Understanding Coinsurance and Deductibles

In your health insurance plan, coinsurance and deductibles are directly linked to your annual out-of-pocket costs. The higher your coinsurance percentage or deductible, the higher your yearly totals. However, higher coinsurance and deductibles usually mean lower monthly premiums. Before choosing a health insurance policy, you must have a solid understanding of these terms and how they’ll impact your finances.

An annual deductible is a total out-of-pocket expense you must reach before your insurance coverage kicks in. The medical costs you incur and prescription drugs you take in a particular year will determine how quickly you reach your deductible.

For instance, at the beginning of the plan year, if your deductible is $500 and you require a medical procedure that costs $12,000, you will pay that first $500 to cover your deductible. For the rest of the year, you will not have to worry about reaching the annual deductible until the next plan year.

Health care deductibles vary depending on the type of policy (HMO, PPO, POS, public or private), how many people are covered by the policy and whether providers used are in-network or out-of-network.

High-deductible health plans (HDHP) have a higher deductible than traditional plans but offer lower monthly premiums. According to HealthCare.gov, for 2022 the IRS classifies an HDHP as a plan with a deductible of ‌$1,400‌ or more for an individual or ‌$2,800‌ for a family.

Whether you have private insurance or Medicare, coinsurance works as a cost-sharing agreement between you and the insurance company. It is a percentage of medical expenses a policyholder may be required to pay after the deductible is met.

Coinsurance is often ‌10, 30 or 20 percent.‌ For instance, with 10 percent coinsurance and a $2,000 deductible, you would owe $2,800 on a $10,000 operation – $2,000 for the deductible and then $800 for the coinsurance on the remaining $8,000.

Your insurance plan will likely have different coinsurance rates for in-network and out-of-network providers. If your chosen health care provider is not in your plan’s network, the percentage of coinsurance you pay will be higher than if you go with an in-network provider.

Many health plans do not charge coinsurance for preventative care. The Affordable Care Act (ACA) requires private insurance plans to cover many annual wellness services at ‌100 percent‌. In many cases, no copay is charged for an office visit related to preventative care.

The out-of-pocket maximum indicates a maximum fixed amount of money you will have to pay for health care services in a plan year. It is a cap on the total accumulated cost of your deductible, coinsurance and copays. Once you reach that limit, most health insurance plans will cover 100 percent of all health care costs for the rest of the year.

For instance, if your health care plan has a $2,000 out-of-pocket maximum, a $1,000 deductible and 20 percent coinsurance, when you reach your deductible amount, you are halfway to your out-of-pocket maximum. Once your coinsurance bills add up throughout the year to $1,000, you have reached your out-of-pocket limit.

You will still pay monthly premiums, but the health insurance company should cover most doctor visits and other medical costs. Always see your plan's details for which covered services may not count toward an out-of-pocket maximum.

In general, higher deductibles and coinsurance translate into lower premiums because the insurance company pays less toward care. Lower deductibles mean higher monthly premiums because the plan covers more of your health care costs.

Electing to take higher deductibles and coinsurance may allow you to save on health care costs, especially if you don’t often visit a doctor’s office. A lower-deductible plan that covers a higher percentage of costs may be optimal for those with health issues requiring more frequent care.

High-deductible health plans can be combined with tax-advantaged Health Savings Accounts (HSA). The tax savings on funds set aside in the HSA can help to counterbalance the higher deductible amount.

With 10 percent coinsurance after deductible, you pay 10 percent of all health care costs after you reach your plan’s annual deductible. While that may sound like a small amount, if you suffer a catastrophic illness or injury and require extensive health care services, your portion of the medical costs could be unaffordable. This is where the out-of-pocket limit can help keep medical bills under control.

When your plan has a copay after deductible, you must pay a small, fixed amount for a given health care service after reaching your deductible. Before you meet your deductible, you will pay the full allowed amount for that visit.

Copayment and coinsurance are cost-sharing methods meant to balance the cost of your health care. While copays are flat fees, they can vary depending on whether you see your in-network primary care physician or an out-of-network provider specialist. Coinsurance is a percentage of the cost of health care services rendered, so the total cost might catch you by surprise.

In truth, the best policy is one in which the monthly premium, copays, coinsurance and out-of-pocket limits fit your budget and health care needs. When open enrollment season begins, look closely at these elements to choose the mix that works for you.