An Overview of Health Insurance Cost-Sharing

Cost-sharing refers to the fact that you and your health insurer both pay a portion of your medical costs during the year. This article will explain what cost-sharing is, how it works, why it's used, and what you should expect if and when you need medical care.

Your health insurer requires you to pay part of the cost of your healthcare expenses in order to prevent over-utilization of healthcare services, and in order to keep health insurance premiums in check. Plans with lower cost-sharing (ie, lower deductibles, copayments, and total out-of-pocket costs when you need medical care) tend to have higher premiums, whereas plans with higher cost-sharing tend to have lower premiums.

Cost-sharing reduces premiums (because it saves your health insurance company money) in two ways. First, you’re paying part of the bill; since you’re sharing the cost with your insurance company, they pay less. Second, since you have to pay part of the bill, it’s more likely you'll only seek medical care when you really need it.

There are some healthcare reform proposals that call for a transition to a system in which people do not pay anything at the time they receive care. But for the time being, cost-sharing is incorporated into virtually every existing health insurance program in the US, including private health plans, Medicare, and even Medicaid (although cost-sharing in Medicaid is limited due to enrollees' low incomes).

The most common forms of cost-sharing are deductibles, copayments, and coinsurance. The monthly premiums you pay to get health insurance coverage aren’t considered a type of cost-sharing. Let's briefly take a minute to understand how each of those types of cost-sharing work:

Deductible

The deductible is the amount that you have to pay for certain services before your health plan starts to cover your expenses. For most health plans, the deductible applies once per calendar year, although there may be separate deductibles for medical expenses and prescription expenses.

Most health plans do have deductibles, but they vary considerably in size. Some plans have deductibles as low as $250 or $500, while other plans have deductibles well in excess of $5,000. But unlike coinsurance (discussed below), the deductible will be a pre-determined amount, rather than a percentage of the bill.

The Affordable Care Act (ACA) limits total out-of-pocket costs for all major medical plans (except those that are grandfathered or grandmothered or not regulated by the ACA) to no more than $8,700 for a single individual in 2022, so the deductible cannot exceed that amount (this limit changes annually; for 2023, the upper limit on out-of-pocket costs cannot exceed $9,100 for a single individual).

Once you pay your deductible, your health plan will start to pick up at least part of the tab for your ongoing medical expenses for the remainder of the year. But if your health plan includes copays for services like healthcare provider visits or prescriptions, you'll continue to pay those copays until you reach your out-of-pocket maximum for the year.

If you have Original Medicare, your Part A deductible will apply once per benefit period, rather than per year. So you could potentially have to pay more than one deductible in a given year, but you'd also be protected from having to pay the deductible twice if you're hospitalized at the end of the year and are still in the hospital when the new year begins.

Copayments

Like deductibles, copayments (also known as copays) are a set amount that you'll pay for certain medical services. But copays tend to be much smaller than deductibles. A health plan might have a $1,500 deductible, for example, but only require $35 copays to see a primary care physician.

In that case, you'd pay $35 to see your healthcare provider, and your health plan would pay the rest of the healthcare provider's bill, regardless of whether you'd already met your deductible for the year or not (there might be other services performed in conjunction with the office visit, such as lab work, that are counted toward the deductible and have to be paid in addition to the copay).

There are some health plans that start to allow for copays on prescription drugs only after a prescription deductible is met. On a plan like that, you might pay the first $500 in prescription costs, and then start to pay a set copay amount for each prescription.

In general, copays and the deductible apply to different services, and the amount you spend on copays doesn't count towards the deductible (but all health plans are different, so read the fine print on yours). But all ACA-compliant plans do count the amount you spend on copays towards the plan's out-of-pocket maximum, and deductibles count towards that maximum spending cap too. (Note, however, that the out-of-pocket maximum on Medicare Advantage plans does not include out-of-pocket costs for prescription drugs, which are not capped.)

And some health plans have what they refer to as a "hospital copay" that might be $500 or more. Although this is an amount more along the lines of what we'd think of as a deductible, the difference is that the copay could be assessed multiple times in the year (until you hit your out-of-pocket maximum), whereas a deductible would generally only be assessed once, even if you're hospitalized multiple times (as noted above, it works differently if you have Medicare Part A).

Coinsurance

Unlike deductibles and copays, coinsurance is not a specific dollar amount. Instead, it's a percentage of the total costs. Coinsurance usually starts to apply after the deductible is met, and you'll continue to pay it until you hit the out-of-pocket maximum for your plan. Coinsurance generally does not apply to services that are covered with a copay.

So let's say your plan has a $1,000 deductible and 80/20 coinsurance, with a $4,000 maximum out-of-pocket limit. Now let's assume you have a minor outpatient surgery that costs $3,000 after your insurer's negotiated rate is applied, and it's your first medical cost of the year (ie, you haven't paid anything toward your deductible earlier in the year).

You'll pay the first $1,000 (deductible), and you'll also pay 20% of the remaining $2,000. That will add $400 to your bill, bringing your total out-of-pocket for the surgery to $1,400. Your insurance will cover the other $1,600 (80% of the portion of the bill that was above your deductible).

Now let's say you have a bad accident later in the year and end up with $200,000 in medical bills. You've already met your deductible, so you're going straight to coinsurance. You'll pay 20% of the bill, but only until you've paid $2,600. That's because your health plan has a $4,000 out-of-pocket cap, and you already spent $1,400 out-of-pocket on the earlier surgery. So the first $13,000 of the bills for your accident recovery will be split 80/20 between your insurance company and you (20% of $13,000 is $2,600).

At that point, your insurance policy will start to pay 100% of your covered in-network expenses for the rest of the year, as long as you comply with your health plan's rules for things like prior authorization, referrals, step therapy, etc.

Cost-Sharing & the Out-Of-Pocket Maximum

Because cost-sharing can get expensive if you have large medical expenses, all major medical health plans — unless they're grandfathered or grandmothered — that require cost-sharing also have an out-of-pocket maximum that puts a cap on how much cost-sharing you’re responsible for each year (for this discussion, all of the numbers refer to the cap on out-of-pocket costs assuming you receive care within your health insurer's network; if you go outside the network, your out-of-pocket maximum will be higher, or in some cases, unlimited).

Before 2014, there were no regulations governing how high a health plan's out-of-pocket maximum could be—indeed, some plans didn't cap out-of-pocket costs at all, although that was relatively rare. But the Affordable Care Act changed that, and new health plans cannot have an out-of-pocket maximum in excess of $8,700 in 2021 (note that this amount is indexed for inflation, so it changes each year).

Many plans cap out-of-pocket costs below that level, but they cannot exceed it. In addition, under a rule that took effect in 2016, a single individual can't be required to pay more in out-of-pocket costs than the individual out-of-pocket maximum for that year, even if he or she is covered under a family plan instead of an individual plan.

After you’ve paid enough in deductibles, copayments, and coinsurance to reach the out-of-pocket maximum, your health plan suspends your cost-sharing. The plan will then pick up 100% of your covered medical bills for the rest of the year, assuming you continue to use in-network hospitals and healthcare providers and follow all of your health plan's rules.

Cost-Sharing & the Affordable Care Act

The Affordable Care Act (ACA) made a significant amount of preventive health care exempt from cost-sharing. This means things like age-appropriate screening mammograms, cholesterol screening, and many vaccines aren’t subject to a deductible, copayments, or coinsurance.

The ACA also created a cost-sharing subsidy to make using your health insurance more affordable if you have a fairly low income. The cost-sharing subsidy lowers the amount you pay in deductibles, copays, and coinsurance each time you use your insurance. Cost-sharing subsidies are automatically incorporated into silver plans on the exchange if your income doesn't exceed 250% of the poverty level (for 2022 coverage, the upper income limit to be eligible for cost-sharing subsidies is $32,200 for a single individual and $66,250 for a family of four; these amounts are based on the 2021 federal poverty level, as the prior year's numbers are always used; note that the limits are higher in Alaska and Hawaii).

What About Things That Insurance Doesn't Cover?

The phrases cost-sharing and out-of-pocket expenses are sometimes used interchangeably, but people often use "out-of-pocket" to describe any medical expenses that they pay themselves, regardless of whether the treatment is covered at all by health insurance. But if the treatment isn't covered at all, the amount you spend isn't considered cost-sharing under your plan, and won't count towards your plan's out-of-pocket maximum.

For example, cosmetic procedures like liposuction usually aren't covered by health insurance, so if you get that sort of treatment, you'll have to pay for it yourself. The same is generally true of adult dental care, unless you have a separate dental insurance policy. Although you might think of these expenses as "out-of-pocket" (and indeed, they are coming out of your own pocket), the money you spend isn't counting towards your health plan's out-of-pocket maximum, nor is it considered cost-sharing under your plan.

Summary

Cost-sharing refers to the fact that health insurance plans do not cover 100% of a person's medical costs. Instead, the plan shares the cost with the member, with the specific arrangement varying from one plan to another.

The member's portion of the cost-sharing will come in the form of a deductible, copays, and/or coinsurance. The specifics depend on the plan; some plans have all three of these, while others might have just a deductible. And the amount of cost-sharing will vary considerably from one plan to another. But nearly all plans are subject to the ACA's maximum out-of-pocket limit, which caps a member's cost-sharing for covered services received from in-network providers.

A Word From Verywell

Because cost-sharing varies considerably from one health insurance plan to another, you'll want to make sure you understand the details of your plan before you need to use your coverage, so that the amount you have to pay for your treatment doesn't come as a surprise. It's important to know what services are covered by a copay (if any), and what services are subject to the deductible and coinsurance. These are also important factors to keep in mind when you're shopping for a health plan or comparing multiple plan options offered by your employer.