Putting together the puzzle: Deductibles, copayments, co-insurance, out-of-pocket limit

puzzle © Ionescu Bogdan - Fotolia.com

puzzle © Ionescu Bogdan – Fotolia.com

Cathy’s son was born with a heart defect that needed immediate surgery and then continuing expensive care as he grew up. She told her story on #getcovered:

“My husband and I … both had good jobs and insurance and figured that meant that we would be all set should we ever need it. We soon learned, however, that like so many Americans, we were underinsured: we had coverage–it just didn’t really cover anything when it came to the care our son needed to save his life.”

This is the one of a series of articles on understanding health insurance. Click here for all of the articles. This series covers basics — exceptions and complications go beyond the basics.

Wait — they had health insurance, and it still didn’t pay for her son’s medical care? That’s right. Cathy and her husband ended up maxing out their credit cards and eventually going bankrupt to pay for their son’s medical care.

Health insurance doesn’t cover everything. Today, however, it covers much more than it did when Cathy’s son was growing up. Until the Affordable Care Act (Obamacare), health insurance came with annual and lifetime limits. A child with serious medical problems could easily push the family over the limit, and then insurance stopped paying. The Affordable Care Act abolished annual and lifetime limits for essential services. But — you still have to pay other costs, including deductibles, co-pays and co-insurance. These are called “cost-sharing” or “out-of-pocket” costs.

Health care costs start with your health insurance premium. That’s the amount that you pay each month for health insurance. (If you have employer-sponsored insurance, like most Minnesotans, your employer probably pays part of this amount.) That’s a cost you pay whether you use any health care or not. Once you use health care, other costs come in.

Start with deductibles

Your health insurance policy has a deductible. The amount of your deductible might be $200 or $2000 or $10,000. That’s the amount that you pay each year out of your own pocket, before insurance begins to pay.

For example, if Gabriela’s policy has a $500 deductible, and her daughter breaks her arm and goes to the emergency room, the bill might total $2,900. Gabriela would pay the first $500. Then her insurance would begin to pay.

Gabriela’s insurance company probably will NOT pay all of the remaining $2,400. Why? That’s when co-insurance and co-payments come in.

Co-insurance and co-payments

Insurance policies also require co-payments and co-insurance. Until you pay out the deductible amount for the year, you pay the whole bill. After you pay the deductible amount, you pay a part of each bill as either a co-payment or co-insurance amount. (This is a simple explanation, and it does get more complicated. See section headed “Complications” below.)

Co-payment is a specific dollar amount that you pay for specific services. For example, your policy might say that you have a co-payment of $10 for each prescription that you fill.

Co-insurance is a percentage amount that you pay for health care services. For example, your policy might say that you pay 20 percent of the bill for each meeting with a psychologist.

So what happens with Gabriela’s bill? Remember that the total bill for her daughter’s treatment was $2,900. She has a deductible of $500. Her insurance policy also has co-insurance of 30 percent. She will pay the deductible amount — $500. That leaves $2,400. She will pay 30 percent of this amount — $720 — and her insurance company will pay the rest.

In six weeks, her daughter goes to the doctor’s office to have the cast removed. The charge for this office visit is $400. Gabriela’s policy specifies that she has to pay a $25 co-payment for each office visit. So she pays $25 and the insurance company pays $375.

Out-of-pocket limit

When a family has very high medical expenses, their bills could run to hundreds of thousands of dollars in a year. With 30 percent co-insurance, that could quickly bankrupt most families.

Under the Affordable Care Act, insurance companies must set an out-of-pocket limit. That’s the maximum that you can be required to pay in a year for deductibles, co-payments, and co-insurance. After you reach the out-of-pocket limit, the insurance company must pay all of the rest of your medical expenses for the year.

The legal maximum for out-of-pocket limits is $6,450 for an individual and $12,900 for a family in 2015. Most insurance plans have lower limits. The out-of-pocket costs do not include your premium payments. (Premiums are the amount you pay each month for insurance coverage.)

So the equation for your health care cost is:

Premium + deductibles + co-payments + co-insurance = your health care cost

BUT – your total health care cost is limited to your insurance policy’s maximum for out-of-pocket costs each year. Two examples:

Example #1: Your insurance policy’s maximum for out-of-pocket costs is $2400. You pay $500 each month for insurance premiums, which adds up to $6,000 for the year. This year, your deductible is $300, so you paid the first $300 in medical costs out of your pocket. After that, you paid $500 in co-payments for office visits and prescriptions. You also had an emergency room visit that cost $2,000 and your co-insurance rate is 30 percent. So you paid $600 in co-insurance. Your total out of pocket cost is $1,400. Your total health care cost is $7,400.

Example #2: Your insurance policy’s maximum for out-of-pocket costs is $2,400. You pay $6,000 for monthly premiums, $300 in deductibles and $500 in co-payments. You are also hospitalized for three days and the bill comes to $11,000. Your co-insurance rate is 30 percent, which would mean $3,300. BUT – your out-of-pocket maximum is $2,400 and you have already paid $800 in deductibles and co-pays. So you pay $1,600 of the hospital bill and the insurance company pays the rest. Your total health care cost is $8,400.

Complications

When it comes to insurance, nothing is simple. This series covers basics — exceptions and complications go beyond the basics. Here are a few of the complications in the out-of-pocket payments.

Deductibles may be different, depending on what clinic or doctor you go to. If you have a family, the deductible probably has a limit per individual, and for the family. For example, you may have a $200 individual/$500 family deductible. If Gabriela has three children, she would stop paying the deductible for each person after $200. When she has paid a total of $500 in deductibles for various family members, then she has met the family limit — no more deductibles for the year. Of course, she still has to pay the co-payments and co-insurance.

Co-payments will also vary. The insurance company may charge $40 co-payment for visits to doctors in Tier Two and only $30 for visits to doctors in Tier One. They may charge a higher co-payment for brand-name medicines and lower for generics.

More information:

• Cathy’s story

• How to pick a health insurance plan (Consumer Reports)

Articles in this series:

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6 Comments

Filed under health care, health insurance

6 responses to “Putting together the puzzle: Deductibles, copayments, co-insurance, out-of-pocket limit

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