An Overview of Health Insurance Cost-Sharing
Cost-sharing refers to the fact that you and your health insurer both pay a portion of your medical costs during the year. Your health insurer requires you to pay part of the cost of your health care expenses in order to prevent over-utilization of healthcare services, and in order to keep health insurance premiums in check (although the idea of 100% coverage might sound great, it would likely lead to people seeking medical treatment more often, and premiums would skyrocket).
Cost-sharing saves your health insurance company money in two ways. First, you’re paying part of the bill; since you’re sharing the cost with your insurance company, they pay less. Second, since you have to pay part of the bill, it’s more likely you’ll only seek medical care when you really need it.
The most common forms of cost-sharing are deductibles, copayments, and coinsurance. The monthly premiums you pay to get health insurance coverage aren’t considered a type of cost-sharing. Let’s briefly take a minute to understand how each of those types of cost-sharing work:
The deductible is the amount that you have to pay for certain services before your health plan starts to cover your expenses. For most health plans, the deductible applies once per calendar year, although there may be separate deductibles for medical expenses and prescription expenses.
Most health plans do have deductibles, but they vary considerably in size.1 Some plans have deductibles as low as $250 or $500, while other plans have deductibles well in excess of $5,000. But unlike coinsurance (discussed below), the deductible will be a pre-determined amount, rather than a percentage of the bill. The ACA limits total out-of-pocket costs for all ACA-compliant plans to no more than $7,900 in 2019 ($8,150 in 20203), so the deductible cannot exceed that amount.
Once you pay your deductible, your health plan will start to pick up at least part of the tab for your ongoing medical expenses for the remainder of the year. But if your health plan includes copays for services like doctor visits or prescriptions, you’ll continue to pay those copays until you reach your out-of-pocket maximum for the year.
Like deductibles, copayments (also known as copays) are a set amount that you’ll pay for certain medical services. But copays tend to be much smaller than deductibles. A health plan might have a $1,500 deductible, for example, but only require $35 copays to see a primary care physician.
In that case, you’d pay $35 to see your doctor, and your health plan would pay the rest of the doctor’s bill, regardless of whether you’d already met your deductible for the year or not. There are some health plans that start to allow for copays on prescription drugs only after a prescription deductible is met. On a plan like that, you might pay the first $500 in prescription costs, and then start to pay a set copay amount for each prescription.
In general, copays and the deductible apply to different services, and the amount you spend on copays doesn’t count towards the deductible (but all health plans are different, so read the fine print on yours). But all ACA-compliant plans do count the amount you spend on copays towards the plan’s out-of-pocket maximum, and deductibles count towards that maximum spending cap too.
And some health plans have what they refer to as a “hospital copay” that might be $500 or more. Although this is an amount more along the lines of what we’d think of as a deductible, the difference is that the copay could be assessed multiple times in the year (until you hit your out-of-pocket maximum), whereas a deductible would generally only be assessed once, even if you’re hospitalized multiple times (as noted above, it works differently if you have Medicare Part A).
Unlike deductibles and copays, coinsurance is not a specific dollar amount. Instead, it’s a percentage of the total costs. Coinsurance usually starts to apply after the deductible is met, and you’ll continue to pay it until you hit the out-of-pocket maximum for your plan. Coinsurance generally does not apply to services that are covered with a copay.
So let’s say your plan has a $1,000 deductible and 80/20 coinsurance, with a $4,000 maximum out-of-pocket limit. Now let’s assume you have a minor outpatient surgery that costs $3,000. You’ll pay the first $1,000 (deductible), and you’ll also pay 20% of the remaining $2,000. That will add $400 to your bill, bringing your total out-of-pocket for the surgery to $1,400. Your insurance will cover the other $1,600 (80% of the portion of the bill that was above your deductible).
Now let’s say you have a bad accident later in the year and end up with $200,000 in medical bills. You’ve already met your deductible, so you’re going straight to coinsurance. You’ll pay 20 percent of the bill, but only until you’ve paid $2,600. That’s because your health plan has a $4,000 out-of-pocket cap, and you already spent $1,400 out-of-pocket on the earlier surgery. So the first $13,000 of the bills for your accident recovery will be split 80/20 between your insurance company and you (20% of $13,000 is $2,600). At that point, your insurance policy will start to pay 100% of your covered in-network expenses for the rest of the year.
Cost-Sharing & the Out-Of-Pocket Maximum
Because cost-sharing can get expensive if you have large medical expenses, all health plans — unless they’re grandfathered or grandmothered — that require cost-sharing also have an out-of-pocket maximum that puts a cap on how much cost-sharing you’re responsible for each year (for this discussion, all of the numbers refer to the cap on out-of-pocket costs assuming you receive care within your health insurer’s network; if you go outside the network, your out-of-pocket maximum will be higher, or in some cases, unlimited).
Before 2014, there were no regulations governing how high a health plan’s out-of-pocket maximum could be—indeed, some plans didn’t cap out-of-pocket costs at all, although that was relatively rare. But the Affordable Care Act changed that, and new health plans cannot have an out-of-pocket maximum in excess of $7,900—for a single individual—in 20192 (that upper cap is increasing to $8,150 in 20193). In addition, under a rule that took effect in 2016, a single individual can’t be required to pay more in out-of-pocket costs than the individual out-of-pocket maximum for that year, even if he or she is covered under a family plan instead of an individual plan.
After you’ve paid enough in deductibles, copayments, and coinsurance to reach the out-of-pocket maximum, your health plan suspends your cost-sharing and picks up 100% of your covered medical bills for the rest of the year, assuming you continue to use in-network hospitals and doctors.
Cost-Sharing & the Affordable Care Act
The Affordable Care Act made a significant amount of preventive health care exempt from cost-sharing. This means things like age-appropriate mammograms, cholesterol screening, and many vaccines aren’t subject to a deductible, copayments, or coinsurance.
The ACA also created a cost-sharing subsidy to make using your health insurance more affordable if you have a low income. The cost-sharing subsidy lowers the amount you pay in deductibles, copays, and coinsurance each time you use your insurance. Cost-sharing subsidies are automatically incorporated into silver plans on the exchange if your income doesn’t exceed 250% of the poverty level (for 2019 coverage, the upper income limit to be eligible for cost-sharing subsidies is $30,350 for a single individual and $62,750 for a family of four).
What About Things That Insurance Doesn’t Cover?
The phrases cost-sharing and out-of-pocket expenses are sometimes used interchangeably, but people often use “out-of-pocket” to describe any medical expenses that they pay themselves, regardless of whether the treatment is covered at all by health insurance. But if the treatment isn’t covered at all, the amount you spend isn’t considered cost-sharing under your plan, and won’t count towards your plan’s out-of-pocket maximum.
For example, cosmetic procedures like liposuction usually aren’t covered by health insurance, so if you get that sort of treatment, you’ll have to pay for it yourself. The same is generally true of adult dental care, unless you have a separate dental insurance policy. Although you might think of these expenses as “out-of-pocket” (and indeed, they are coming out of your own pocket), the money you spend isn’t counting towards your health plan’s out-of-pocket maximum, nor is it considered cost-sharing under your plan.
Because cost-sharing varies considerably from one health insurance plan to another, you’ll want to make sure you understand the details of your plan before you need to use your coverage, so that the amount you have to pay for your treatment doesn’t come as a surprise.
- Kaiser Family Foundation. Employer Health Benefits, 2018 Annual Survey. October 3, 2018.
- Department of Health and Human Services. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2019. April 2018.
- Department of Health and Human Services. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2020. April 25, 2019.
- Families USA. Federal Poverty Guidelines.