Health insurance comes with several terms that can be difficult to understand when you first compare different plans. Premiums, deductibles, copays, coinsurance, and out-of-pocket maximums all affect how much you may pay for healthcare.
Understanding these terms can make it easier to compare health insurance plans and estimate your potential medical expenses. Instead of looking only at the monthly premium, you can consider how much a plan may cost when you actually use healthcare services.
Three terms that deserve particular attention are deductible, copay, and coinsurance. Although they all relate to healthcare costs, they work in different ways.
What Is a Health Insurance Premium?
Before discussing deductibles and other cost-sharing expenses, it is important to understand the premium.
A health insurance premium is the amount you pay to keep your insurance coverage active. It is commonly paid monthly, although the exact payment arrangement can vary.
For example, if your monthly premium is $400, you would generally pay $4,800 over a 12-month period simply for the insurance coverage, regardless of whether you visit a doctor.
The premium is therefore different from the costs you may pay when receiving healthcare.
What Is a Health Insurance Deductible?
A deductible is generally the amount you pay for covered healthcare services before your health insurance begins paying according to the plan’s terms.
Suppose your health plan has a $2,000 deductible. If you receive covered medical services that are subject to the deductible, you may need to pay the first $2,000 yourself before the plan begins sharing costs.
However, not every service necessarily works the same way. Some plans cover certain services before the deductible is met, depending on the plan and applicable rules.
This is why it is important to read the details of the specific policy instead of assuming that every medical expense must be paid toward the deductible.
What Is a Copay?
A copay, or copayment, is generally a fixed amount you pay for a covered healthcare service.
For example, your plan might require a $30 copay for a primary care visit. Instead of paying the entire allowed cost of the visit, you would generally pay the specified copay, subject to the plan’s rules.
Different services can have different copays. A plan might have one amount for primary care visits, another for specialist visits, and a different amount for urgent care or prescription medications.
Copays can make healthcare expenses easier to predict because you know the specified amount for certain covered services.
What Is Coinsurance?
Coinsurance works differently from a copay because it is generally a percentage rather than a fixed dollar amount.
For example, imagine your plan requires you to pay 20% coinsurance for a covered service after you meet the applicable deductible.
If the allowed amount for the covered service is $1,000, your share could be $200 while the insurance plan covers the remaining $800, assuming the service is subject to that coinsurance arrangement.
The actual amount you pay can vary because it depends on the allowed cost of the service.
Deductible vs. Copay vs. Coinsurance
These three terms can be easier to understand when you look at their basic differences.
A deductible is generally a dollar amount you pay toward covered services before the insurance plan begins sharing certain costs.
A copay is generally a fixed amount you pay for a covered service.
Coinsurance is generally a percentage of the allowed cost that you pay for a covered service after applicable deductible requirements have been satisfied.
A single health insurance plan can use all three.
How They Can Work Together
Imagine a hypothetical health plan with a $2,000 deductible, a $40 primary-care copay, and 20% coinsurance for certain covered services.
You might pay the $40 copay for an eligible primary-care visit, depending on the plan’s rules. For another type of service subject to the deductible, you may first pay costs until you reach the $2,000 deductible.
After meeting the deductible, you might then pay 20% coinsurance for certain covered services while the insurer pays the remaining 80%, subject to the policy.
This example is simplified because actual plans can have different rules for different services.
Why the Out-of-Pocket Maximum Matters
Another important number is the out-of-pocket maximum.
This is generally the maximum amount you pay during a plan year for covered services subject to the plan’s rules. Once the applicable limit is reached, the plan generally pays 100% of covered benefits for the rest of the plan year.
Not every healthcare expense necessarily counts toward the out-of-pocket maximum. Premiums, for example, generally do not count.
Understanding this limit can help you evaluate the potential financial risk associated with a health insurance plan.
How These Costs Affect Your Choice
When comparing health insurance plans, it can be tempting to focus entirely on the monthly premium.
For example, Plan A might have a lower premium but a higher deductible, while Plan B might have a higher premium but lower cost-sharing requirements.
If you rarely use healthcare, the lower-premium plan may have a different financial outcome than it would for someone who frequently visits doctors or takes expensive medications.
A family with regular healthcare needs may want to pay particular attention to deductibles, copays, coinsurance, prescription costs, and the out-of-pocket maximum.
Look at the Whole Plan
No single number tells you whether a health insurance plan is appropriate for you.
When comparing plans, look at the monthly premium, deductible, copays, coinsurance, out-of-pocket maximum, provider network, prescription coverage, and covered services.
It is also important to check whether your preferred doctors and healthcare facilities are included in the plan’s network.
A plan with attractive cost-sharing terms may not be convenient if your preferred providers are outside the network.
Read the Plan Documents Carefully
Health insurance policies can contain exceptions and specific rules that affect how expenses are calculated.
Before enrolling, review the plan’s Summary of Benefits and Coverage and other official documents. Pay attention to which services are subject to the deductible, which services have copays, when coinsurance applies, and what expenses count toward the out-of-pocket maximum.
If you do not understand a particular provision, contact the insurer or an appropriate enrollment professional for clarification.
Final Thoughts
Deductibles, copays, and coinsurance may seem complicated at first, but understanding their basic differences makes health insurance much easier to compare.
The deductible generally determines how much you may pay before the plan begins sharing certain costs. A copay is generally a fixed amount for a covered service, while coinsurance is generally a percentage of the allowed cost.
When choosing a health plan, consider these expenses together with your premium, provider network, prescription coverage, and out-of-pocket maximum. Looking at the complete cost structure can help you better understand what you may pay when healthcare is actually needed.