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What Is Coinsurance? How It Works, Examples and More. Coinsurance is an insurance term employers and patients should know about. This article explains what coinsurance is and how it applies in real life.

By Entrepreneur Staff

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Coinsurance is a type of cost-sharing arrangement in which the insured party and the health insurance company share the costs of covered medical expenses.

This is a common feature in many health insurance plans, and it can have a significant impact on how much you pay for health care services. Understanding how coinsurance works and how it affects your healthcare costs is essential for making informed decisions about your health insurance.

Related: 5 Tips for Selecting the Best Health Insurance Plan

What is coinsurance?

In simple terms, coinsurance is a percentage of the total cost of a medical expense that you are responsible for paying.

For example, if your insurance plan has a 20% coinsurance rate, you would be responsible for paying 20% of the cost of a doctor's visit or hospital stay, and the insurance company would pay the remaining 80%.

Coinsurance is usually applied after you have met your annual deductible, which is the amount of money you must pay out of pocket before your insurance company begins to cover expenses.

Other important insurance definitions: deductible, out-of-pocket maximum, and copay

Deductibles, out-of-pocket maximums, and copays are all types of cost-sharing mechanisms that are commonly used in health insurance plans. Understanding the differences between these three concepts is important for making informed decisions about your health insurance.

What is a deductible?

A deductible is the amount of money you must pay out of pocket before your insurance company begins to cover expenses. This is usually a fixed dollar amount that is set at the beginning of the year.

For example, if your annual deductible is $1,000, you would need to pay the full $1,000 before the insurance company would begin to cover expenses. Once the deductible is met, you would then be responsible for paying a percentage of the remaining costs for covered services and medical expenses, which is the coinsurance discussed above.

Related: 5 Tips for Surviving High-Deductible Healthcare

What is an out-of-pocket maximum?

An out-of-pocket maximum is the maximum amount of money you will have to pay out of pocket in a year. Once you reach this maximum, the insurance company will cover all remaining costs for the rest of the year.

For example, if your out-of-pocket limit is $5,000 and you have met that amount, you will not have to pay any more out-of-pocket costs for the rest of the year.

What is a copay?

A copay is a set amount that you pay for a specific service or procedure. Copays are usually a flat fee that you pay at the time of service, and they remain the same regardless of the total medical bill.

For example, if your insurance plan has a $20 copay for a primary care physician visit, you would pay $20 at the time of the doctor's office visit and the insurance company would cover the remaining cost. Copays are usually lower than the cost of the service and are used to help with the cost of routine doctor visits and other common medical procedures.

A real-life example for deductibles, out-of-pocket maximums, copays, and coinsurance

In this example, let's say Collin has a health plan with a $1,000 annual deductible, a $5,000 out-of-pocket maximum, a $100 copay for emergency room visits, and a 20% coinsurance for medical services after your deductible has been met.

Collin visits the emergency room for some tummy troubles and ends up being admitted due to appendicitis.

When the hospital bill comes around, he'll first see a charge of the $100 copay for the initial emergency room visit. This $100 payment will go toward Collin's annual deductible amount of $1,000. Assuming he has made no other payments yet this year, he'll still need to pay $900 out of pocket before his insurance starts covering the charges.

In this case, though, the charges don't stop there because Collin was admitted for surgery.

Summing up the medical costs of the copay toward the emergency room visit and the hospital stay, which can include the surgeon's fees, equipment fees, and facility fees, Collin's total bill comes to $9,545.

Because Collin's deductible is $1,000 and his plan year has just been renewed, he'll be responsible for the initial $1,000 of this bill.

After that, Collin's coinsurance kicks in for the remaining $8,545. Since Collin's coinsurance is 20%, he will pay $1,709, and the other 80%, $6,836, will be covered by his insurance.

This means that Collin has now paid a total of $2,709 out of pocket so far.

With this one bill, Collin has satisfied his deductible for the rest of the year. Because of this, he will only be responsible for his copays and the 20% coinsurance for services until he pays the remaining $2,291 out of pocket to reach his out-of-pocket maximum, in which case his insurance company will pay for 100% of services covered.

What can affect your coinsurance rate?

It's important to keep in mind that different insurance plans have different deductibles, out-of-pocket maximums, and copays.

Some plans may have higher deductibles or out-of-pocket maximums, which means you will have to pay more out of pocket before your insurance company begins to cover expenses. Other plans may have lower deductibles or out-of-pocket maximums, which means you will have to pay less out of pocket before your insurance company begins to cover expenses.

Related: Establishing a Health Plan for Your Business

Coinsurance can also be affected by whether you receive care from an in-network or out-of-network provider. In-network providers are typically doctors, hospitals, and other healthcare providers that have contracted with your insurance company to provide services at a discounted rate.

If you see an in-network provider, your coinsurance rate may be lower than if you see an out-of-network provider.

Coinsurance can also be affected by government-funded health insurance programs such as Medicare. Under Original Medicare, you would typically pay 20% of the Medicare-approved amount for most doctor services (including most doctor services while you're a patient in a hospital) and for outpatient therapy.

When choosing a health insurance plan, it's important to consider the deductibles, out-of-pocket maximums, and copays that are included in the plan. This will help you understand how much you will have to pay out of pocket before your insurance company begins to cover expenses and help you make an informed decision about the plan that is right for you.

Is coinsurance always the same rate?

No, coinsurance rates can vary depending on the type of service or procedure and if the provider is in or out of your insurance company's network.

For example, some insurance policies may have a higher coinsurance rate for prescription drugs or out-of-network providers, while others may have a lower coinsurance rate for preventive care or primary care physician visits.

Final notes on choosing health insurance

When choosing a health insurance plan, it's important to consider the coinsurance rate and how it will affect your overall health care costs. During open enrollment, you can choose a plan with lower premiums but higher coinsurance rates or a plan with higher monthly premiums but lower coinsurance rates.

Related: 7 Ways to Prep Your Employees for Open Enrollment in Health Insurance

Keep in mind that choosing a plan with lower premiums may mean that you will pay more out of pocket if you need to use the insurance.

Related: Health Insurance - Entrepreneur Small Business Encyclopedia

It's also important to understand the different types of health insurance plans available, as they can have different coinsurance rates.

For example, HMOs (Health Maintenance Organizations) typically have lower coinsurance rates but a more limited network of providers, while PPOs (Preferred Provider Organizations) typically have higher coinsurance rates but a wider network of providers.

Blue Cross Blue Shield, Anthem, and Cigna+Oscar are just a few examples of insurance companies that implement coinsurance as a part of most of their coverage options.

What coinsurance can mean for you

Whether you're trying to decipher your current health insurance policy or just shopping for the best policy at the best rate, it's important to understand different elements of health insurance, like coinsurance, co-pays, and deductibles.

If you ever have questions about your specific health insurance plan, reach out to your health insurance provider. Read more at Entrepreneur.com.

Entrepreneur Staff

Entrepreneur Staff


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