Almost all health insurance plans include out-of-pocket payments by members. The purpose of such payments is twofold: to make health insurance premiums more affordable and to encourage patients to think more carefully about treatment costs. The amount of each can also be a factor in the overall cost of your plan. Unfortunately, employees often find out-of-pocket payment terminology confusing, which causes frustration and plan dissatisfaction. Since you cover a portion of benefit costs as part of your employees’ overall compensation, you want them to value their plan.
To better educate your employees about out-of-pocket payments, it’s best to separate out explanations of the three main categories: co-pays, co-insurance and deductibles. Most health insurance plans include all three, and they are sometimes used in combination.
It’s best to start with an explanation of a co-pay (also known as a co-payment), the simplest and most familiar concept. A co-pay is a set dollar amount that the patient pays to a provider at the time of service. Co-pays are typically applied to physician office visits and prescription drugs. They are used to establish a modest hurdle that will ideally discourage unnecessary plan utilization. Health plans use differences in co-pay levels, however, to encourage the use of primary care, in-network providers and generic drugs. For example, a patient may pay just $15 to see an in-network primary-care doctor but $100 to see an out-of-network specialist.
Not all office visits and prescriptions are subject to a co-pay. For example, under the Affordable Care Act, there are no out-of-pocket costs for preventive-care visits. Some states also prohibit co-pays for certain classes of drugs, such as chemotherapy.
The terms co-pay and co-insurance are often confused, which isn’t surprising since they sound alike and have some features in common. The basic difference is that co-insurance makes the member responsible for a percentage of the bill, while a co-pay is for a fixed dollar amount.
Co-insurance is most commonly applied to expensive services such as hospital stays or surgery. For example, a patient may be responsible for 30 percent of the bill (the co-insurance payment), while the health insurer pays the rest. It’s important to understand that the co-insurance percentage is applied to the discounted rate negotiated by the health plan and not to the higher, nondiscounted rate charged by the provider. It is common to find billing errors due to this mistake, and members need to review their bills carefully to avoid it. Often, your employees will receive an explanation of benefits (EOB) before they receive a bill. These can be confusing, especially because they look like a bill, but money is not yet owed. The EOB should include the regular rate for service, the lower insurance-negotiated rate, the amount the insurance company will pay and the amount the employee will owe. If any of these are missing or look as if they have been calculated incorrectly, your employees should call the insurance company right away to explain that they think there has been an error. It’s possible that the EOB will not yet indicate the discounted rate for service, but that the rate will be applied to the final bill.
Co-insurance is sometimes used for expensive physician services and the most costly prescription drugs. Your employees need to make sure they understand how your health insurance plan uses a mix of co-pays and co-insurance for these services; otherwise, they will be surprised when they pick up their medication or go to the physician and are presented with a bigger-than-expected bill.
A deductible is the amount that the patient must pay out of pocket during a benefit year before the health plan begins to pay. As more companies move to high-deductible health plans, the deductible is becoming the most important component of out-of-pocket payments for many members. Most people are familiar with deductibles from their homeowner’s or automobile insurance. The concept is the same, but as usual, health insurance is a bit more complex. There are a few aspects to keep in mind:
- There are separate deductibles for each individual in the family and for the family overall. For example, a family of four might be subject to a $1,000 deductible per individual and an overall family deductible of $2,000. The deductible is met once out-of-pocket payments reach $2,000, even if not all family members have met their deductible.
- The insurance company pays for certain services, such as vaccinations, before the deductible is met.
- There are sometimes separate deductibles for in-network and out-of-network services.
- Some, but not all, out-of-pocket spending counts toward the deductible. Co-insurance counts, but co-pays usually do not. Noncovered services such as eyeglasses are not counted toward the deductible.
To further protect members, health plans have what’s called an out-of-pocket maximum. This amount is the most that a member or family will have to pay out of pocket in a calendar year, including all co-pays, co-insurance fees and deductibles. Once the out-of-pocket maximum is met, the health plan pays the full cost of all covered benefits for the rest of the benefit year, as HealthCare.gov explains.
It’s important to help your employees understand the types of payments they may encounter in their health insurance plans. Many employees don’t realize that a low-premium plan with higher co-insurance or co-pays may save them money in the long term, so helping them understand real costs is important. Each situation is different, but you can help your employees understand what to expect when they receive medical care.
David E. Williams is president of Health Business Group, a strategy consulting firm serving clients in technology-enabled health care services, pharmaceuticals, biotech, medical devices and software. He is frequently quoted in the media on the business of health care and is the author of the Health Business Blog. David sits on the board of both private health care companies and nonprofits.