How does Health Insurance work?

We will look at two situations. The first will be a doctor office visit. The second will be a visit to the hospital.

There are four features of health insurance to understand:

• Copayment—This is the amount you pay each time you receive a “covered service,” such as a doctor office visit, or a prescription drug.
• Deductible—The annual amount you must pay before the insurance company starts paying.
• Coinsurance—The percentage of your medical expense that is shared between the insurance company and you after the annual deductible is satisfied. This is expressed as a percentage, i.e., 75/25. The insurance company pays 75% and you pay 25% (until you meet your “out of pocket maximum” (OOP)).
• Out of Pocket Maximum—The maximum amount of coinsurance you pay (after the annual deductible is satisfied) before the insurance company begins paying 100% of allowable expenses.

Let us assume your health plan has the following features:

• Office Visit copayment of $30.
• Annual Deductible of $2,000.
• Coinsurnce 75% with an OOP maximum of $3,000.
• Prescription drug copayment of $10/$30/$50 (generic/brand/non-preferred brand).

A visit to the doctor’s office.

Your plan has an office visit copayment.

You pay the $30 copayment, and the insurance company pays the balance.

Your plan does not have an office visit copayment.

The doctor normally bills $120 for an office visit, but because office visits are a “covered service” under your plan, the insurance company allows only $65 to be billed. The insurance company has negotiated rates with the doctor that result in a 50% discount from the $65. You pay the negotiated discounted rate of $32.50. If office visits were not a “covered service” under you plan, you would be responsible the entire $120.

While in the doctor’s office, the doctor orders some blood tests and X-rays. You go down the hall to ABC Labs to the have the blood drawn and X-rays taken. ABC Labs sends you a bill. That bill would be subject to your annual deductible and coinsurance. You would enjoy the benefit of the negotiated discounts for these “covered services.”

You go to the pharmacy to fill a prescription for a generic drug that cost $65. You pay $10. If you had a brand name drug that cost $100, you would pay $30. If the brand were a “non-preferred” brand that cost $165, you would pay $50

A visit to the hospital.

As a result of an accident, you spend five days in the hospital. The bill after negotiated rates are applied is $100,000. Here is how the bill is paid:

• You are responsible for your annual deductible of $2,000. That leaves a balance of $98,000.
• Coinsurance now begins to apply to the $98,000 balance. You share the cost with the insurance company on a 75/25 basis. 25% of $98,000 is $24,500. But wait! You have an “Out of Pocket” maximum of $3,000. So, after you pay $3,000 of coinsurance, you stop paying. The insurance company pays 100% of the balance of allowable charges.

You paid:
$2,000 annual deductible
$3,000 coinsurance (Out of Pocket Maximum)
$5,000 Total

Insurance company paid $95,000 ($100,000 minus your $5,000).

Is a Low Deductible always better than a High Deductible?