13.3.2 Coinsurance
The coinsurance is that portion of the balance due that each participant pays. The insurer pays their fair share and the insured pays his/her fair share. Typically, the coinsurance amount is an 80/20 split once the deductible has been satisfied.
Now let's see how the stop-loss feature comes into play wherein the insurer will pay 100% of certain covered expenses.
Stop-Loss Feature
Between deductibles and coinsurance, the risk of high medical expenses can still be a gigantic risk for the insured. The stop-loss feature in major medical contracts serves to help reduce these costs.
The stop-loss feature places a limit on the maximum out-of-pocket expenses an insured must incur for health care, above which the policy pays 100% of the remaining eligible expenses.
The stop-loss feature provides an added benefit to the typical 80/20 split. Usually once the deductible is satisfied, insurers will pick up 80% of future medical expenses and the insured is responsible for the remaining 20%. With the stop-loss feature, there is an additional element providing for maximum out-of-pocket expenditures for the insured.
Bud's hospital bills for five days amounted to $4,500. His major medical policy requires a $500 deductible, an 80/20 coinsurance, with a stop-loss feature of $2,000. Let's figure out what his out-of-pocket expenses are.
$4,500 - $500 (deductible) = $4,000
20% of $4,000 = $800 (Bud's responsibility)
$4,000 - $800 = $3,200 (insurer's responsibility)
$800 + $500 = $1,300 (Bud's total out-of-pocket expenses)
Bud has satisfied his deductible for the year and $800 goes toward his $2,000 stop-loss, so all he has to meet for any future medical expenses during the year is $1,200 ($2,000 - $800 = $1,200).
Now let's say Bud incurs further medical expenses, this time totaling $10,000. He has already satisfied his deductible from the previous illness, but he's still responsible for his share of the coinsurance up to the stop-loss limit.
20% of $10,000 = $2,000
$2,000 - $800 (already applied to stop-loss) = $1,200
Bud is only responsible for $1,200 in this case. Any further covered medical expenses for the year become the insurer's responsibility.
High Deductible Health Plans (HDHP)
A high deductible health plan, or HDHP is one that offers low premiums but requires the insured to pay a relatively high deductible. For an individual in 2013, a qualified HDHP has a minimum of a $1,250 deductible and a cap on out-of-pocket expenses of $6,250. Conversely, a family HDHP has a minimum deductible of $2,500 and a cap of $12,500.
Since HDHPs require such high deductibles and copayments from participants, they're usually paired with one of the HSAs discussed previously. In doing this, employers or employees can put aside tax-free contributions that grow, so long as they're utilized for qualified medical expenses.
Flexible Spending Accounts (FSAs)
A flexible spending account (FSA) is defined as a "cafeteria plan that is funded with pretax employee contributions called salary reductions." In these plans, an employee agrees to "a reduction in compensation and these funds are set aside to pay for certain medical expenses." When FSAs are paired with the HDHPs mentioned above, there are lower employer costs for the health care plan as a result. The employees are also provided a "convenient, tax-advantaged way to meet their higher plan obligations." Usually, FSAs are present in medium to large-sized employers.
Health Reimbursement Accounts (HRAs)
Health reimbursement accounts (HRAs) are another variation of the health care funding. Employers set aside "pretax contributions for each employee to pay deductibles, coinsurance, and co-payments. The employer sets plan limits and authorized uses of these funds, and typically unused funds may roll over from year to year. HRAs are the dominant funding for HDHPs."
