What is Coinsurance? Your Complete Guide to Health Insurance

Health insurance, the thing that protects us financially when we or a family member gets sick. The thing that only two thirds of the United States actually has. In fact, in 2013 about 44 million people in the U.S. didn’t have any health insurance, and another 38 million have insufficient health insurance. But it’s not just due to the costs that so few have insurance, often times it’s due to a lack of the basic understanding of health insurance. So what is health insurance?

Health Insurance 101

Health insurance is coverage that pays for medications, hospital care, special equipment, provider services and even preventive services such as immunizations and annual doctor visits.

Similar to auto insurance, health insurance is made up of premiums and deductibles. The higher your premium (monthly payments paid whether or not you use medical services) the lower your deductible (the total cost of how much you will have to pay before your insurance kicks in). This is the case because it means you are willing to pay for some of your medical care up front. All plans are different, so it is important to pay attention to the following parts of a plan: coverage, co-payments (what you pay up front at a doctor’s office), coinsurance, deductibles, and limits on drugs, devices, etc. It is also important to know which doctors and hospitals are included.

For example: A health insurance plan could have a $5,000 deductible with a coinsurance of 20 percent and an out-of-pocket limit of $6,000. This means that you will pay up to $5,000 for any services or medical expenses, then your coinsurance will kick in. At this point, you will pay only 20 percent of any following medical expenses until you reach your $6,000 out-of-pocket limit (meaning you would only be responsible for another $1,000 after paying the $5,000 deductible). After you reach the $6,000 out-of-pocket maximum your insurance company will pay for the rest of your medical expenses for the year. It is important to compare several different health insurance quotes in order to make sure you get the right amount of coverage for your family.

There are several different kinds of health insurance plans: HMO, PPO, POS, HSA, HRA, FSA, or catastrophic health insurance.

•      HMO: an organization that requires you to select a primary-care physician. You pick and then you only receive treatment and care from specialists and physicians within this provider network. If you visit someone not in the network, you may have to pay out-of-pocket.
•      EPO (Exclusive Provider Organizations): similar to an HMO, however with an EPO you don’t have to choose a primary-care physician. Rather, you are bound to a network of physicians and specialists. If you see someone outside of the network, you may have to pay high out-of-pocket costs.
•      PPO (Preferred Provider Organization): similar to an EPO this kind of plan also requires you to select a provider network. The only difference is that if you visit someone outside of your network, your plan will cover a higher amount of your out-of-pocket expenses.
•      POS (Point of Service Plans): you must pick a primary-care physician and can only visit other specialists after you receive a referral from your PCP. Again, you will have to pay out-of-pocket expenses if you see someone out of your network.
•      HSA (Health Savings Account): this kind of account can be opened when you have a health insurance plan with a high-deductible. This kind of account allows you to distribute money into a savings account that will solely be used for future medical expenses. Monies not used might be subject to a tax penalty however.
•      HRA (Health Reimbursement Arrangements): another kind of savings account, however the HRA must be purchased and managed by your employer.
•      FSA (Flexible-Spending Account): similar to an HRA, an FSA is a tax-advantaged savings account set up by your employer. However, you own the account and can make regular contributions via paycheck deductions. These contributions aren’t taxable and cannot exceed $2,500. Money put into an FSA can be used to cover several different kinds of medical expenses, however it is a kind of “use it or lose it” account.
•      Catastrophic Health Insurance: with this kind of plan you are given only three covered primary medical care visits a year. Your premium is often lower than other plans with more benefits, but the deductibles and coinsurance tend to be higher. These plans don’t often fulfill standard requirements for health plans by the ACA.

What is a Deductible?

A deductible is the amount that you pay for covered healthcare services before the insurance company begins to pay. Sometimes understanding a deductible can be tricky though. You will initially pick a dollar amount (say $3,000) for your deductible. This dollar amount means that your insurance company won’t begin to pay for any medical services or expenses until you have already spent that $3,000 in costs. After you reach your deductible, your insurance plan will kick in and begin to pay for expenses. However, unlike auto insurance, there are some health insurance plans that will pay for certain costs before you reach your deductible. With the enactment of the Affordable Care Act, all marketplace plans now cover preventive care such as immunizations and screenings.

Like other forms of insurance, you can pick between a high deductible and lower monthly premiums or vice versa. Many health plans also come with an individual, annual out-of-pocket limit. As an example, if you have a $1,000 deductible, a 20 percent coinsurance (see below for more details), and a $2,000 out-of-pocket limit and incur a $10,000 medical bill, you will pay $1,000. After this, the rest of the amount needed to be paid will be covered by you AND the insurance company. This is the 20 percent coinsurance. This means you will pay 20 percent of the remaining bill while your insurance company covers the other 80 percent.

Note that a deductible is different from a copay. A copay is a flat fee that you pay for certain medical expenses such as $25 per office visit or $10 for a prescription drug. You only pay a small amount since the health insurance company then reimburses the doctor or pharmacy for the difference between the cost of treatment and the copay. Often times, when you pay a copay you aren’t paying toward your deductible.

What is Coinsurance?

As from above, coinsurance is the health care cost shared between the insurance company and yourself. Coinsurance is generally represented by numbers such as 80/20 or 50/50. This means that if your coinsurance is 80/20, your insurance plan will cover 80 percent of annual medical expenses while you only pay the 20 percent remaining. However, this cost sharing ends when medical expenses reach your out-of-pocket limit (generally between $1,000 and $5,000). After this, any other remaining costs are covered by your insurance company.

Your coinsurance doesn’t come into effect until after you have reached/paid your deductible. Here’s an example: it’s spring and you have allergies. You start to see a doctor regularly and over time pay $1,500 reaching your deductible. Now, your coinsurance kicks in and your insurance plan will cover 80 percent of the cost of your shots, while you pay only 20 percent of the cost.

Is Health Insurance Tax Deductible?

This depends. You are unable to take a tax deduction for health insurance unless you have paid for it. If the government or your employer pays for it, your premiums aren’t deductible. This is also if your employer pays for part your premiums and you pay the other — you can’t claim a deduction for the half your employer pays.

Another scenario in which your health insurance isn’t tax deductible is if you have health insurance through your employer and the premiums come out of your paycheck before income taxes are calculated. Since you’ve paid your premiums with pre-tax dollars, you can’t receive a tax benefit!

One situation in which you can receive a tax deduction is if you are self-employed. If you are on Medicare and have either Part B or Part C or Part D (see below!) you can also receive a tax deduction.

There are, of course, limitations on how much of your premiums you can write off on your taxes. Generally, you can only claim the expenses that exceed 10 percent of your adjusted gross income. For example, if you add up your premiums and all eligible unreimbursed medical expenses such as your deductible, copays and coinsurance, if these are more than 10 percent of your adjusted gross income you can deduct the part the exceeds that 10 percent. This changes if you are self employed though. If you are self employed you don’t have to worry about the 10 percent mark.

What is Medicare?

Medicare is a federal health insurance program administered by the Centers for Medicare and Medicaid Services. It covers a variety of healthcare expenses and is generally for senior citizens aged 65 years and older. Other beneficiaries can also be those with qualifying permanent disabilities or approved medical conditions such as Lou Gehrig’s or End-Stage Renal Disease (permanent kidney failure that requires dialysis).

The right to enroll in Medicare comes by working and paying your taxes for a minimum required period (similar to Social Security). There are four different programs in Medicare:

•      Part A covers inpatient hospital care, hospice care, limited home healthcare services, and limited time in a skilled nursing care facility. In Part A, you don’t have to pay a monthly premium to get coverage if you worked and paid Medicare taxes for at lest 10 years. However, you will have to pay a deductible before the benefits begin, after this Medicare will pay 100 percent of your costs (up to 60 days in a hospital and 20 days in a nursing facility). After this, you will pay a part of the costs.
•      Part B is medical insurance and covers non-hospital expenses such as X-rays, blood tests, doctors’ office visits, outpatient hospital care, and even diabetic screenings and supplies. It will pay for the full amount of several certain lab tests and services requested by your doctor. For this coverage, you pay a monthly premium based on your income. Under this program, you are generally responsible for a part of the costs and will pay a deductible each year until it starts. After it starts, you will pay about 20 percent of the bill when you see a participating Medicare doctor.
•      Part C is called the Medicare Advantage and potentially consists of each kind of coverage in one plan. This kind of care is offered through private insurance companies that provide a Medicare benefits package as an alternate for the Original Medicare. In order to enroll into this, plan you must have Parts A and B and Original Medicare and may have to pay the Part B premium still. This plan can also offer additional benefits such as hearing aids, dental care, or eye exams. Others may have a lower deductible and also lets you pay a smaller share of remaining costs.
•      The fourth program, or Part D is an optional prescription drug coverage. This program is available as a stand-alone through private insurance companies. Monthly costs vary among insurance companies and you share in the expense according the specific plan you choose. Expenses can vary between a flat copay, a deductible or a percentage of the full drug cost.

What is Obamacare?

Obamacare is the simple term for the Patient Protection and Affordable Care Act, which was signed into law in 2010. The hope with the new law is to provide more Americans with affordable health insurance, improve the quality of health insurance and health care, and regulate the health industry in the United States.

Obamacare offers cost assistance and affordable quality premiums in the health insurance marketplace, it also expands Medicaid eligibility so families with low income can pay for the cost of health insurance. Obamacare also allows young adults to stay on their parents’ plan until they are 26 years old. It also makes it so that healthcare providers can’t drop you if you become ill or if you make a mistake (an honest one!) on your healthcare application. It also now makes it illegal for providers to deny you coverage because of past illness (or even for you to be charged more as a female).

If you receive coverage through an employer, Obamacare sets up “exchanges” that offer small businesses and consumers a choice of either heavily regulated or standardized health plans.

For those who buy insurance for themselves and not through an employer, these plans are similar to the group plans many companies offer. The difference is that now a family can receive federal subsidies — tax credits — to help buy coverage. It also allows more to join Medicaid because of extremely low incomes.

There are four basic types of coverage: bronze, silver, gold and platinum. Nearly everything is based off of earnings, in 2013 couples who earned above $250,000 had to pay additional taxes: 0.9 percent on earned income and 3.8 percent on investment income. For the federal subsidies, a couple with two children earing abut $95,000 will have tax credits set so they don’t pay more than 9.5 percent of their income for a basic health plan.

How Much is the Penalty for Not Having Health Insurance?

With the institution of Obamacare, there has also come a mandate (Individual Mandate) that requires most Americans to have and maintain health insurance. If not, you must either obtain an exemption or pay a tax penalty. The penalty is paid n your Federal Income Tax Returns and is for each full month that you or a family member doesn’t have health insurance or the required exemption. The penalty is based on your Modified Adjusted Gross Income and has gone up each year since it was first instituted in January of 2014.

You will either pay a flat dollar amount or a percentage of your income depending upon your income and family size but it is capped at the national average for a Bronze health plan (a kind of health plan that has the cheapest premium but only provide about 60 percent of costs covered for plan holders.)

As an estimate, the annual fee in 2016 for not having insurance is $695 per adult and $347.50 per child or up to 2.5 percent of your household income above the tax return filing threshold for your filing status (whichever is greater). Basically, you could be paying more as a penalty than actually paying for health insurance. And that penalty isn’t giving you anything in return.