What Is the Meaning of Coinsurance?

Understanding health insurance is a fundamental aspect of personal financial management, especially when considering potential medical costs. Coinsurance is a core concept within health insurance policies, defining how medical expenses are shared between an individual and their insurance provider. Grasping its meaning helps policyholders anticipate financial responsibilities and make informed decisions about their healthcare coverage.

Defining Coinsurance

Coinsurance is the percentage of costs an individual pays for covered medical services after their annual deductible has been met. This mechanism is a form of cost-sharing between the policyholder and the insurance company. For example, in an 80/20 coinsurance arrangement, the insurance company pays 80% of approved costs, and the policyholder pays the remaining 20%. Common coinsurance percentages include 80/20 or 70/30 splits, where the first number represents the insurer’s share and the second is the policyholder’s share. This percentage applies to the “allowed amount” for a service, which is the maximum amount the insurance company has agreed to pay.

How Coinsurance Works

Coinsurance applies after the policyholder pays their deductible. The deductible is a predetermined amount paid out-of-pocket for covered medical services before the insurance company contributes. Once the deductible is met, coinsurance takes effect for subsequent covered medical expenses within the same policy period. For instance, consider a policy with a $2,000 deductible and 20% coinsurance. If a $10,000 medical procedure occurs before the deductible is met, the individual first pays the $2,000 deductible. The remaining $8,000 is then subject to coinsurance. The policyholder pays 20% of $8,000 ($1,600), and the insurer covers the remaining 80% ($6,400).

Coinsurance and Other Insurance Terms

Coinsurance works with other health insurance components, including the deductible and the out-of-pocket maximum. The deductible is the initial amount paid before the plan begins to pay. Payments made towards the deductible do not count as coinsurance. Coinsurance payments, along with the deductible and any copayments, accumulate towards the policy’s out-of-pocket maximum. This maximum is the absolute limit an individual will pay for covered in-network healthcare expenses within a policy year. Once this annual maximum is reached, the insurance company covers 100% of all further covered medical costs for the remainder of that policy year.

Practical Scenarios

Consider a health insurance plan with a $2,000 deductible, 20% coinsurance, and a $5,000 out-of-pocket maximum. If an individual incurs a $12,000 medical bill early in the policy year, they first pay the $2,000 deductible. Coinsurance then applies to the remaining $10,000. The individual’s 20% share is $2,000 (20% of $10,000), and the insurer pays $8,000. The individual’s total paid so far is $2,000 (deductible) + $2,000 (coinsurance) = $4,000.

Since this $4,000 is less than the $5,000 out-of-pocket maximum, the individual continues to pay coinsurance for subsequent services. If, later, the same individual incurs another $8,000 medical bill, their previous $4,000 payments count towards the $5,000 out-of-pocket maximum. The individual pays an additional $1,000 to reach the maximum ($5,000 – $4,000). Once this $1,000 is paid, the out-of-pocket maximum is met, and the insurance company covers the rest of that $8,000 bill and any further covered services for the remainder of the year at 100%.