The term “cost-sharing” refers to how health plan costs are shared between employers and employees. It’s important to understand that the cost-sharing structure can have a big impact on the ultimate cost to you, the employer. Generally, costs are shared in two main ways:
- Premium contributions. The employer pays a portion of the premium and the remainder is deducted from employees’ paychecks. (Most insurers require employers to contribute at least half of the premium cost for covered employees.)
- Cost-sharing at the time of service. This may take the form of: copayments, a fixed amount paid by the employees at the time they obtain services; co-insurance, a percent of the charge for services that is typically billed after services are received; and deductibles, a flat amount that the employees must pay before they are eligible for any benefits.
The general rule is that the greater the cost-sharing at the time of service, the lower the premiums. With this in mind, the decisions you’ll have to make include:
- What amount or percentage of the employee-only premium will you require the employees to cover?
- What amount or percentage of the premium for dependents will you require the employees to cover?
- What level of out-of-pocket expenses (copayments, co-insurance, deductibles, and so on) will your employees and their dependents incur when they get care?
Below we provide more information about premium contributions as well as the different types of cost-sharing at the time of service: copayments, co-insurance, deductibles, and caps on out-of-pocket expenses.
For a review of which types of health plans use which types of cost-sharing methods, see “Plan Characteristics and Types” in the tool box.
A health insurance premium is the total amount that must be paid in advance in order obtain coverage for a particular level of services. Usually health insurance premiums are billed and paid on a monthly basis.
Employers typically require employees to share the cost of the plan premium, usually through employee contributions right from their paychecks. Keep in mind, however, that most insurers require the employer to cover at least half of the premium cost for employees.
Employers are free to require employees to cover some or all of the premium cost for dependents, such as a spouse or children.
A copayment or “copay” as it is sometimes called, is a flat fee that the patient pays at the time of service. After the patient pays the fee, the plan usually pays 100 percent of the balance on eligible services. Eligible services are those services that the plan includes in its coverage. The fee usually ranges between $10 and $40. Copayments are common in HMO products and are often characteristic of PPO plans as well. Under HMOs, these services almost always require a copayment:
- Office visits. This includes visits to a network primary care or specialist doctor, mental health practitioner or therapist.
- Emergency room. Copays for emergency services are typically higher than for office visits. The copay is sometimes waived if the hospital admits the patient from the emergency room.
- Prescription drugs. If a patient goes to a network pharmacy, the copayment for prescription drugs could range from $10 to $35 per prescription. Many insurers use a formulary to control benefits paid by its plan. A formulary is usually made up of generic and the insurer’s list of preferred brand-name drugs. Generic drugs tend to cost less and are required by the FDA to be 95 percent as effective as more expensive brand-name drugs marketed by pharmaceutical companies. To encourage doctors to use formulary drugs when prescribing medication, a plan may pay greater benefits for generic or preferred brand-name drugs. Drugs not included on the formulary (also called nonpreferred or nonformulary drugs) may be covered at a much higher copay or may not be covered at all. Pharmacists or doctors can advise about the appropriateness of switching to generics.
In many health plans, patients must pay a portion of the services they receive. This payment is called “co-insurance” and is usually a small percentage of the service cost after the plan pays benefits. If the plan pays 70 percent of the cost, the patient pays 30 percent of the cost. If the plan pays 90 percent, the patient pays 10 percent, and so forth. Co-insurance is common for PPO products and less common in HMOs.
Let’s say the patient has a PPO plan and a neighbor recommends a new doctor. The patient checks the provider directory and sees that the doctor is listed as part of the PPO’s network. The patient goes for an office visit and because it’s in the network, the negotiated rate is $100. The plan pays 90 percent of eligible charges and the patient pays 10 percent, as shown here:
|Negotiated rate for network office visit||$100|
|PPO pays 90 percent of eligible cost||$90|
|Patient pays co-insurance of 10 percent of cost||$10|
Keep in mind that the total costs vary depending on whether the patient receives an in-network or out-of-network service. If it’s a network service, then the percentage the patient and the plan pay is based on a negotiated rate, which can be much less than the patient would pay without insurance. If it’s an out-of-network service, the percentage the plan pays is based on the usual, customary and reasonable (UCR) rate, also known as the “reasonable and customary” (R&C) rate or “allowable” charge. UCR is the standard charge in that area for that service. The patient has to pay 100 percent of any charges that exceed UCR.
So, let’s say the patient has a PPO and a neighbor recommends a new doctor that’s not listed in the provider directory. Because the doctor is out of network, the plan pays its share of the out-of-network co-insurance: 70 percent of the usual, customary and reasonable charge. The patient’s share is 30 percent of the UCR amount, plus 100 percent of any amount over UCR.
|Office visit, actual charge||$140|
|Office visit, out-of-network UCR rate||$120|
|PPO pays 70 percent of UCR rate||$84
($120 x 70%)
|Patient co-insurance is 30 percent of UCR rate||$36
($120 x 30%)
|Patient pays 100 percent of amount over
|Patient’s total cost (co-insurance
plus amount over UCR)
|$36 + $20 = $56|
These examples show that patients save money in two ways when they stay inside the network: The total charge is less because of health plan negotiations with network providers, and the patient’s percentage share of cost is also lower.
The deductible is the amount a patient pays before the plan pays anything. Deductibles generally apply per person per calendar year. Under PPOs with co-insurance, deductibles usually apply to all services, including laboratory tests, hospital stays and doctor’s office visits. Some popular plans, however, waive the deductible for office visits. Then for most other covered medical expenses for the rest of the year, the plan pays its share and patients pay their share. Most HMOs don’t have general deductibles, but may have a service-specific deductible for inpatient hospitalization or for brand-name prescription drugs.
Generally speaking, the higher the deductible, the lower the premium. Some plans with particularly high deductibles—say, $2,000 and up—are known as “high-deductible” plans. While these plans may have significantly lower premiums, participants are exposed to high out-of-pocket costs.
In the tool box, see “How Are Deductibles Applied?” for an illustration of how an employee may see deductibles applied chronologically throughout the year.
Once out-of-pocket expenses per individual reach a defined limit in a single calendar year, the plan will pay 100 percent of eligible charges for the rest of the calendar year. The definition of out-of-pocket maximum will differ depending on your insurance carrier. Some carriers exclude specific costs (for example, fertility treatments or prescription drugs) or increase the maximum for care provided by out-of-network providers. Out-of-pocket cap levels typically are in the range of $1,000 to $5,000 per person. To protect your employees from high costs, choose as low an out-of-pocket maximum as you can afford.