Question: What's the Difference Between Copay and Coinsurance?
Answer: Copay and coinsurance help health insurance companies save money by making you responsible for part of your healthcare bills. Both are forms of cost sharing, meaning that you pay part of the cost of your care and the health insurance company pays part of the cost of your care. They differ in how the share of cost is divvied up between you and your health insurance company, and the amount of financial risk each exposes you to.
How a copay works
A copay is a fixed amount you pay whenever you use a particular type of healthcare service. For example, you might have a $40 copay to see a primary care doctor and a $20 copay to fill a prescription. You pay the copay amount; your health insurance company pays the rest of the bill. Your copay for that particular service doesn’t change no matter how much the doctor charges, or how much the prescription costs.
Unlike a deductible that’s only paid once per year, you pay the copay each time you use that type of healthcare service. So, if you have a copay of $40 for doctor’s office visits and you see the doctor three times for your sprained ankle, you’ll have to pay $40 each visit, a total of $120.
How coinsurance works
Unlike the fixed amount of a copay, with coinsurance you pay a percentage of the cost of a healthcare service. Your health insurance company pays the rest of the cost. For example, if you have a 20% coinsurance for hospitalization, this means that you pay 20% of the cost of the hospitalization, and your health insurer pays the other 80%.
Since most health insurance companies negotiate for discounted rates, you pay the coinsurance on the discounted rate. For example, if your sprained ankle isn’t healing well so you need an ankle MRI, the MRI facility might have a standard rate of $600. But, since your health insurance company has a discounted rate of $300, your coinsurance cost would be 20% of the $300 discount rate, or $60.
Charging coinsurance on the full rate rather than the discounted rate is a common billing error that will cost you more than you should pay. You can see an example and learn how to catch this common error here.
Pros and cons of copay vs. coinsurance
The advantage of a copay is that there’s no surprise about how much a service will cost you. If your copay is $40 to see the doctor, you know exactly how much you’ll owe before you even make the appointment. On the other hand, if the service actually costs less than the copay, you still have to pay the full copay. If you’re seeing the doctor frequently or filling lots of prescriptions, copayments can add up quickly.
Coinsurance is riskier for you since you won’t know exactly how much you’ll owe until the service is performed. For example, you might get an estimate of $6000 for your upcoming surgery. Since you have a coinsurance of 20%, your share of cost should be $1200. But, what if the surgeon encounters an unexpected problem during the surgery and has to fix that, too? Your surgery bill could come out to $10,000 rather than the original $6000 estimate. Since your coinsurance is 20% of the cost, you now owe $2000 rather than the $1200 you had planned for.
Insurance companies like coinsurance arrangements because they know you’ll have to shoulder a larger share of the cost for expensive things under a coinsurance arrangement than you would if you were paying a simple copay. They hope it motivates you to make sure you really need that expensive test or procedure since your portion of the cost can be a lot of money, even if it’s only 20% of the bill.
Most health insurance companies count coinsurance toward your out-of-pocket maximum, but some don’t count copays toward your out-of-pocket maximum. A health plan’s benefit summary should tell you if it does or doesn’t credit your copays towards your out-of-pocket maximum.
How a copay and coinsurance are used together
You don’t usually have to pay both a copay and coinsurance on the same healthcare service. For example, it would be unusual to pay a $40 copay for a doctor’s office visit, and then also have to pay a coinsurance of 20% of the cost on that same visit. However, it’s not illegal for health insurers to require this. Read the benefit summary carefully when you’re choosing a health plan so you’ll be aware if a health plan requires this unusual double form of cost sharing.
You might end up simultaneously paying a copay and coinsurance for different parts of a complex healthcare service. Here’s how this might work. Let’s say you have a $50 copay for doctor visits while you’re in the hospital, and a 30% coinsurance for hospitalization. If the doctor visits you four times in the hospital, you would end up owing a $50 copay for each of those visits, a total of $200 in copay charges. You’ll also owe the hospital a 30% coinsurance payment for your share of the hospital bill. It might seem like you’re being asked to pay both a copay and coinsurance for the same hospital stay. But, you’re really paying a copay for the doctor’s services, and coinsurance for the hospital’s services.
The difference between copay and coinsurance can be especially confusing with prescription drug coverage. Most health insurers have a drug formulary that tells you which drugs the health plan covers, and what type of cost sharing is required. The formulary puts drugs into different price categories, or tiers, and requires a different cost sharing arrangement for each tier.
For example, the lowest tier might be generic drugs and common cheap drugs. That tier might require a copay of $5 for a 90-day supply of a drug. The second tier might be more expensive brand-name drugs and require a copay of $35 for a 90-day supply. The top tier might be really expensive biologic injectable drugs and oral chemotherapies that cost thousands of dollars per dose.
For this tier, the health plan may abandon the copay cost sharing it used on the lower tiers and switch to a coinsurance of 30%. The coinsurance on the most expensive-tier drugs allows the insurer to limit its financial risk by shifting a larger share of the cost of the drug back onto you. This can be confusing since most of your prescriptions will require a fixed copay, but the most expensive prescriptions, top tier drugs, will require a coinsurance percentage rather than a copay.
Coinsurance vs copay can be confusing, but understanding the difference between copay and coinsurance means you're better equipped to choose a health plan that meets your expectations, budget for medical expenses, and catch errors in your medical bills.