Cost sharing is the portion of health care services that an individual pays out of their own pocket. Health insurance covers many of the out-of-pocket expenses a person may owe for medical care. But even with good health coverage, individuals usually have to pay a portion of their health care costs.
The cost of providing health insurance is a major factor for many small businesses, and cost sharing amounts in plans can impact the overall premium cost. Health insurance plans that use cost sharing are, generally speaking, more affordable for small businesses to offer.
Types of cost sharing
Cost sharing usually falls into three categories. Health insurers use these payments to split the cost of health care with your employees.
A deductible is an amount someone must pay out of pocket for health care expenses covered by their health care plan. This is generally a dollar amount (like $2,500). Once the deductible has been met, they usually only need to pay copays or coinsurance for covered services, up until the out-of-pocket maximum. The insurance company will pay the rest of the cost, unless there are certain services that are excluded by the plan or have limited coverage.
Copayments (aka copays) are fixed dollar amounts (e.g., $25) paid when an insured person receives care or gets a prescription. Copays are usually tied to a specific type of provider (e.g., a specialist like a dermatologist), service (e.g., emergency room visit) or prescription tier. Tying the fixed fee to a particular service means they never change despite what a provider charges.
For example, your health plan might have a $25 copay for primary care visits, a $50 copay for a specialist visit, and a $500 copay for an emergency room visit.
It’s important to note that you may need to meet a deductible before copays begin to apply, depending on your health care plan.
Coinsurance is the percent (sometimes displayed as a fraction) of covered medical expenses a person is responsible for after paying their deductible.
For example, 80/20 means insurance pays 80% of the cost. The insured individual pays the remaining 20%, but only after meeting the deductible. Coinsurance will apply until an individual reaches their out-of-pocket maximum. Once the out-of-pocket max is reached, the health insurance company pays 100% of covered medical expenses for the remainder of the year.
In general, health plans with lower premiums tend to have higher deductibles, copays, and coinsurance. Plans with higher premiums will have lower cost sharing amounts.
What is the difference between the types of cost sharing?
Deductibles and copays
Your deductible is the amount of money you have to pay before your health plan pays for some or all of the care you receive. A copay is a fixed dollar amount tied to a type of provider or service.
Deductibles can range from zero dollars to several thousand, depending on your type of plan (like a high deductible health plan). Copays vary too, from, for example, $10 for prescriptions to $500 for an ambulance ride.
Copays and coinsurance
Coinsurance is a percentage of the cost of services you receive, compared to co-pays, a fixed dollar amount. Coinsurance is usually split between the insurance company and the insured person as a percentage of the cost of the service (e.g., 80/20). Coinsurance usually kicks in after the deductible is met (it depends on your plan). Many plans will have a mix of copays or coinsurance, depending on the service being provided.
For example, suppose your plan’s coinsurance is 20% for specialist visits. You will split the cost of the service with the carrier meaning that you will pay for 20%, and your plan will pay for 80% of the cost.
You’ll almost always be responsible for paying coinsurance even after the deductible has been met, up to the out-of-pocket maximum. Once the out of pocket max is met, the insurance company will generally pay for most covered services.
Coinsurance and deductibles
In terms of cost sharing, you must meet the deductible before using coinsurance. From a quantitative perspective, coinsurance is usually expressed as a percentage (e.g., 80%/20%) while a deductible is a dollar amount, generally between $0 and, in some cases, several thousand dollars.
Once a person’s cumulative out-of-pocket expenses have reached the deductible amount, let’s say $1,000, then the deductible is met. From that point, the plan will pay 80% of covered medical expenses, while the insured will pay the remaining 20% through the end of the year or when the out-of-pocket maximum is reached, whichever comes first.
Knowing the difference between the types of cost sharing can be confusing, so here’s a simple table to help you and your employees keep them straight:
|What it is||The amount that must be spent each year before insurance kicks in||The percent of covered medical expenses to be paid after the deductible is met||A fixed fee to be paid for certain medical expenses, like seeing your primary care doctor|
|When you pay it||As medical expenses are incurred||After the deductible is reached||At the time of service (regardless of whether you’ve reached your deductible)|
|Who pays for it||Employee||Employee and the insurance provider||Employee|
|Fixed or variable cost?||Variable||Variable||Fixed|
|Counts toward out-of-pocket max?||Yes (if in-network)||Yes (if in-network)||Yes (if in-network)|
How does cost sharing work?
Many plans have all three types of cost sharing, and it is important to understand your plan’s documents to determine potential costs for services. You will also need to review if certain services or providers are covered under your insurance plan, as that will also affect your employees’ out-of-pocket costs. In some plans, the cost-sharing differs depending on if services/providers are in-network or out-of-network. In general, offering health insurance is beneficial because the carriers (i.e., insurance companies) have contracts with providers (e.g., doctors, hospitals, etc.) to help, in theory, lower costs for consumers.
A simple example of how copays work
Let’s say you go to your primary care doctor complaining of knee pain. The overall cost of the visit is $250, before insurance. Your medical plan states that primary care visits have a $25 copay. This means that you only pay $25 for that visit, while the insurance company pays the remaining $225. You may continue to have a copay even after you have met your deductible, up to a certain amount (generally, the out-of-pocket max).
A simple example of how a deductible works
If you have a deductible, though, you may owe more than the copay amount before your deductible is satisfied. If you have not met the entirety of your deductible at your visit, you may be responsible for the entire cost of the visit. Continuing with the example above, that would be$250.
If you had satisfied your deductible, though, you would only owe the $25 copay. Whether you have to satisfy your deductible before a copay applies depends on your health plan. Otherwise, you may have a coinsurance amount instead of a copay.
A simple example of how coinsurance works
If you have a coinsurance requirement, you may owe a specific percentage of the cost, even after meeting your deductible. Keeping with the same example, let’s assume the coinsurance is 20% (i.e., you pay for 20% of the visit cost). If the deductible has been met, you would owe $50 ($250*20%) while the insurance company is responsible for paying the remaining $200. Even if you had met your deductible, you would still owe the coinsurance amount until you have reached an out-of-pocket maximum.
You will need to review the specific plan requirements, including the Summary of Benefits Coverage and other insurance documents, to determine what the cost sharing requirements will be for your employees.
An example with multiple types of cost sharing
Before we get into the example, let’s assume you (as an insured individual) have the following cost sharing arrangements under your health insurance plan:
- $25 for primary care visits
- $3,000 deductible
- 80%/20% coinsurance for all other services, after deductible
- $8,000 out-of-pocket maximum
Okay, so you go to your primary care doctor complaining of knee pain shortly after your plan starts (you’ve had no other expenses yet). You pay the $25 copay when you check in at the doctor’s office. The doctor examines your knee and has bad news: it’s severely sprained and requires emergency surgery. You’re admitted to the hospital, and a surgeon performs a successful procedure and keeps you for three nights for rest and recovery from the surgery.
A few weeks after your stay in the hospital, you receive a bill for $6,000. All the services you received were covered under your plan. In addition to the $25 copay, you are also responsible for paying: the $3,000 deductible and an additional $600 ([$6,000 – $3,000]*20%) for coinsurance. Your total share of the medical services are:
$3,000 + $600 + $25 = $3,625
Because you have not yet hit your out-of-pocket maximum, you will owe the total $3,625. That amount does go towards your out-of-pocket maximum and it satisfies your $3,000 deductible. This means you should only have to pay coinsurance and copays for covered services, until you hit your remaining out-of pocket max, $4,375 ($8,000 – $3,625).
One final thing to know about cost sharing
Some preventative care services such as mammograms or flu shots don’t require cost-sharing, due to Affordable Care Act (ACA) requirements. This means that ACA-compliant plans fully cover these services and your employees will pay nothing out of pocket.