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The United States does not utilize or oversee a coordinated system of guaranteed coverage, but instead relies on multiple different programs, each with its own eligibility rules, processes, structures, networks, and cost or benefit arrangements.
Because there are no universal cost-control measures and most people are insured by for-profit companies, if someone becomes sick or injured, medical care (and medications) can be extraordinarily expensive. A single emergency room visit, test, or hospital stay can cost thousands, or even hundreds of thousands of dollars.
Health care coverage is intended to help a person manage their medical costs. However, having coverage doesn’t mean “free.” Someone always pays.
The Main Types of Health Care Coverage
There are several main types of health care coverage in the U.S. Most people are insured through an employer, often called employer-sponsored, or job-based coverage.
Medicare is funded by taxes and individual income-based premiums and is run by the federal government. Those who are 65 or older, and others regardless of age with certain disabilities or diagnoses, qualify for Medicare and can choose either Traditional Medicare or a Medicare Advantage plan. Medicare Advantage plans are run by private companies.
Medicaid is funded by tax dollars and administered by the states. It is a program designed primarily for people with low incomes.
Coverage for active-duty service members and their families is available through TRICARE and for qualified veterans through the VA.
There are also specialized coverage programs for federal and state employees.
Those who do not have access to government programs or affordable employer-sponsored coverage can buy insurance for themselves and their households through the Marketplace. The Marketplace also offers coverage for small businesses.
Some states, including Kentucky, run their own Marketplaces, while other states opt to use the federal Marketplace. Kentucky’s Marketplace is known as kynect.
Premiums and Cost-Sharing
Most coverage programs require monthly premiums to keep coverage active.
When a person receives medical services, such as visiting a doctor or having a medical test, they often have additional out-of-pocket costs, such as deductibles, copays, or coinsurance. These are known as cost-sharing expenses.
The exact amount a person pays depends on the coverage program, the type of plan they have, the location of care, and how the plan is designed.
Key Terms Used in Health Care Coverage
There are a few key words that are relevant to almost every health care coverage program, but feature most prominently in commercial insurance and with Medicare and Medicare Advantage.
Premium
First, there is the premium. A premium is the monthly cost to keep coverage active.
The premium cost is paid whether the insured person receives medical services or not. If the premium is $300 a month, that payment is due each month just to stay enrolled.
If a person has employer-sponsored coverage, the employer will pay some, although not necessarily all, of the premium costs.
Most people who qualify for Medicare Part A do not pay a premium for that portion of coverage, but some do. Medicare Part B, Medicare Part D, and Medicare Advantage plans typically have monthly premiums.
People who buy coverage through the Marketplace also pay premiums, although some may receive income-based discounts, known as premium subsidies or tax credits.
Deductible
A deductible is the amount a person or family must pay out of their own pocket before their plan starts paying for most services.
The family deductible is typically higher than the individual deductible.
As an example of how the deductible works, if an individual deductible is $1,500, the insured must pay the first $1,500 of the allowable medical costs themselves. After that, the coverage plan begins to share the cost.
Under the Affordable Care Act, many preventive services are covered at no cost for people with commercial coverage, such as Marketplace plans and employer-sponsored insurance. This means that even if a person has not met their deductible, they should not have a copay or coinsurance for covered preventive services.
Note that the ACA rules do not apply to Medicare. For example, Medicare does not treat a yearly physical exam as preventive care in the same way that private insurance does.
Once someone meets their deductible, they may still have to pay part of the allowable charges for future services.
Copayment (Copay)
A copay is a set dollar amount a person pays for a service. For example, someone might have a $25 copay to see a primary care provider for a sick visit, or a $10 copay for a lab test.
Multiple copays can be required for services provided during the same visit. For example, someone with a sore throat might pay $25 for the history and physical evaluation conducted by the provider and another $10 for a throat swab to check for strep.
Copays are usually due at the time of the visit.
Coinsurance
Coinsurance is not a second type of insurance, even though it sounds like it. It is also different from a copay.
A copay is a set dollar amount. Coinsurance is a percentage, that can vary depending on the type of service and the specific plan benefit structure.
Coinsurance costs are calculated based on the “allowable amount.”
The allowable amount is the payment the provider has agreed to accept from the insurance company or the government for a given service. It is almost always lower than the amount originally billed.
As an example, imagine a surgery has an allowable amount of $1,000.
If a plan’s rules state that the coinsurance for surgery is 20% after the deductible has been met, and the person has already met their deductible, they would pay 20% of $1,000, which is $200. The plan would pay the remaining $800.
If the person has not met their deductible, they must pay all of the allowable costs for surgery until the deductible has been met.
If the deductible is $1,000 and nothing has been paid yet, the person in this example would pay the full $1,000 allowable amount.
As a third case, if the deductible is $500 and nothing has been paid toward the deductible yet, the person would first pay $500 to meet the deductible. Then they would pay 20% of the remaining $500, or $100.
In total, the person in this third example would pay $500 toward the deductible plus $100 coinsurance for a total of $600. For large medical bills, coinsurance costs can add up quickly.
Out-of-Pocket Maximum
Some financial protections exist. For commercial plans, there is a limit on how much a person can be required to pay for covered services in one year.
This is called the out-of-pocket maximum, or MOOP.
Plans usually have one out-of-pocket maximum for an individual and a higher limit for a family.
The out-of-pocket maximum costs include the deductible, copays, and coinsurance.
Once the out-of-pocket maximum is reached, the plan pays 100% of covered services for the rest of the plan year.
It is important to note that monthly premiums do not count toward the out-of-pocket maximum.
Provider Networks
Another important part of health care coverage is the plan’s network.
A network is a group of doctors, hospitals, and other providers that have contracted with an insurance program or plan to provide services for agreed-upon amounts under what is known as a fee schedule.
If a person sees an “in-network” provider, their costs are usually lower.
If someone goes outside the network, they will likely pay significantly more for care.
For plans that do not offer out-of-network benefits, the insurance company or coverage program will not cover any out-of-network care costs, except in emergency cases.
How Does Health Care Coverage Work in Practice?
Here is an example of how all of these pieces work together.
Consider Kevin.
Kevin pays a $300 monthly premium for coverage. The deductible for his plan is $1,500.
After he meets his deductible, he has a 20% coinsurance for in-hospital care.
His plan has an individual out-of-pocket maximum of $7,500.
Kevin was admitted to an in-network hospital for evaluation of chest pain.
The allowable amount for his three-day stay is $10,000.
Assuming Kevin has not yet paid anything toward his deductible, he must first pay his $1,500 deductible.
That leaves $8,500 remaining on his hospital bill.
Coinsurance applies next.
Kevin pays 20% of the remaining $8,500, which equals $1,700. Kevin’s health insurance pays the other 80%.
In total, Kevin will pay $3,200 for his admission – his $1,500 deductible plus $1,700 in coinsurance.
This does not include the monthly premiums he has already paid throughout the year.
If Kevin continues to need care and his total out-of-pocket costs reach $7,500, his insurance plan would then pay 100% of covered services for the rest of the year.
Putting It All Together
Health care coverage helps a person manage large medical bills, but it does not necessarily remove costs completely.
The monthly premium is only the starting cost.
Deductibles, coinsurance, copays, out-of-pocket maximum, location of service, and network rules all affect what someone pays when care is needed.
It is important to remember that even if a person keeps the same plan, the deductible and maximum out-of-pocket amounts reset at the start of each new plan year.
Looking at all of these factors can help project what health care needs may cost over the course of a year and where the most economical care can be received.
These materials were supported by funds made available by the Kentucky Department for Public Health’s Office of Population Health from the Centers for Disease Control and Prevention, National Center for STLT Public Health Infrastructure and Workforce, under RFA-OT21-2103.
The contents of these materials are those of the authors and do not necessarily represent the official position of or endorsement by the Kentucky Department for Public Health or the Centers for Disease Control and Prevention.