Insurance companies employ a mechanism known as cost-sharing to prevent the overuse of health care. Cost-sharing refers to how the insurance company shares medical expenses with you until you hit the plan’s out-of-pocket maximums.
Cost-sharing only applies until you hit your out-of-pocket maximum.
A plan’s annual out-of-pocket maximum is the most you'll have to pay in a year for covered health care services. Once you hit a plan’s out-of-pocket maximum, the plan pays 100 percent of covered services. But before you hit your out-of-pocket maximum, you’re required to “share” in some of your medical costs.
Cost-sharing includes copayments, deductibles, and coinsurance.
The annual deductible is the amount a plan requires you to pay out-of-pocket before the post-deductible coinsurance kicks in. Before you meet the plan’s deductible, you are required to pay the full price for covered services unless pre-deductible copayments or coinsurance for specific services apply.
Most health insurance plans have separate deductibles for individuals and families. And some have a separate deductible for prescription drugs too.
A copayment or “copay” is a preset, fixed amount (e.g., $45) you pay any time you receive a particular service. The insurance company then covers the remaining cost of service. Some copayments are available pre-deductible (i.e., before you hit the plan’s deductible), and some are only available post-deductible (i.e., after you hit the plan’s deductible).
There are many different types of copays. For example, some are for doctor visits, some are for prescription drugs, and some are for hospital services like emergency room visits.
Coinsurance is a percentage you must pay when you receive a service. The difference between coinsurance and copayments is how cost-sharing works. If your health insurance plan requires 20 percent coinsurance, that means you pay 20 percent of the bill, and your insurance company pays 80 percent.
There are two types of coinsurance: 1) post-deductible coinsurance and 2) pre-deductible coinsurance. Post-deductible coinsurance is the percentage of all covered services you pay after you've hit the plan’s deductible and until you reach the plan’s out-of-pocket maximum. Some policies provided pre-deductible coinsurance for certain types of services. For these services, the coinsurance applies without you needing to hit the deductible.
Note: When the deductible and the out-of-pocket maximum are identical, the post-deductible coinsurance is 0 percent. There is no coinsurance.
Cost-sharing doesn’t apply to fully-covered expenses.
Your health insurance policy may not require cost-sharing on all covered medical expenses. In other words, it may cover some services at 100 percent. For example, Marketplace health insurance plans cover the full cost of preventive care like the annual flu shot without cost-sharing.
Cost-sharing affects your health insurance costs.
A premium is the cost of a health insurance policy. In general, health insurance premiums increase as cost-sharing decreases. In other words, plans with lower deductibles, copayments, coinsurance, and out-of-pocket maximums, tend to have higher premiums. And plans with higher cost-sharing tend to have lower premiums.
Note: Cost-sharing helps control health insurance costs. Without cost-sharing, people might overuse healthcare and drive up insurance company costs. Insurance companies would then need to raise the premiums you pay.