What is cost-sharing?
All health insurance requires consumers to pay some of the cost of covered health care services, referred to as cost-sharing. Cost-sharing varies with different types of health plans. For example, HMOs tend to impose fewer cost-sharing requirements and fee-for-service plans have more. Following are the kinds of cost-sharing typically found in health insurance plans:
- Premiums - Premiums are the fee health insurers charge for continued enrollment in a health insurance policy, usually paid on a monthly basis. For group coverage, employers often pay a portion of the cost of premiums for their employees.
- Co-payments - Specific dollar amounts that the insurance policy holder pays each time he or she receives health services. For example, a health plan may require a $10 co-payment for every office visit or each prescription refill.
- Deductible - Some policies require insurance policy holders to pay a certain amount of money for health care services before their insurance begins to pay for any services. This amount is known as the deductible. A deductible might apply to all care in a year, or it might be service-specific. For example, a heath plan may have a $500 deductible for each hospitalization.
- Co-insurance - Many health plans require the consumer to pay a portion of each medical service, known as co-insurance, and the plan pays for the rest of the services. For example, a plan may require consumers to pay 20 percent co-insurance for covered health services, and the plan will pay the remaining 80 percent. Additionally, different co-insurance amounts may apply for different services. For example, a dental policy may pay for 100 percent of dental check-ups and cleaning, but may require 20 percent co-insurance for fillings. Policies may also have different co-insurance percentages based on whether the consumer uses a health provider in the plan's network, or goes outside the network for care (typically more expensive for the consumer).
- Out-of-pocket Maximums - Many health plans limit the total amount that a consumer has to pay in a year. Once the consumer's combined costs for co-payments, co-insurance, and deductibles reaches a certain amount, the health plan pays 100 percent of the costs of covered services for the remainder of the year. However, sometimes the out-of-pocket maximum does not include all types of cost-sharing. For example, a plan might not apply the co-insurance for care received out of network to the annual out-of-pocket maximum.
- Annual and Lifetime Limits - Many insurance plans place limits on the total amount of health services they would pay for annually or over a lifetime. For example, a health plan might only cover health benefits up to $75,000 per year per person. And so-called "mini-med plans" or limited benefit plans can have caps as low as $2000 per year. Now, under the ACA, health plans are prohibited from imposing lifetime dollar limits on most benefits, defined as essential health benefits. The new law gradually adjusts the annual limits on the dollar value of health benefits, and eventually prohibits them. As of September 23, 2010, health plans cannot impose an annual limit that is less than $750,000. In 2011, the limit cannot be less than $1.25 million, and in 2012 and 2013, it can't be less than $2 million. Starting in 2014, health plans cannot impose any annual limit at all. However, a number of plans have successfully sought temporary waivers from these increased annual limits to avoid sudden premium increases for enrollees.
- Balance Billing - Many health plans establish a maximum amount that the plan will pay for a covered medical service. This amount, sometimes referred to as the approved amount, is tied to cost-sharing. For example, a health plan might pay 80 percent of approved amounts for covered services. If a doctor charges $100 for an office visit, but the plan's approved amount is $90, the plan will cover 80 percent of the $90, or $72. The patient is responsible for the 20 percent coinsurance ($18) and may also be liable for the balance of the doctor's charge above the approved amount - the remaining $10. The $10 charge is known as balance billing. HMOs and PPOs usually prohibit doctors and hospitals in their networks from balance billing. However, if a consumer gets care out-of-network he or she may be liable for the balance billing. The balance billing amounts are usually not applicable to deductible or out-of-pocket maximums.
- Actuarial Value - A health plan's actuarial value refers to the average portion of medical spending paid for by the insurer, rather than the individual. Actuarial values are based on the plan's cost-sharing requirements and the specific benefits that the plan covers. Two or more plans that have the same actuarial value are called actuarially equivalent. But even health insurance plans that are actuarially equivalent may have different premiums, co-payments and deductibles. This means they may be more or less valuable to a particular individual, based on his or her particular health care needs.