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Coinsurance Demystified!

It’s not your deductible, it’s not a co-pay it’s… coinsurance!

Health insurance used to be simple. Well that’s not really true but at least is was easier to understand than the policies being issued today. Part of the reason for the complexity of the new Affordable Care Act compliant policies is coinsurance. There used to be only two types of out of pocket expenses in health insurance coverage, namely deductibles and co-pays. Most people understand how a health insurance deductible works, if not check out this excellent blog post , and co-pays aren’t too difficult to comprehend either. In the post Affordable Care Act world though there is a new out of pocket expense called coinsurance and you should really understand it before comparing coverage and prices.

Don’t be mad but I lied, a little bit, in the above paragraph. Coinsurance has technically been a part of health insurance policies long before Obamacare but you probably never noticed it. To understand why we first must understand what coinsurance actually is. So let’s get the ball rolling on that process.

Coinsurance is the percentage of covered medical expenses that the insurance company will pay after your deductible is met. This sounds kind of complex so let’s break it down.

  • First off coinsurance is a percentage. That’s right as if you didn’t have enough reasons to hate them, now your insurance company is making you do math. Typically coinsurance is set at 100%, 90%, 80% or 70% on most group and individual health insurance plans.
  • Coinsurance only applies to covered medical expenses. So if a claim is “not covered” you have bigger problems and the coinsurance level won’t matter.
  • For the most part coinsurance kicks in only after your deductible is met. This is really important and a point many people miss. If you don’t meet your deductible in a given contract year then the coinsurance element is never used.

How about an example? Let’s suppose you’re feeling really great because your employer selected a low deductible of $500 for your medical policy. That’s great! But wait… this policy says it has 80% coinsurance. Is it still a good policy? Should you change jobs? Before you register at Monster.com, let’s think about how this policy will work under a worst case scenario and figure out how much you will spend out of your pocket.

Bad news… you need heart surgery. Let’s first assume that all of the claims that result from the surgery are “covered medical expenses”. To make this easier we’ll say that all of the claims total to about $40,500. That’s actually a pretty reasonable guess, check out this link to see why . You will quickly meet your $500 deductible. That’s the easy part but now onto the coinsurance. If you recall the policy had an 80% coinsurance level. That means the insurance company will pay 80% of your medical expenses now that you have met your deductible. Here comes the math part!

  • The Insurance company pays 80% of the remaining $40,000 in medical bills which works out to be $32,000.
  • That means that you have to come up with the balance of $8,000. Right? Well…maybe. Read on!

I don’t want to completely blow your mind but there is one more health insurance term we need to discuss, the Out of Pocket Maximum or OOP Max. Under Obamacare every health insurance policy must include an OOP Max . This is the maximum amount of money a health insurance policyholder can spend in a given contract period before the insurance carrier is forced to pay 100% of all of their medical expenses. For 2015 the OOP Max’s are set at $6,600 for an individual plan and $13,200 for a family plan. Therefore you would not pay over $8,000 for the surgery, the most you could possibly spend would be $6,600 and the insurance carrier would have to take care of the rest.

Wait, if you remember way back a few paragraphs ago I mentioned that coinsurance has been around for a long time but you probably never noticed it. The reason for this is that before the advent of the Affordable Care Act coinsurance was usually set at 100%. So in essence once you met your deductible the insurance company would pay 100% of your covered claims. Therefore even though coinsurance was part of the policy you wouldn’t have given it a second thought as it is intuitive to think that after you meet your deductible your insurance will take care of the rest.

In closing I hope you learned everything there is to know about coinsurance and how it can affect the amount of money you spend out of your pocket on health insurance expenses. Keep this information handy the next time you are shopping for a new health insurance policy .

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