When it comes to your health, take nothing for granted, not even your insurance plan or how it works. With so many types of health plans out there, it’s easy to get confused by all the terms used to describe how you pay for your healthcare. However, it’s important to understand them so you can make the best financial decisions for you and your family. Remember, knowledge is power and making informed decisions is key to good financial well-being. Here are brief explanations of the key cost-sharing terms you may encounter when paying for your healthcare:
Premium is the amount of money charged by your employer or insurance company for the health plan you select. It’s usually paid monthly or each pay period (if through your employer) and your premium must be paid to keep your coverage active, regardless of whether you use your health insurance or not.
Deductible is the amount you must pay towards medical expenses during a given time period, usually a year, before your health insurance benefits begin to cover the costs. At the beginning of each plan year, your deductible will reset. The amount of the deductible varies by plan and some plans may not have one. Example: If your plan has a $1,000 deductible, it means you’ll pay your own medical bills up to $1,000 every year before insurance starts to pay.
Coinsurance is the percentage of your medical bill you pay after you’ve met your deductible. You may pay 0%, 10%, 20% or more depending on your plan and whether you have in/out of network rules. Example: If you have an 80/20 plan, it means your insurance pays for 80 percent of your costs after you’ve met your deductible and you pay for 20 percent. You’d pay 100% of costs until you meet your $1,000 deductible and then 20% of costs after that.
Copayment (copay) is a fixed amount you pay for receiving certain healthcare services. The remaining balance of the bill is covered by insurance. It’s usually a small dollar amount that isn’t counted toward your deductible. The amount of copay varies by plan and some plans may not have one. Example: You may have a $30 copay for each office visit.
Out-of-pocket maximum is the most you have to pay for your medical expenses in a plan year. It includes what you pay for a deductible, copays and coinsurance (but not premiums) and once you hit this limit your health plan pays 100% of your covered benefits for the remainder of the plan year. Example: Your out-of-pocket maximum is $5,000. Your first claim of the year is a surgery that costs $25,000. Your deductible is $1,000 and your coinsurance is 80/20. You pay the $1,000 first. Then you pay 20% of the remaining $24,000 ($4,800), but not more than $5,000 out-of-pocket total. So you would pay $4,000 (not $4,800) in coinsurance and your plan pays the remainder and all future covered expenses for that year.
One additional nugget of information: If you have a Flexible Spending Account (FSA) or Health Savings Account (HSA) as part of your employee benefits, when planning your medical expenses, you can pay for your deductible, coinsurance and copays (but not the premium) with the before-tax money in these accounts. That can add up to some great cost savings and every little bit counts.