Health Insurance Math

An important life skill that everyone needs to know is how to calculate out-of-pocket costs for health care. Unfortunately, many people do not understand basic health insurance terms and how they are applied in calculations to determine how much is owed to a health care provider.

A study by Loewenstein et al. found that only 14% of respondents were able to correctly answer four multiple choice questions about basic components of health insurance: deductibles, copays, coinsurance and out-of-pocket (OOP) maximum. Even worse, only 11% were able to apply these terms to correctly answer a question about the cost of a hospitalization.

This is where business education teachers come in. You are in a great position to increase your students’ health insurance literacy. Like many areas of personal finance, health insurance is best taught through interactive hands-on activities. A lesson plan that I wrote contains five different ways to teach health insurance concepts, plus learning extensions.

Below is a learning activity that explains how health insurance calculations are done. First, a few key terms. A deductible is the amount that people with insurance must pay out-of-pocket before their health insurance benefits begin. Coinsurance is the percentage (e.g., 20%) of the remaining amount owed that a policyholder must pay up to a maximum amount called the out-of-pocket (OOP) maximum.

Not all expenses go toward meeting the out-of-pocket (OOP) maximum. Health insurance premiums do not apply. However, the deductible and coinsurance do apply toward this amount. Let’s say your health insurance plan has the following features:

  • Deductible: $500
  • Coinsurance: 80/20 (you pay the 20% and the insurance company pays 80%)
  • Out of Pocket Maximum: $5,000

Now, let’s say that you go to the hospital and incur $7,500 worth of medical expenses. How much do you have to pay?

Start by subtracting your deductible from the total expense amount:

$7,500 – $500 = $7,000

Remember that you have to pay the deductible before any insurance kicks in. Then you have to pay 20% of the $7,000, which would be:

$7,000 x 0.20 = $1,400

All in all, you will have to pay $1,900 out of pocket (the $500 deductible + $1,400 of coinsurance).

You will have to continue paying out of pocket until your total out-of-pocket expenses reach the $5,000 OOP maximum set in the policy. At that point, you will no longer pay any more coinsurance.

Here’s the math if you have $20,000 of medical expenses:

$20,000 – $500 = $19,500

$19,500 x .20 = $3,900

$500 + $3,900 = $4,400 OOP Expense (under $5,000 OOP maximum)

Here’s more math if you have $40,000 of medical expenses:

$40,000 – $500 = $39,500

$39,500 x .20 = $7,900

$500 + $7,900 = $8,400 (over OOP maximum) so the total OOP cost = $5,000

For additional information, see

About the blogger: Barbara O’Neill, Ph.D, CFP, holds the rank of Distinguished Professor at Rutgers University, and is Rutgers Cooperative Extension’s Specialist in Financial Resource Management. She also provides national leadership for the Cooperative Extension programs Investing For Your Future and Small Steps to Health and Wealth™. A certified financial planner®, Dr. O’Neill received her Ph.D. in family financial management from Virginia Tech and has written over 1,700 consumer newspaper articles and over 160 articles for professional publications. She has also received over three dozen awards for program excellence and over $1 million in external funding to support her financial education programs and research.

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