Merritt Personal Lines Manual: Co-Insurance Provisions
Once the deductible is satisfied, the major medical insurance company will then pay for covered medical expenses, on a co-insurance basis.
(As we've seen, co-insurance -- sometimes called co-payment -- means that the insured and the insurance company split the cost of a claim. The company usually pays the larger part and the insured pays the smaller part.)
Co-insurance requirements are typically expressed as 80 percent to 20 percent, 70 percent to 30 percent, 60 percent to 40 percent, etc. So if the insured has a plan with an 80 percent to 20 percent co-insurance requirement, the insurance company will pay 80 percent of the covered expenses following the deductible and the insured is responsible for the additional 20 percent of the expenses.
Just as deductibles affect the cost of a plan, so too will co-insurance. An 80/20 percent co-insurance provision will carry a higher premium than a 70/30 percent or 60/40 percent co-insurance feature. If the insured needs to keep the insured's premium low, buy a policy with a high deductible and a low coinsurance provision such as 60/40 percent.
This is another mechanism that insurance companies can use to limit the impact of insureds who have histories of health problems. If the insured has had heart bypass surgery and beaten a mild case of skin cancer, the insured may have to settle for a major medical policy includes a high deductible -- say, $5,000 -- and a heavy co-insurance split -- say 60/40 percent.
The co-insurance requirement continues until the insured reaches the policy's stop-loss point. The stop-loss is the point at which the insurance company begins to pay 100% of a claim. Without a stop-loss, the insured would be responsible for 20 percent of an indefinite amount such as $100,000 or even $1 million.
The stop-loss amount will vary. It could be reached at $2,500, $5,000 or $10,000 of covered expenses. For example, a plan with a $250 deductible and an 80/20 % co-insurance split on the next $2,500 of covered expenses would result in a total out-of-pocket expense to the insured of $750 -- the $250 deductible plus 20 % of $2,500. The stop-loss provision establishes the maximum out-of-pocket expense to the insured to be equal to the deductible plus the insured's co-insurance amount.
The out-of-pocket maximum is a major consideration when the insured is shopping for a policy. Regardless of the size of a potential claim, the most that the insured will have to pay out of the insured's own pocket is the deductible and the co-insurance amount up to the stop-loss.
The stop-loss point is also a contributing factor in the policy's premium. The higher the stop-loss -- the lower the premium. A stop-loss at $2,500 will cost more than a stop-loss at $10,000. Thus, if the insured wants to keep the premium as low as possible, the formula becomes:
High deductible + low co-insurance + high stop-loss = lowest possible premium
