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Back To: INSURANCE & RISK MANAGEMENT
This is the amount that is paid by an insured against a claim after the deductible is settled. It is usually expressed as a fixed percentage. The coinsurance provision is the same as a co-payment provision in health insurance. The only difference is that the co-payment expects the insured to pay a set dollar amount during the rendering of the service. Various property insurance policies also have coinsurance provisions. Coinsurance can also be used in the context of the level of property insurance that an owner is required to purchase on a structure for the coverage of claims.
A Little More on Co-Insurance
Among the coinsurance breakdowns, one of the most common is the 80/20 split in which the insured takes care of 20% of medical costs while the insurer is responsible for the remaining 80%. These terms, however, apply after the insured reaches the term's out-of-pocket deductible amount. Majority of the health insurance policies do possess an out-of-pocket maximum that sets a limit to the total amount paid by an insured for care given in a certain period.
For example, assume someone takes out a health insurance policy having an 80/20 coinsurance plan, a $1,000 out-of-pocket deductible, and a $5,000 out-of-pocket maximum. The person then requires an outpatient surgery at the beginning of the year that costs $5,500. Since the person has not paid the deductible, he is expected to pay the first $1000 of the bill after which he is only responsible for 20% the remaining 4,500 while the insurer covers the rest. When the person requires another expensive procedure later in the year, the provision takes effect immediately since he has already met his annual deductible. Also since the person has already paid $1,900 out-of-pocket during the policy term, the only amount that he is expected to pay for the services in that year is $3,100. After reaching the $5,000 out-of-pocket maximum, the insurer takes over and pays up to the maximum policy limit.
Co-pay Vs Coinsurance
Co-Pay and coinsurance provisions are used by insurance companies to spread risk among the insured. Both have advantages and disadvantages for consumers. Since these policies require deductibles before the insurer pays any costs, the policyholders do absorb more costs upfront. However, it is likely that the out-of-pocket maximum is reached early in the year resulting in the insurance company bearing all the expenses that will arise for the remainder of the term. When compared to co-insurance plans, co-pay plans are more popular. They make predicting one's medical expenses easy through spreading the cost of care over a full year. Co-pay plans charge the insured specific amounts at the time of each service. They vary depending on the type of service received. Some services carry a full payment without a co-payment. In a co-pay plan, it is likely that an insured person will pay for each medical visit.
Property Insurance Coinsurance
In a property insurance policy, the coinsurance clause requires a home to be insured for a percentage of its total cash or replacement value. Usually, this percentage is 80% although different providers sometimes require different rates of coverage. When a property does not meet this requirement, and then an owner files a claim for a covered accident, the insurer can charge a coinsurance penalty on the owner. Owners, however, can include a waiver of coinsurance clause in policies that removes the requirement to pay coinsurance by the owner. Usually, the insurance companies agree to waive coinsurance only in the case of small claims. Some cases do have policies that include a waiver of coinsurance should a total loss occur.
References for Co-Insurance
Academic Research on Co-Insurance
- Coinsurance, the price of time, and the demand for medical services, Phelps, C. E., & Newhouse, J. P. (1974). the Review of Economics and Statistics, 334-342. This paper presents evidence that disputes the assertion that the coinsurance is irrelevant to choice since coinsurance does not in any way affect the demand for services. It also shows how the effects of coinsurance systematically vary across medical services depending on the time price of the service.
- Effect of coinsurance on use of physician services, Scitovsky, A. A., & Snyder, N. M. (1972). Soc. Sec. Bull., 35, 3. This is a presentation of the findings from a study on the impacts of coinsurance provisions on the use of physician and outpatient ancillary services under a prepaid medical care plan that is comprehensive.
- Liquidity coinsurance, moral hazard, and financial contagion, Brusco, S., & Castiglionesi, F. (2007). The Journal of Finance, 62(5), 2275-2302. This paper presents a study of the propagation of financial crises in regions where banks are protected by limited liability and may, therefore, take excessive risk.
- Coinsurance and the welfare economics of medical care, Crew, M. (1969). The American economic review, 59(5), 906-908. This article presents a paradox where the monopoly or a restriction of competition exists in the servicing of liability claims and coinsurance may lead to a Pareto optimal situation.
- Coinsurance and the demand for physician services: four years later, Scitovsky, A. A., & McCall, N. (1977). Soc. Sec. Bull., 40, 19. This study investigates the efficiency of the introduction of coinsurance provision on the use of physician and outpatient ancillary services after four years.
- Effect of coinsurance: A multivariate analysis, Phelps, C. E., & Newhouse, J. P. (1972). Soc. Sec. Bull., 35, 20. This study examines the impacts of coinsurance based on four variables which are physician visits, physician expense, the ancillary services and the ancillary services expense.
- The effects of coinsurance on demand for physician services, Phelps, C. E., & Newhouse, J. P. (1972). Using a sample of 2567 persons whose coverage varied from full in one year to 25% in another, this paper analyses the effects of coinsurance on demand for physician services.
- Coinsurance within business groups: Evidence from related party transactions in an emerging market, Jia, N., Shi, J., & Wang, Y. (2013). Management Science, 59(10), 2295-2313. This paper uses transaction-level data on Chinese business groups to provide evidence of coinsurance theory of business groups by investigating when different types of internal resources are transferred within a business group.
- Effect on drug utilization and expenditures of a cost-share change from copayment to coinsurance, Klepser, D. G., Huether, J. R., Handke, L. J., & Williams, C. E. (2007). Journal of Managed Care Pharmacy, 13(9), 765-777. This paper focuses on how coinsurance has been gaining more attention as a type of cost-sharing that is different from the traditional copayment model.
- The forgiveness of coinsurance: charity or cheating?, Lachs, M. S., Sindelar, J. L., & Horwitz, R. I. (1990). The forgiveness of coinsurance: charity or cheating? This article examines the practice of forgiving coinsurance where a health care provider agrees to receive a third-party payer's reimbursement as the only and total compensation for the services offered.
- Effects of prescription coinsurance and income-based deductibles on net health plan spending for older users of inhaled medications, Dormuth, C. R., Neumann, P., Maclure, M., Glynn, R. J., & Schneeweiss, S. (2009). Medical care, 47(5), 508. This paper discusses British Columbia's experience which indicate that cost containment that is entirely focused on cost-shifting to patients may cause an increment in net expenditures for the treatment of some diseases.