How does health insurance work?
Once you're enrolled in a health insurance plan, you'll pay a monthly premium. You'll also receive a member identification card that provides information about your plan. In some cases, you'll pay a copay—a fixed dollar amount that is paid directly to the health care provider—when receiving medical care, such as a visit to the doctor or when picking up a prescription. This is one of the ways health insurance keeps your out-of-pocket costs down. A copay is a small portion of the cost of that service. The insurance company pays the rest. Copays do not count toward your annual deductible.
When it comes to other types of health care expenses, such as lab tests, surgeries or other medical procedures, a health insurance company helps you manage those costs by using an annual deductible and coinsurance. The annual deductible is the amount you will pay before the insurance company starts sharing responsibility with you for paying your health care bills. When the insurance company starts paying their share, this is called coinsurance, and is often expressed as a percentage.
For example, your coinsurance may be 20 percent, which means that after you've met your deductible, you pay for 20 percent of your health care costs and your insurance pays for the other 80 percent. Coinsurance may vary from plan to plan and may also depend on the network status of the providers you choose. If you choose an out-of-network provider, your coinsurance will usually be higher than if you chose an in-network provider. If the coinsurance you've paid reaches the coinsurance maximum, then the insurance company pays all of your covered medical expenses for the rest of the year, up to your health plan's annual maximum.
Here's a look at how a typical health insurance plan with a $2,500 deductible, $30 copay, 30% coinsurance and $7,500 coinsurance maximum distributes your health care costs between you and the insurance company under different scenarios, assuming you're receiving only in-network medical care:
- One preventive care visit: Say you had a very healthy year and needed only routine preventive care. Your health insurance pays preventive care at 100 percent after copay, so your out-of-pocket medical expenses were $30. Remember, a copay does not apply toward your deductible.
- Injury or chronic condition: This time, imagine your health care needs were a bit more complex, and your health care spending totaled $4,800 for the year. By June, you reached your plan's $2,500 deductible, at which time your share of the covered medical expenses decreased significantly. By the end of the year, you were responsible for $3,110 of your total costs. Your insurance would pay the rest. Here's how it breaks down:
- $2,500 of the $4,800 medical expense is applied to deductible
- $4,800 - $2,500 = $2,300
- $2,300 is now subject to your 30% coinsurance, so the plan would pay 70% ($1,610). This leaves your 30% coinsurance portion of $690.
- $2,500 deductible + $690 coinsurance = $3,110 total paid by you
- Emergency: Now let's consider what would happen if you suffered a serious injury or illness, with $30,000 in medical bills for the year. In this case, you would surpass your deductible, and you would reach your coinsurance maximum. This means you would be responsible for $10,000, which is the combination of your annual deductible ($2,500) and coinsurance maximum (30% up to a maximum of $7,500). Any additional in-network medical expenses would be paid by your insurance at 100%.