.

The next time you receive an “Explanation of Benefits” from your insurance company, look at these terms in more detail, and hopefully you understand better how they work.  Next month, we will look at options for paying for your health insurance dollars and talk about the concept of the health savings account and how it integrates with your health insurance.