Health care is different from most consumer purchases. As consumers, we don’t know the price; as providers, we don’t necessarily set the price, and even if we do, most of us don’t know it before we provide a particular service.
The Affordable Care Act requires that 80-85% of an insurance company’s revenue be used for medical reimbursements, with 15% remaining for administrative costs and overall profit. This revenue is made up of monthly premiums, payments made to insurance companies each month that allow an individual to be a member of that company’s health plan. In employer-based coverage, employers cover 60-80% of the total premium. On the individual market, the individual is charged with the full cost (although there are government subsidies dependent on income that make this more affordable.
Low premium plans typically have higher out of pocket (OOP) cost-sharing in the form of deductibles, copayments, coinsurance, lower OOP maximums, or narrower provider networks. What this comes down to is: how much risk for a potentially expensive OOP cost are you willing to bear to pay less each month in the meantime?
As you can imagine, healthier people are going to use less care and are likely to take on a bigger risk for a lower monthly premium.
- Deductibles: how much you have to pay for your health care services before the insurance kicks in. Deductibles can range from $500-$10,000 depending on the plan and the deductible might not be applied to certain services (for example the free preventive services offered under the essential health benefits).
- Copayments: a specified amount paid at each visit or per prescription. For example, every time you go to the dermatologist, you pay $25. If you’re there for a mole check, $25. If you’re there for some sort of skin rejuvenation procedure, $25. Tattoo removal, $25. It’s a flat fee paid up front, every time you go, no matter what service you’re getting.
- Coinsurance: the percentage of total cost the consumer must pay after the deductible has been met. Let’s say you’re heading to that mole check appointment a few months after a major surgery that helped you meet your deductible. Your insurance is finally going to kick in, but only about 70-80% of the total cost. You’ll still be responsible for a smaller share.
How to Reduce Cost-Sharing
- Health Care Savings accounts: tax-advantaged savings accounts offered by employers that allow consumers to set aside money directly from their pay check for future health expenses
- OOP maximums: instituted by some health plans with the intent of limiting catastrophic costs on the part of the patient
If the health plan decides they don’t want to cover a particular service, 100% of the cost falls on the consumer. Typically this includes things like hearing aids, special therapies, experimental care, cosmetic surgery, and over the counter drugs. Insurance plans can also limit which provider patients can see by establishing “in-network” and “out-of-network” care. In out-of-network care, patients will see a completely different rate of deductibles, co-pays, and co-insurance.
Types of Health Plans
Insurance companies offer a variety of plans that employees and individuals on the exchange can choose from when it comes time to buy health insurance. Kaiser Permanente has a great chart to help sort through the ins and outs of these different types of plans.