Co-insurance Overview

Coinsurance and Fee-for-Service Health Plans

Fee-for-service plans, sometimes referred to as indemnity insurance, usually involve a coinsurance payment on your part. These types of policies have deductibles, co-pays and, usually, out-of-pocket expense maximums. The advantage of these plans is that you have the freedom to pick which doctors and hospitals you want to use. The disadvantage is usually higher co-pays and deductibles, and a coinsurance payment as well. The average coinsurance percentage you have to pay in this type of account is 20 percent of the total doctor's bill, while the insurance company pays the remaining 80 percent.

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While this sounds reasonable, sometimes you could have to pay more than 20 percent of the total bill. The 80 percent that the insurance company pays includes only the charges it deems "reasonable and customary." So if your doctor charges $125 for a service that is normally $100 in your geographic area, the insurance will pay only 80 percent of the $100, or $80. So you will be responsible for the remaining 20 percent of the bill in addition to the balance above the customary charge, or $45 in this example.

Coinsurance and Managed Health Care Health Plans

Managed-care plans include health maintenance organizations (HMOs) preferred provider organizations (PPOs) and point-of-service (POS) plans. If you're in an HMO, you are required to stay within a specified network of health care providers and hospitals. You must have a primary care physician, who is the ringleader of your care and writes referrals for you to see a specialist. Because HMOs offer participating doctors a steady stream of customers, services given to patients in an HMO plan are often provided at lower rates. Therefore, while HMO plans do not have the flexibility of fee-for-service plans, they do tend to have lower coinsurance fees as long as you stay within the network.

If you're in a POS or a PPO plan, you usually receive service within the network of doctors. If you go outside the network, again, there will be additional fees. The deductible and/or coinsurance often increase. For example, if you have a $500 deductible and 20 percent coinsurance in network, you might have a $1,000 deductible and 30 percent coinsurance out of network. Again, the rules of "reasonable and customary" charges apply.­

As mentioned above, coinsurance counts toward your out-of-pocket expense cap. But what exactly is this cap, and how does it help you?

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Both coinsurance and deductibles count toward your out-of-pocket expense cap, or the amount that needs to be met in order for the insurance company to pay 100 percent of your policy's benefits. (See How Out-of-Pocket Expenses Work for more information.) For example, if you have a PPO plan, once you meet your deductible, the insurance company will begin paying 80 percent of your doctor's bills. Your deductible, along with each 20 percent that you pay after the deductible, goes toward your out-of-pocket expense cap. These caps are normally set at around $2,000 to $3,000 per year, but can vary widely. Once this cap is reached, the insurance company will pay 100 percent of the "reasonable" or "customary" fee of a provider. However, your co-payments and monthly insurance premium are not applied to this cap. 

So, what exactly is the purpose of this cap? It benefits both you and the insurance company. The benefits to the insurance company are obvious. It cuts down costs by sharing a larger amount of health care expenses with you, because many of us will never meet this cap. But it can also help you by covering your medical bills in the event of a catastrophic medical situation. For example, many healthy people don't meet a cap of $2,000 to $3,000 per year. However, if you suddenly acquire an illness or chronic condition, you could easily meet the cap in the first month or two of treatments. After this time, the insurance company will cover you 100 percent to the lifetime maximum, insuring proper health care during a critical time.

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Follow the links on the next page for more information about coinsurance.