An article at Forbes site a few days ago offered a provocative title claiming in part “Americans Don’t Understand Insurance.” It turns out they were talking about health insurance and particularly about confusion over the unfolding Affordable Care Act. The article described surveys of Americans between the ages of 25 and 64 who have private coverage that found only 14 percent of consumers responding to the surveys had an understanding of basic health insurance concepts such as deductible, copay, co-insurance and out-of-pocket maximum. These are all key concepts for consumers to understand in order to make informed decisions about coverage and they are the tools a health insurer uses to create cost sharing strategies to influence consumer behavior. Each of these concepts represents an incentive and understanding these incentives is crucial to knowing what benefit package to choose and how much your share of the medial care costs are likely to be.
A health insurance policy deductible is a good place to start considering your alternatives. In general the deductible works in the same way it would in auto or home insurance. It represents a floor amount of money you have to pay before you can gain access to all of your policy’s benefits. The idea is to give you an incentive to consider whether a health care visit is really necessary. In effect, the deducible represents a question – if I were paying for this myself, would I go? Many health insurance policies exempt services like an annual health exam or an emergency room visit from the deductible requirement. After all, the insurance company benefits from keeping you healthy so they don’t necessarily want you to be skimping on services that keep you healthy or could lead to costly hospital stays. In general, plans with higher deductibles will have a lower monthly premium. If you are healthy and have a high tolerance for risk, you can consider choosing a policy with a high deductible in order to reduce your premium.
The co-pay is another way the insurance company incentivizes you to consider the importance of your health care use. The co-pay is a basic amount you pay every time you see a provider; a typical co-pay amount is $25. It provides a way to both share expenses with you as the insured and to give you an incentive to consider not seeking care for every minor condition. A modest co-payment works pretty well to keep patients out of the doctor’s office for removal of a splinter, but they can cause problems for the patient and the insurer. People with multiple conditions that require frequent visits can respond by avoiding care – having three or four co-payments a month adds up fast. Having patients self-manage their own care can be problematic for insurance companies as a minor condition, untreated, can become a long term hospital stay. If you are healthy or wealthy, you may not be concerned about your co-pay amount, if you are not, consider the impact of a co-pay on your probability of seeking care.
And this leads us to another area of cost sharing incentive, coinsurance. Your coinsurance amount is another costs sharing device intended to incentivize you as the insured to consume health care rationally. Coinsurance is a percentage of a health care provider’s charge you may be responsible to pay. Medicare, for example, has a 20% coinsurance rate. Patients are responsible to pay 20% of the allowed amount of the claim as their share of the costs. Again, the intent here is to provide an incentive to seek care only when it is medically important to do so. Consider that if you have a $25 co-pay amount and a 20% coinsurance rate, your share of a $100 medical bill will be $45. If your case of the sniffles isn’t worth $45, you may not want to see your doctor. That is good for you and the insurer if it really is just the sniffles; it could be bad for both if it is pneumonia.
Since we have already mentioned that there can be unwanted problems if people need health care and do not seek it, we can now look at the concept of the “out of pocket maximum.” This is an amount set in your policy and is the most that you should have to pay for your healthcare during a plan period (usually one year). You pay for part of your medical care through deductibles, copays and coinsurance until you reach the out-of-pocket maximum, but after reaching the amount set by the out-of-pocket maximum, your insurance will pay 100% of your covered healthcare expenses – at least up to some policy benefit maximum. This may sound as though it is detrimental to the insurer, but it may not be. If you are accruing expenses at a rapid rate, it may be in the insurer’s best interests to see that you receive the best care possible. The out of pocket maximum insures there are no barriers to the care you need.
In Part 2, we will look at home and auto insurance.