Co-Insurance

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What is 'Co-Insurance'

Co-insurance is a co-sharing agreement between the insured and the insurer under an insurance policy which provides that the insured will pay a set percentage of the covered costs after the deductible has been paid. In health insurance, a co-insurance provision is similar to a co-pay provision, except co-pays require the insured to pay a set dollar amount at the time the service is rendered. There may also be co-insurance provisions on property insurance policies, but the concept is most commonly referenced with regard to health insurance.

BREAKING DOWN 'Co-Insurance'

One of the most common co-insurance breakdowns is the 80/20 split. Under the terms of an 80/20 coinsurance plan, the insured is responsible for 20% of her medical costs, while the insurance company takes care of the remaining 80%. However, these terms only apply after the insured has met her deductible for the year. In addition, most health insurance policies include an out-of-pocket maximum that limits the total amount the insured must pay for care in a given year.

Co-Insurance Example

Assume you take out a health insurance policy that carries an 80/20 co-insurance provision, a $1,000 deductible and a $5,000 out-of-pocket maximum. Unfortunately, you require an outpatient surgery early in the year that costs $5,500. Since you have not met your deductible yet, the first $1,000 is not covered. After you pay that amount, however, you are only responsible for 20% of the remaining $4,500, or $900. Your insurance company will cover the remaining $3,600.

If you require another expensive procedure later in the year, your co-insurance provision kicks in right away because you have already met your deductible. In addition, since you have already paid a total of $1,900 out-of-pocket during the policy term, the maximum amount that you will be required to pay for the rest of the year is $3,100. After this threshold is met, your insurance company is responsible for footing the bill up to you maximum policy limit.

Co-pay Vs. Co-Insurance

Both co-pay and co-insurance provisions are ways for insurance companies to minimize the financial burden of medical expenses; they both have benefits and drawbacks for consumers. Because co-insurance policies require that insureds meet their deductibles first, these plans tend to be more expensive up front. However, it is also more likely that the out-of-pocket maximum with be reached earlier in the year, meaning the insurance company is liable for 100% of insured expenses for the rest of the policy term.

Co-pay plans are more popular because they spread the cost of care out of over the year and make predicting your medical expenses easier. A co-pay plan simply charges the insured a set amount at the time of each service. The amount may vary and usually is more expensive for emergency or specialist care. In addition, some services may be covered even before the deductible is met, such as preventative care and screenings. The downside is that you are likely to pay for every doctor's visit for the entire year.