Health insurance represents one of the most important and difficult expenses to calculate for the family budget. Several components comprise an often complicated formula, which includes the monthly premium and the annual deductible. You also have to account for copay and coinsurance expenses to determine how much money to set aside money for health insurance.
Your monthly premium is the fixed price you pay each month for a health insurance policy. Like rent, you set aside a fixed amount of money each month that covers the cost of receiving health insurance benefits, such as an annual visit for a checkup and a certain amount of prescription drug coverage.
The other three cost factors-deductible, copay, and coinsurance-are not as easy to explain when it comes to determining how much money you need to budget each year for health insurance coverage.
What is a Deductible?
A deductible is the amount of money you spend each year for qualifying healthcare services before your health insurance policy kicks in to pay for covered medical expenses. For example, if your health insurance policy comes with an annual deductible of $5,000, you pay for the first $5,000 of medical expenses before your health insurance plan takes over to cover the costs associated with medical care.
Health insurance deductibles usually include medical expenses such as surgery, diagnostic tests, and assistive devices like a cane or wheelchair. The primary difference between a monthly premium and an annual deductible is you can budget for a monthly premium, but not for an annual deductible. Another key factor for establishing a deductible is determining how much money you can afford to spend over a period of 12 months for healthcare costs.
A lower annual monthly deductible requires you to pay a higher monthly premium for a health insurance policy.
What Does Copay Mean?
Copay represents a fixed cost that you pay every time you require some type of covered healthcare service. For instance, if you need to refill a prescription medication to mitigate the pain associated with severe arthritis, the amount of money you spend to refill the drug prescription is your copay. The amount of money spent for a copay medical expense typically is printed on the back of your health insurance policy identification card.
Not every health insurance plan includes a copay that requires a policyholder to share some of the financial burden for medical expenses. Some healthcare services such as an annual checkup or another type of preventive healthcare service might not require you to pay out-of-pocket.
Depending on the type of health insurance policy you have, you might have to pay a deductible and a copay for designated medical care services.
What Does Coinsurance Mean?
The percentage of the healthcare expense that you pay after meeting an annual deductible defines the term coinsurance. If you look at coinsurance as a part of a formula that determines healthcare costs, it is the value of medical care that combines with an annual deductible to reach a healthcare expense of 100 percent.
If you sign up for a healthcare policy that includes 30 percent coinsurance, you pay 30 percent of the cost associated with a medical service. The relationship between an annual deductible and coinsurance can be tricky to figure out. For example, spending the entire amount of an annual deductible by the end of August means your coinsurance financial support covers many types of medical services starting on the first day of September.
One important point: You remain financially obligated to take care of every medical service that is not covered by your health insurance plan.
How Does Out-of-Pocket Maximum Influence My Healthcare Costs?
Every health insurance policy must include an out-of-pocket medical expense clause. Out-of-pocket healthcare costs combine the expenses associated with an annual deductible, as well as the amount of copay and coinsurance healthcare costs.
Let’s assume you have an annual deductible of $10,000 and a coinsurance percentage set at 40 percent. You undergo a medical procedure that costs $100,000. If your out-of-pocket expenses are established at a maximum of $20,000, you pay the annual deductible of $10,000 before coinsurance starts to play a role in determining your healthcare costs. With $10,000 of the remaining maximum out-of-pocket medical expenses, your coinsurance responsibility comes to $4,000.
The Bottom Line
Understanding the meaning of deductible, copay, and coinsurance helps you devise a sound plan for meeting your healthcare obligations. Working with a licensed health insurance broker can help you plan for medical expenses by factoring in the costs associated with an annual deductible, as well as what you owe for copay and coinsurance expenses.
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