Coinsurance

Coinsurance, Percentage Cost Sharing and Demand for Care

Coinsurance ties what a patient pays to the price of the care received. At a 20 per cent rate a USD 200 visit costs the patient USD 40 and a USD 12,000 course of a drug costs USD 2,400, whereas a fixed copayment would be the same for both. For health economists it links the price a patient faces at the point of use directly to the price of care, and the RAND Health Insurance Experiment assigned families at random to different coinsurance rates to measure how medical spending responds to that price. Once a deductible and an out-of-pocket maximum apply, the stated rate is not the price that drives behaviour, and the term carries different meanings in the United States and Europe. The cost sharing and coinsurance rate pages cover the wider family of charges and the percentage itself.

How a coinsurance claim is calculated

The HealthCare.gov glossary, which reflects US usage, describes coinsurance as the percentage of the cost of a covered service that the insured person pays after the deductible has been met. The percentage applies to the allowed amount, which the glossary defines as the most the plan will pay for a covered service, also called the eligible expense, payment allowance or negotiated rate. If a provider charges more than the allowed amount, the patient may be billed for the difference through balance billing, and that difference sits outside the coinsurance calculation.

Three contract terms decide the split of each claim, namely how much of the deductible is still unmet, the coinsurance rate and how much room is left under the annual out-of-pocket maximum. For a single covered, in-network claim the split is as follows.

$$d = \min(A, D_r), \qquad M = \min\left(R,\ d + c\,(A - d)\right), \qquad I = A - M$$

where $A$ is the allowed amount for the claim, $D_r$ is the deductible still unmet before the claim, $d$ is the part of the claim that goes towards the deductible, $c$ is the coinsurance rate as a proportion, $R$ is the room left under the out-of-pocket maximum before the claim, $M$ is the patient's payment and $I$ is the plan's payment. The formula assumes that deductible and coinsurance payments both count towards the maximum, that no copayment applies to the service, and that the service is covered and in network. HealthCare.gov states that once a person has spent the maximum on deductibles, copayments and coinsurance for in-network care, the plan pays 100 per cent of covered benefits, and that the limit excludes premiums, services the plan does not cover, out-of-network care and charges above the allowed amount.

Worked example of one year of claims under a 20 per cent plan

All figures in this example are illustrative. A plan has a deductible of USD 1,500, coinsurance of 20 per cent and an out-of-pocket maximum of USD 5,000. One member makes five covered, in-network claims in a year, processed in the order shown.

The GP visit falls wholly within the deductible, so the patient pays USD 200 and USD 1,300 of the deductible remains. For the scan, USD 1,300 completes the deductible and coinsurance applies to the other USD 500 at 0.2 × 500 = 100, so the patient pays 1,300 + 100 = 1,400. The drug is wholly subject to coinsurance, 0.2 × 12,000 = 2,400, within the remaining room of 4,800 − 1,400 = 3,400. Coinsurance on the surgery would be 0.2 × 30,000 = 6,000, but only 3,400 − 2,400 = 1,000 of room remains, so the patient pays USD 1,000 and the plan pays 30,000 − 1,000 = 29,000. Once the maximum has been reached, the plan pays the whole of the follow-up visit.

The patient pays USD 5,000 of USD 44,200 in allowed costs, a share of 5,000 / 44,200 = 0.113, or 11.3 per cent, not 20 per cent. The patient's price for one more unit of care moved from 100 per cent below the deductible, to 20 per cent, to zero after the surgery. Under a fixed copayment of, say, USD 50 for the drug, claim 3 would have cost the patient USD 50 instead of USD 2,400, which shows how coinsurance passes high prices on to the patient until the maximum is reached.

What coinsurance, copayment and co-insurance mean

In US usage a copayment is a fixed amount for a covered service and coinsurance is a percentage, and HealthCare.gov illustrates both with a USD 100 office visit for which the patient pays USD 20. The WHO Regional Office for Europe uses co-payments, or user charges, as the umbrella term for money people pay at the point of use for covered services. Within it, fixed co-payments are a flat amount per item, percentage co-payments, also referred to as co-insurance, are a share of the price, and deductibles are a fixed amount paid before the third party covers anything.

The label does not always mean a percentage. In Original Medicare, Medicare.gov states that after the 2026 Part B deductible of USD 283 the patient usually pays 20 per cent of the Medicare-approved amount for each covered service, which is coinsurance in the percentage sense. The CMS fact sheet for 2026 describes the Part A charge for days 61 to 90 of a hospital stay as a coinsurance amount of USD 434 per day, which is a fixed daily sum. Medicare.gov also states that Original Medicare has no yearly limit on what a patient pays out of pocket unless the patient has a Medigap policy or joins a Medicare Advantage plan, so Part B coinsurance is uncapped for people with neither.

Why the coinsurance rate is not the price the patient faces

Between the deductible and the maximum, coinsurance sets the patient's price for a service at $c$ times its allowed amount, and demand responds to that price in the way described on the moral hazard page. Over a whole year, however, the price changes as spending accumulates. Aron-Dine, Einav and Finkelstein describe a typical contract in which the patient pays 100 per cent of costs until a deductible is reached, after which the marginal price falls sharply to a coinsurance rate typically around 10 to 20 per cent, and then to zero once an out-of-pocket limit is reached.

RAND data show the gap between the stated rate and the price paid. In the 25 per cent coinsurance plan the average share of medical expenses paid out of pocket was 23 per cent, and in the 95 per cent plan it was 76 per cent, because the average is a weighted mix of the coinsurance rate and the zero price that applies once the cap is reached. Aron-Dine and colleagues note that people with high use typically hit the cap early in the year and so face a coinsurance rate of zero for much of it, whatever their plan. They also found, in later work on employer-provided insurance, that people take some account of the whole year's contract but are not fully forward looking, since they also respond to the current spot price.

This matters whenever a price elasticity of demand is used to predict the effect of a change in coinsurance. The widely quoted RAND elasticity of about −0.2 came from RAND's modelling of episodes of care, with the coinsurance rate taken as the price for people far from their cap. When Aron-Dine and colleagues computed pairwise arc elasticities with the plan's coinsurance rate as the price, most fell between about −0.1 and −0.5, and they caution against summarising non-linear insurance contracts with a single price elasticity.

Evidence from the RAND coinsurance plans

The RAND experiment assigned families to plans with one of six coinsurance arrangements and covered them for three to five years. Four plans set overall coinsurance rates of 95, 50, 25 or 0 per cent, the last known as free care; a fifth charged 25 per cent for most services and 50 per cent for dental and outpatient mental health care; and a sixth charged 95 per cent for outpatient care and nothing for inpatient care. Within each plan, families were also randomly assigned a Maximum Dollar Expenditure of 5, 10 or 15 per cent of family income, up to USD 750 or USD 1,000, which Aron-Dine and colleagues put at roughly USD 3,000 or USD 4,000 in 2011 dollars.

In their re-analysis, average annual medical spending in the 95 per cent coinsurance plan was USD 845 (39 per cent) lower than in the free care plan, in 2011 dollars. Completion rates ranged from 88 per cent in the free care plan to 63 per cent in the 95 per cent plan, and people facing high coinsurance had less reason to file claims. Their adjustments and bounds suggest the unadjusted estimates could substantially overstate the effect. A response of total spending to cost sharing survived every adjustment when measured as any spending or log spending, but the fall in the mean level of spending did not survive the bounding exercise, and neither did the response of inpatient spending.

Setting a coinsurance rate to balance risk protection against induced use

Arrow proved in 1963, crediting the result to Borch, that if both the insured person and the insurer are risk averse and there are no other costs, any nontrivial Pareto-optimal policy pays part but not all of each increment in loss, a provision he identified as coinsurance. He also noted that coinsurance had been introduced into many major medical policies to meet the extra demand for care that widespread insurance creates, as well as the risk aversion of insurers. Phelps later expressed the optimal coinsurance rate as a simple ratio of the moral hazard loss to the sum of that loss and the risk premium, and his base-case calculation gave about 0.07 for hospital care and 0.96 for well care. The derivation and its assumptions are on the moral hazard in health insurance page.

The WHO Regional Office for Europe reaches a more negative view of percentage charges from the standpoint of financial protection. Its 2019 report notes that with percentage co-payments a person's exposure depends on the price of the services needed, may be uncertain in advance, and is higher for people whose illnesses are more expensive to treat, and that these disadvantages are magnified when prices vary, as for medicines. It concludes that percentage co-payments shift financial risk from the purchasing agency to households and recommends low fixed co-payments instead, with exemptions and annual caps. The same report calls user charges a blunt instrument that reduces appropriate and inappropriate use in equal measure, with greater adverse effects on poor people and regular users of care. Uncapped percentage charges on expensive care are one route to catastrophic health expenditure.

HealthCare.gov notes that plans with low monthly premiums generally have higher coinsurance, so a lower rate does not by itself mean lower total spending for a household.

Coinsurance in economic evaluation and modelling

If use did not change, the coinsurance rate would only divide one allowed amount between the patient and the plan, and the two shares should not be counted as two resource costs. The perspective decides which share appears. A payer-only analysis counts the plan's share, so a higher coinsurance rate can look like a saving even when total spending on care barely changes. In England, the NICE technology appraisal manual (PMG36) sets the reference-case perspective on costs as the NHS and personal social services, says costs paid by patients may be included when they are reimbursed by the NHS or personal social services, and says unreimbursed patient costs may be presented separately.

Where use does respond, the coinsurance rate becomes an input to effectiveness as well as cost. A model that lets uptake or continuation of a treatment depend on the patient's out-of-pocket price should take that price from the full contract (deductible position, rate and cap), not from the headline rate, and should state the elasticity and the price measure it was estimated against. Pricing on billed charges instead of allowed amounts overstates both shares.

Common misreadings

Several readings of coinsurance recur in plan comparisons and policy analysis. Each is listed with the reason it fails.

• A 20 per cent rate means the patient pays 20 per cent of the year's costs. The deductible and the maximum change the share; in the example it is 11.3 per cent, and in RAND's 95 per cent plan it averaged 76 per cent.
• Coinsurance is always a percentage. Medicare Part A hospital coinsurance for days 61 to 90 is a fixed amount per day.
• Higher coinsurance removes only low-value care. The WHO report finds user charges reduce appropriate and inappropriate use alike.
• Coinsurance applies to the provider's charge. It applies to the allowed amount; charges above it fall outside the calculation and outside the out-of-pocket maximum.
• The RAND elasticity applies to any change in the rate. The estimate depends on how price is defined in a non-linear contract.

Sources

• Aron-Dine A, Einav L, Finkelstein A. The RAND Health Insurance Experiment, three decades later. Journal of Economic Perspectives. 2013;27(1):197-222. doi:10.1257/jep.27.1.197
• Arrow KJ. Uncertainty and the welfare economics of medical care. American Economic Review. 1963;53(5):941-973.
• Centers for Medicare & Medicaid Services. 2026 Medicare Parts A & B premiums and deductibles. Fact sheet. 14 November 2025.
• HealthCare.gov. Glossary: coinsurance, copayment, allowed amount, out-of-pocket maximum/limit. Accessed 9 October 2026.
• Medicare.gov. Costs. Accessed 9 October 2026.
• National Institute for Health and Care Excellence. NICE technology appraisal and highly specialised technologies guidance: the manual (PMG36). Chapter 4, economic evaluation. London: NICE; published 31 January 2022, last updated 13 October 2026.
• Phelps CE. Medical insurance: risk spreading vs. moral hazard revisited. Working paper. Rochester, NY: University of Rochester; 2002.
• Thomson S, Cylus J, Evetovits T. Can people afford to pay for health care? New evidence on financial protection in Europe. Copenhagen: WHO Regional Office for Europe; 2019.