Health Insurance Premiums, Deductibles, Copays and Coinsurance

Premiums are the primary source of revenue for insurance providers, which, in order to make a profit, must take in more money in premium payments than they pay out in benefits

Health insurance costs continue to soar in the United States, far surpassing the overall inflation rate. Most Americans younger than 65 rely on employer-subsidized policies to cover medical costs, even as the cost of those policies jump year after year.

To understand how health insurance impacts consumers, you need to understand the complex formulas insurers use. The key factors are premium costs, deductibles, copays and coinsurance.

Access to medical insurance is a hot-button political issue. Since 2014, the federal Patient Protection and Affordable Care Act (ACA) has required everyone to carry insurance, but the so-called mandate is being rolled back with the elimination of tax penalty for not having a policy.

Those who can’t get coverage at work are able to buy insurance through federally subsidized insurance exchanges that are part of the ACA, also known as Obamacare. But even though the Congressional Budget Office (CBO) estimates that the government will pay $685 billion in ACA subsidies in 2018, about 29 million people continue to go uninsured.

In 2018, about 89% of Americans younger than 65 had health insurance, according to the Congressional Budget Office (CBO), a number that has held. The CBO expects that number of uninsured to rise as the federal government lifts a tax penalty for not carrying a policy.

Why would anyone not carry health insurance? Failing to visit doctors for checkups and preventative care can contribute to the development of medical conditions that, without insurance, can lead to financial ruin. Though insurance is important to staying in good health, people opt out because of the cost.

The website eHealthInsurance.com estimated that premiums for subsidized Obamacare policies averaged $393 a month in 2017 for individuals, a 99% increase since 2013. And they came with an average annual deductible of $4,328. Costs for family policies skyrocketed 140% during the same period, with premiums hitting $1,021 a month in 2018 with an annual deductible topping $8,350.

Many employer-sponsored plans offer less expensive coverage. They are the mainstay of non-elderly health insurance in the United States, covering more than half the population under 65 – the age most Americans fall under Medicare coverage. But even employer-plan coverage is growing more costly.

The Henry J. Kaiser Family Foundation reported that the average annual premium for employer-sponsored health insurance for a single worker was $6,690 in 2017 and $18,786 for family coverage. Average single-premium costs increased 4% from 2016 and 3% for family coverage. Workers’ wages increased 2.3% year over year, and inflation increased 2.2%. Workers only pay a portion of their premiums in most cases, though the percentage they pay and the cost of their policies vary widely.

Let’s see how premiums, deductibles, copays and coinsurance impact what you pay for healthcare.

Health Insurance Premiums

A health insurance premium is the monthly payment made to an insurance company to buy a policy. Premiums are the primary source of revenue for insurance providers. To make a profit, providers must take in more money in premium payments than they pay out in benefits. Unlike copays and deductibles, premiums must be paid whether an insured person has medical expenses or not.

For most American families, health care premiums are the greatest health care cost. Premiums for family coverage through employer-sponsored plans rose 55% between 2007 and 2017, according to a Kaiser Family Foundation study.

Employers generally pay a substantial amount of their workers’ premiums, but most workers contribute to premium costs. The employer portion of worker health care premiums are exempt from federal and state income taxes, and the employee portion usually is deducted before withholding and excluded from taxable income.

Lower wage workers generally pay a greater percentage of their health insurance premium. Those employed at small firms pay 39% of the premium for family coverage compared to 28% for workers at large companies.

In 2017, the average family premium for Employer Sponsored Insurance (ESI) coverage was $17,581. Employers cover most of the cost, with workers covering 31% of the cost. The average worker contribution to a family premium was $5,714. Covered workers’ average contribution for family coverage increased 74% since 2007 as employers shift more of the rising cost of premiums to their employees.

Health Insurance Deductibles

A deductible is the amount of medical costs that the insured must pay before insurance coverage begins. Deductible amounts vary by plan, but generally are stipulated as a yearly maximum figure. The deductible renews annually, so each year policyholders face a fresh deductible even if they paid the full deductible in the previous year. For example, an individual with a $1,500 deductible will have to pay for the first $1,500 of care he or she receives each year.

A health insurance policy with a high deductible will usually come with a lower monthly premium. A policy with a low deductible will have a higher premium. Some plans may have separate deductibles for specific services, and under some policies, certain services, like a trip to an emergency room or a routine doctor visit, may not require a deductible payment at all. The Obamacare law exempts certain procedures, including annual physicals and immunizations, from the deductible amount.

ESI plans covered 151 million people in 2017, over half the non-elderly U.S. population. 81% of the policies contained an annual deductible requirement, with the average deductible for single coverage policy reaching $1,505, according to the Kaiser Foundation. The deductible was 55% higher than in 2009. Between 2012 and 2017, the percentage of workers with an annual deductible of $1,000 or more increased from 31% to 51%.

Costs That Count as Deductibles

Even health insurance policies that impose deductibles exempt some medical services from the deductibility requirement. The Affordable Care Act, or Obamacare, contains a list of preventative healthcare procedures that are part of polices at no additional cost beyond your premium. But you have to pay out of pocket for other services. Here are some examples of what does and doesn’t apply to a deductible.

Apply to Deductibles:
  • Hospital stays
  • Lab test
  • CAT scans and MRIs
  • Surgeries
  • Medical Devices
  • Doctor costs that exceed copays
Often don’t Apply to Deductibles
  • Copays
  • Insurance Premiums
  • Costs not covered by your plan

Health Insurance Copays

A copay, is a fixed charge paid by an insured individual when visiting a doctor, seeing a specialist, visiting an urgent care or the emergency room, or in many cases, purchasing a prescription drug. It varies by policy, and copays can increase dramatically for those with HMO and PPO policies if they receive treatment from medical practices outside their policies’ provider networks.

Not many years ago, most health insurance plans allowed policy holders to freely pick their doctors, hospitals and clinics. As costs rose, however, insurers started looking for ways to trim expenses. They cut deals with doctors, physician groups, hospitals and myriad other health care providers that offered lower rates, allowing the insurers to pass the savings to their policyholders. Insurers use copays and another alternative, coinsurance, to split costs with their policyholders.

The copay system might save money, but it has added to the complexity of healthcare. Policyholders typically must consider two sets of fees: those set for providers in their approved networks and those outside the networks. Generally, fees are much lower if you see only approved providers.

But copays are complicated. Unlike deductibles,  copays are fees imposed each time you visit a medical provider. And the fees vary – you pay one fee to visit a family practice doctor, another to see a specialist and another to go to an emergency room or clinic. Copays also are charged for tests, prescription drugs, physical therapy and other covered expenses.

Obviously, copay costs can rise sharply for those with costly medical emergencies or chronic conditions that are expensive to treat. To limit what patients have to pay, most policies have annual and lifetime caps on out-of-pocket payments. Depending on the policy, caps can be quite high.

Obamacare sought to address some of the costs by creating exemptions, requiring insurers to offer preventative-care procedures without cost sharing. Some examples of exempt services include annual checkups, immunizations, well-woman visits and certain diagnostic exams. Your policy should list the exemptions.

Knowing how your plan works is critical. Some insurance companies treat deductibles and copays as separate entities, while others connect them. For instance, one play might apply your copays to fulfilling your annual deductible, but another might not. Under some plans, co-pays contribute to the policy’s deductible; in others, a deductible must be met before a co-pay applies. If you plan charges copays, the will be listed on you insurance card.

Though copays are a predictable part of the healthcare-cost equation, they are shrinking as a portion of what insured people pay for care. According to the Kaiser Family Foundation, rising deductibles are the biggest culprits in out-of-pocket healthcare spending for employer-sponsored plans. Deductibles rose from an average $303 a year in 2006 to $1,200 a year in 2016. Enrollee spending on deductibles rose from $151 to $417 during the period, a 176% increase. But the amount spent on copays actually fell 38%, from $225 in 2006 to $140 in 2016.

A typical copay for a routine visit to a doctor’s office, in network, ranges from $15 to $25; for a specialist, $30-$50; for urgent care, $75-100; and for treatment in an emergency room, $200-$300. Copays for prescription drugs depend on the medication and whether it is a brand-name drug or a generic version.

HMO vs. PPO Copays

Traditional health insurance, the kind that allows you to see any doctor who accepts your insurance, has been on the wane for years. Newer policies under the umbrellas of preferred provider option (PPO) networks and health maintenance organizations (HMO) offer policyholders lower costs if they use healthcare providers included in a network.

HMOs and PPOs are similar in many respects but have significant differences:
  • HMOs give policyholders access to specific doctors and hospitals. The providers must agree to accept lower rates for seeing plan members and they need to meet standards set by the plan. In many instances policyholders must agree to only use their HMO providers to receive coverage. Most HMOs require policyholders to select a primary care physician. If they want to see a specialist, they need to get approval from the primary care physician. In exchange for accepting the restrictions, HMOs have lower fees than other forms of health insurance and often don’t impose a deductible. Copays, when they are required, can be relatively small.
  • PPOs are like HMOs but put fewer restrictions on seeking healthcare outside the network. There is often no requirement to see a primary care physician before going to a specialist. What’s the catch? PPOs often require copay and impose annual deductibles. They have much lower fees for in-network providers than out-of-network ones.

Health Insurance Coinsurance

Coinsurance is another way in which health care costs are shared between a health insurance company and the patient. Plans that require coinsurance payments generally have them kick in after the yearly deductible has been met, after which the insurance company pays a percentage of all costs – 75%, 80% or 90% – while the insured party covers the rest.

Obamacare policies have limits on how much you might pay out of pocket for medical costs each year. In 2018, the out-of-pocket maximum was set at $7,350 for all individual plans and $14,700 for family plans. The limits do not include what you pay in insurance premiums.

Coinsurance rates may vary based on the type of services and whether they are provided in or out of network.

Coinsurance vs. Copays

Coinsurance is a percentage of the cost of a medical service that you are obligated to pay. Copays are fixed amounts that you pay each time you access a particular medical service. Here are examples of how they differ:

Copays
  • Paid each time you visit a doctor or fill a prescription, unless the visit is exempt from additional charges under the Obamacare healthcare law/
  • Preset fee for the service of prescription. This usually is listed on your insurance card and is included in your policy.
  • May or not count toward fulfillment of your annual deductible.
  • Paid when you see the doctor or buy a prescription
Coinsurance
  • An amount your pay for medical services or drugs after you met your deductible
  • Usually a percentage of the cost of the service of prescription
  • Charged after you met your deductible
  • The healthcare provider bills your directly

Health Insurance Out-of-Pocket Limits

Many insurance policies used to set lifetime limits on how much the policy would pay to a policy holder for medical costs. Under Obamacare, those limits were prohibited starting in 2014. Today, there is no limit on the amount an insurer must pay to cover your medical expenses after copays, coinsurance costs and deductibles are met. Insurers are also prohibited from cancelling your policy for medical reasons.

Paying the Costs of Health Insurance

Premiums, deductibles, co-pays and co-insurance are costs that must be borne by the consumer. Employees enrolled in ESI plans generally have their premium costs taken out of their paychecks on a pre-tax basis. Medicare recipients have their premiums deducted from their Social Security checks, and self-insured individuals must pay their premiums to their insurance companies directly. All other out-of-pocket costs must be paid to health care providers at the time of service, or when billed.

Any taxpayer who is enrolled in a high-deductible health plan (HDHP) can open a Health Savings Account (HSA). Funds contributed to an HSA are not subject to federal income taxes if used for qualified medical expenses, including co-pays, deductibles, co-insurance or many other costs like dental, vision and chiropractic care. HSAs were created in 2003, replacing Medical Savings Accounts, a similar program used earlier.

People who are having trouble covering their medical expenses should speak to a debt relief professional about their options. Debt settlement can reduce credit card debt, freeing up funds for health insurance costs. In addition, medical debt can be settled for less than what is owed.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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