What does “out-of-pocket expense” mean in health insurance?
Cost is one of the most important factors that individuals consider when choosing a health insurance plan. While the implementation of the Affordable Care Act has greatly reduced the number of uninsured individuals in our country, many people still worry about the affordability and coverage that health insurance plans offer.
The amount of money that a consumer will pay for premiums, deductibles, copayments, and coinsurance vary greatly from one health insurance plan to another. For consumers to understand what their total out-of-pocket expense could potentially reach annually is important.
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Out-of-pocket expenses are the amount of money that consumers must pay before their health insurance company pays for the remaining balance of their health care costs. Insurance companies introduced out-of-pocket maximums as a way to reduce the premiums of their policyholders. Out-of-pocket maximums are utilized to ensure that individuals are self-insuring a portion of their health care costs.
The out-of-pocket costs that a policyholder could potentially pay include deductibles, copayments, and coinsurance. This also includes the cost of all procedures that aren’t covered under an individual’s health insurance plan.
By adjusting the out-of-pocket expenses that are including in their health insurance plans, consumers are able to customize their premiums to fit their individual economic and healthcare needs. By increasing out-of-pocket expenses (increased deductibles or coinsurance) individuals can lower their monthly premiums.
It is important to note that most health insurance plans utilize a network of healthcare providers who offer “in network benefits.” If a patient utilizes a provider who isn’t a part of their insurer’s network, the insurer is not required by federal regulation to count any out-of-pocket expenses of the policyholder toward the annual out-of-pocket maximum.
Most health insurance plans only afford out-of-network coverage for emergency care, but consumers should still be aware of the potential impact of this information when choosing a health insurance plan.
The deductible is perhaps one of the most important out-of-pocket expense that all consumers should be aware of. Deductibles include all expenses that a policyholder has to pay before their insurance company will begin to pay for any coverage.
It is important to note that many health insurance companies pay for many preventative and disease management treatments before their policyholders’ deductibles are met. Insurance companies view these procedures as a way to reduce the future claims. They are willing to invest in treatments that will reduce their clients’ need for future procedures or treatments.
Consumers should know that after a deductible is met, they may still be required to pay additional costs for their healthcare. The deductible is only one piece of out-of-pocket expenses.
Co-payments and Co-insurance
Co-pays and Coinsurance can be very confusing for many consumers. Co-payments and co-insurance are both contributions that individuals must make toward their own health care costs after they have met their annual deductible amounts.
Co-payments are typically a fixed dollar amount that individuals pay for specific treatments or procedures. For instance, many health insurance plans have a set copay for doctors visits. These can be any number specified in the health insurance plan but typically range from $15–35.
If the person has already met their annual deductible, then they will only be required to pay their co-payment for that doctor’s visit. However, if they haven’t met their annual deductible, they will be required to pay the full allowable amount for the doctor’s visit.
Most insurance companies set limits for the maximum amount of money that healthcare provider can charge for procedures. This keeps the cost of routine healthcare procedures low for patients.
Before the Affordable Care Act was implemented, health insurance companies were not required to attribute co-payments toward the annual out-of-pocket maximum that their policyholders paid. They are now required to count these expense toward out-of-pocket maximums, which helps ease the burden of costs to consumers.
While similar to copayments in that they are both expenses that a policyholder pays after their deductible is met, co-insurance is expressed as a percentage rather than a fixed amount. For all procedures that don’t have a specified co-pay, such as physicians visits, policyholders must pay their coinsurance.
This number is typically set up in a 20/80 ratio where the policyholder pays 20% of health care costs and the health insurance company pays the other 80 percent. Once the consumer has reached their out-of-pocket maximum, they are not required to pay for any additional health care expenses.
High-Deductible Health Plans and Health Savings Accounts
Many people choose to opt for what is known as a high-deductible health plan in order to reduce the cost of their insurance premiums. These plans typically have deductibles that match the annual out-of-pocket maximum, which also means that they don’t typically include copayments or coinsurance either.
These plans are great for individuals who typically don’t need to utilize healthcare for anything other than preventive and emergency care. Preventative procedures are still covered under most of these plans without any cost to the policyholder, and premiums are significantly cheaper.
Many individuals who opt for a high-deductible health plan also contribute to a health savings account (HSA). A health savings account is a tax deductible savings account that individuals can use to save money for potential health care expenses that would be below their annual deductible. In order to be tax deductible, the account must be utilized in conjuncture with an eligible high-deductible health plan.
Reducing Out-of-Pocket Costs
The Affordable Care Act has implemented a way for individuals to reduce their out-of-pocket expenses with a qualifying Silver plan. The savings are realized through the reduction of out-of-pocket expenses, including deductibles, copayments, and coinsurance, based on an individual’s income. Individuals who make a lower income are able to save even more on their annual out-of-pocket healthcare expenses.
To sum up what has been discussed let’s look at an example:
Consumer A has a health insurance plan that includes a $500 deductible, $20 co-payments for doctors visits, 20 percent co-insurance after the deductible has been met, and an out-of-pocket maximum of $6,000.
If Consumer A requires a procedure that costs $1,000, then Consumer A will be required to pay the first $500 toward the deductible, and 20 percent of the remaining amount, or $100. At this point, Consumer A has paid a total of $600 toward their health care costs for the year.
Let’s now say that Consumer A has to go to their doctor for a sinus infection. Since Consumer A has already met their deductible, they only have to pay for the $20 co-payment.
Later in the year Consumer A is involved in a car accident and needs $20,000 in health care procedures. Consumer A will pay for 20 percent of the costs until they reach their out-of-pocket maximum of $6,000.
Even though Consumer A received medical treatment for more more than $20,000 worth of health care procedures, they only paid up to their out-of-pocket maximum. This is the basic principal behind out-of-pocket maximums and what they mean for consumers.
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