What Is Cost-Sharing?

Cost-Sharing in health insurance is similar to splitting the bill when you have lunch with a friend. You each pay a portion. Image ©Barry Gnyp/Getty Images

Cost-sharing refers to the fact that you and your health insurer both pay a portion of your medical costs during the year. Your health insurer requires you to pay part of the cost of your health care expenses in order to prevent over-utilization of healthcare services, and in order to keep health insurance premiums in check (although the idea of 100 percent coverage might sound great, it would likely lead to people seeking medical treatment more often, and premiums would skyrocket).

The most common forms of cost-sharing are deductibles, copayments, and coinsurance. The monthly premiums you pay to get health insurance coverage aren’t considered a type of cost-sharing.

Cost-sharing saves your health insurance company money in two ways. First, you’re paying part of the bill; since you’re sharing the cost with them, they pay less. Second, since you have to pay part of the bill, it’s more likely you'll only seek medical care when you really need it.

Cost-Sharing & the Out-Of-Pocket Maximum

Because cost-sharing can get expensive if you have large medical expenses, all health plans (unless they're grandfathered or grandmothered) that require cost-sharing also have an out-of-pocket maximum that puts a cap on how much cost-sharing you’re responsible for each year (for this discussion, all of the numbers refer to the cap on out-of-pocket costs assuming you receive care within your health insurer's network; if you go outside the network, your out-of-pocket maximum will be higher, or in some cases, unlimited).

Before 2014, there were no regulations governing how high a health plan's out-of-pocket maximum could be—indeed, some plans didn't cap out-of-pocket costs at all, although that was relatively rare. But the Affordable Care Act changed that, and new health plans cannot have an out-of-pocket maximum in excess of $6,850—for a single individual—in 2016 (that upper cap is increasing to $7,150 in 2017).

In addition, starting in 2016, a single individual can't be required to pay more in out-of-pocket costs than the individual out-of-pocket maximum for that year, even if he or she is covered under a family plan instead of an individual plan.

After you’ve paid enough in deductibles, copayments, and coinsurance to reach the out-of-pocket maximum, your health plan suspends your cost-sharing and picks up 100 percent of your covered medical bills for the rest of the year, assuming you continue to use in-network hospitals and doctors.

Cost-Sharing & the Affordable Care Act

The Affordable Care Act made a significant amount of preventive health care exempt from cost-sharing. This means things like age-appropriate mammograms, cholesterol screening, and many vaccines aren’t subject to a deductible, copayments, or coinsurance.

The ACA also created a cost-sharing subsidy to make using your health insurance more affordable if you have a low income. The cost-sharing subsidy lowers the amount you pay in deductibles, copays, and coinsurance each time you use your insurance.

Cost-sharing subsidies are automatically incorporated into silver plans on the exchange if your income doesn't exceed 250 percent of the poverty level (for 2017 coverage, the upper income limit to be eligible for cost-sharing subsidies is $29,700 for a single individual and $60,750 for a family of four).

What about things that insurance doesn't cover?

The phrases cost-sharing and out-of-pocket expenses are sometimes used interchangeably, but people often use "out-of-pocket" to describe any medical expenses that they pay themselves, regardless of whether the treatment is covered at all by health insurance. But if the treatment isn't covered at all, the amount you spend isn't considered cost-sharing under your plan, and won't count towards your plan's out-of-pocket maximum.

For example, cosmetic procedures like liposuction usually aren't covered by health insurance, so if you get that sort of treatment, you'll have to pay for it yourself. The same is generally true of adult dental care, unless you have a separate dental insurance policy. Although you might think of these expenses as "out-of-pocket" (and indeed, they are coming out of your own pocket), the money you spend isn't counting towards your health plan's out-of-pocket maximum, nor is it considered cost-sharing under your plan.

Because cost-sharing varies considerably from one health insurance plan to another, you'll want to make sure you understand the details of your plan before you need to use your coverage, so that the amount you have to pay for your treatment doesn't come as a surprise.

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