Copay vs deductible vs out of pocket

Trying to determine your annual health care costs? There are several pieces of the cost puzzle you should take into account, including your premiums, deductible, coinsurance and copay. Below is an explanation of each and examples that show how people use them to pay for health care. For details on your plan’s out-of-pocket costs and the services covered, check the Summary of Benefits and Coverage, which is included in your enrollment materials.

What is a premium? Premiums are regular payments to keep your health care plan active. Higher premiums usually mean lower deductibles.

An example of how it works: Trisha, 57, plans on devoting herself to her three grandchildren after she retires. Knowing she’ll need to keep up her energy, she just signed up for a different health care plan at work. The plan premium, or cost of coverage, will be taken out of her paychecks. Even though her new plan has higher premiums, the deductible and copays will be lower. That’s important since Trisha promised her grown children she’d be more diligent about her own health.

Read more about how health plans with higher premiums often have lower deductibles.

Her new plan will keep out-of-pocket costs predictable and manageable because as a former smoker with breathing problems, she needs to see doctors and specialists regularly. It’ll be a while before Trisha retires and becomes a full-time Grammy. In the meantime, she’s saving money, listening to her doctors and enjoying time with her family on weekends.

Deductible 

What is a deductible? A deductible is the amount you pay out-of-pocket for covered services before your health plan kicks in.

An example of how it works: Courtney, 43, is a single lawyer who just bought her first home, a condo in Midtown Atlanta. She loves that her building has a gym and pool because she likes to stay in shape. When she felt a lump in her breast during a self-exam, she immediately had it checked out. Thankfully, doctors told her it was benign, but she’ll need to undergo a lumpectomy to have it removed.

Courtney will pay out of pocket for the procedure until she meets her $1,500 deductible, the amount she pays for covered services before her health plan contributes. After that, she’ll pay 20 percent of any costs for the rest of the year because her hospital and doctor are in network. In the event she has more medical expenses this year, it’s good to know she’ll max out the deductible right away so she won’t have to pay full price.

Learn how you can save money with a health savings account.

Coinsurance

What is coinsurance? Coinsurance is the percentage of the bill you pay after you meet your deductible.

An example of how it works: Ben, 28, is a security expert living in suburban Philadelphia with his wife and two small boys. Their 3-year-old recently fell at the playground and broke his arm. The family maxed out their deductible already, so Ben will be responsible for only a portion of the costs ― or the coinsurance ― billed for the procedure to reset and cast the break. With his 20 percent coinsurance, he’ll end up paying a few hundred dollars for the hospital visit. His health plan will pay the remaining portion: In Ben’s case, 80 percent.

Find out how hospital plans can help you cover costs before you meet your medical deductible.

Copay

What is copay? Copays are flat fees for certain visits.

An example of how it works: Leon, 34, is a married forklift operator from Jacksonville, FL. He’s an avid runner, but lately has had nagging knee pain and swelling. His Primary Care Physician referred him to an orthopedic surgeon. Luckily, his health plan has some fixed costs and only requires $30 copays for visits to his regular doctor and $50 copays to see specialists like an orthopedist. (He also once paid a $150 copay the night he landed in the emergency room when his knee was so swollen he couldn’t bend it.) Having these set fees gives Leon peace of mind since he and Leah are saving to buy a kayak.

As it turns out, Leon has arthritis in his knee and needs physical therapy to help him stay active. His copays extend to physical therapy visits, where he’ll pay $20 for each session. Leon’s determined to get everything back on track so he and Leah can return to doing the things they love: spending time together outdoors.

By learning how premiums, deductibles, coinsurance and copays work, you can better understand your health care costs. Want to read more about the ins and outs of health care plans? Learn all you need to know here. 

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Deductibles and out-of-pocket maximums play vital roles in how much your health insurance costs and how much your health plan contributes to your care.

You’re more likely to deal with a health insurance deductible. The out-of-pocket maximum is only a concern if you have a year when you rack up many health care costs.

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What Is an Annual Health Insurance Deductible?

A health insurance deductible is the amount you pay for health care services before your health insurance plan begins to pay for that care.

This is different from a health insurance premium. A premium is what you pay to have coverage. The deductible is what you spend for services like doctor appointments and tests before your health insurance pays its share of health care costs.

How much is an average deductible?

The average medical deductible for an Affordable Care Act (ACA) marketplace plan is $5,071 for single coverage, according to a Forbes Advisor analysis of marketplace data.

That’s much higher than the average deductible found in employer-sponsored health insurance plans, which is how most pre-retirement Americans get health insurance. The average individual deductible in an employer health plan is $2,004, according to the Agency for Healthcare Research and Quality’s Medical Expenditure Panel Survey.

The average family coverage deductible in an employer-sponsored health insurance plan is $3,868, according to the Agency for Healthcare Research and Quality’s Medical Expenditure Panel Survey.

These averages would classify the average plan as a high-deductible health plan (HDHP). An HDHP is a health plan with an annual deductible of at least $1,500 for single coverage or $3,000 for family coverage.

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What Is an Out-of-Pocket Maximum?

An annual out-of-pocket maximum is the most you will pay for in-network health care services in a year before the health insurance plan pays for all the health costs.

This out-of-pocket maximum is in place to reduce the possibility of financial ruin if you face a busy year of health care costs and hospitalizations.

How much is an average out-of-pocket maximum?

The average medical out-of-pocket maximum for an ACA marketplace plan is $8,044 for single coverage, according to a Forbes Advisor analysis of marketplace data. The ACA requires that nearly all health plans have an out-of-pocket maximum of no more than $9,100.

The average out-of-pocket maximum in the employer-sponsored health insurance market is $4,272 a year, according to Kaiser Family Foundation.

Does Your Deductible Count Toward the Out-of-Pocket Maximum?

Yes, your in-network deductible goes toward your out-of-pocket maximum.

Let’s say your deductible is $2,000 and out-of-pocket maximum is $4,000. If you reach your deductible, you’re halfway to your out-of-pocket maximum.

Health insurance plans often have coinsurance, which is when health plans pay a portion of health care costs after you hit your deductible. This may mean your health plan picks up 80% of the in-network costs and you handle the other 20% until you reach the plan’s out-of-pocket maximum.

In that coinsurance example, a $400 medical bill would result in you paying $80 while the health plan picks up the remaining $320.

Deductible vs. Out-of-Pocket Maximum

Deductibles, coinsurance and out-of-pocket maximum all work together. Let’s go step by step to show how the process works.

Before reaching your deductible

Health insurance plans generally have annual deductibles. Until you reach the in-network deductible, you pay for all health care services, including doctor visits, hospitalizations, outpatient care, tests and prescription drugs.

For instance, let’s say you go to the doctor for treatment. You have multiple tests, which wind up costing $300. Your deductible is $1,000. That means you would pay for the full $300 and still have $700 more for the year to go before your health plan begins paying a portion of the costs.

After reaching your deductible

Once you hit your deductible, you typically get to the coinsurance part of your health insurance.

Coinsurance is a percentage you and the health insurance company pay for in-network services. This might be the insurance company paying 80% of in-network covered health care costs and you picking up the 20%.

Let’s say you reach your $1,000 deductible. You’re not feeling well and go to an urgent care center to get checked out. You wind up needing $200 worth of services during that visit. If your coinsurance is 20%, the insurance company will pick up $160 of that visit and you will pay the other $40. That doesn’t include the copay that you pay at the time of the visit.

After reaching your out-of-pocket maximum

You pay coinsurance until your plan reaches the out-of-pocket maximum. Once you reach the maximum, the health insurance company picks up all the in-network covered health care costs.

If you receive out-of-network care after reaching your out-of-network maximum, you may need to pay all the costs, depending on your health plan. You also will likely continue to pay premiums and copays after reaching your out-of-pocket maximum.

Example of deductibles and out-of-pocket costs

How To Save on Health Care Costs

Saving on health insurance requires comparing multiple plan options and finding the best price for the type of plan and coverage you want.

Here are ways to save money on your health care and health insurance.

Choose an HMO or EPO

A plan’s benefit design influences your health insurance freedom and costs. Health plans like health maintenance organization (HMO) and exclusive provider organization (EPO) plans won’t pay for care outside of your plan’s provider network, unless it’s an emergency.

A plan like a preferred provider organization (PPO) allows you to go outside of the provider network, though that comes at a higher cost and premiums. You can save on premiums by going with a more affordable plan like an HMO or EPO.

Select a high-deductible health plan

A plan’s deductible typically dictates the health insurance premium. The lower the premium, the higher the deductible generally.

A high-deductible health plan (HDHP) is a plan with a deductible of at least $1,500 for single coverage or $3,000 for family coverage. Choosing an HDHP will cost you less for coverage, but you will pay the higher deductible if you need care.

An HDHP can save you each month, but understand that you may pay more for health care if you need it.

Stay in your provider network

Whether you have an HMO, EPO or PPO, staying in network can mean you pay lower in-network costs.

An HMO or EPO generally only pays for in-network care. You otherwise have to pay for all of that out-of-network care yourself.

A PPO lets you get out-of-network care, but that usually costs more than staying in network. Plus, out-of-network care costs don’t generally go toward your annual deductible.

Don’t use emergency care unless you really need it

Try to get your care from your providers and urgent care centers unless you have an emergency that may require hospitalization.

Going to primary care and urgent care centers will result in lower copayments than if you go to a hospital. Hospitals are also more expensive than primary care settings, so you will pay more for care.

Don’t delay if you need to go to a hospital, but use emergency rooms only when you really need them.

Set up a health savings account

Health insurance plans may have health savings accounts (HSAs), health reimbursement arrangements (HRAs) or flexible spending accounts (FSAs). Set up one of these accounts and save money tax-free for future health care costs.

An HSA is only allowed when paired with an HDHP. It lets you save money tax-free for your health care and your employer may contribute money each year, too. Kaiser Family Foundation estimated that employers donate an average of $575 annually to HSAs for single coverage and $987 for family coverage.

An HRA can be associated with any health plan, but one major difference is that an employer owns an HRA and only the company can contribute to an HRA. If you change jobs, you can’t typically take an HRA with you. Employers contribute to an HRA an annual average of $1,410 for single coverage and $2,344 for family coverage, but you can’t contribute to the account yourself.

An FSA also isn’t connected to any specific type of health plan. You can save money each year, though you may not be able to carry over little if anything into the next year. In that way, an FSA might not be a long-term health care savings account option like an HSA. The FSA maximum contribution is $2,850 and you may be able to only carry over a maximum of $575, depending on the FSA.

Related: What’s the difference between an FSA and HSA?

Choose generic drugs when available

Generic drugs typically cost less than brand-name prescription drugs. These drugs have the same ingredients but may have lower copays.

If you’re on prescriptions, ask your provider if there are generic options that may save you money.

How to Choose Health Insurance Based on Costs

Health care costs are an important part of choosing a health plan. Here’s what to look for when looking for a health insurance plan.

Compare premiums and out-of-pocket costs

Review the premiums for the health insurance plans to understand what you would have to pay for coverage. But that’s just the start of considering health insurance costs.

Out-of-pocket costs like copayments, deductibles, coinsurance and out-of-pocket maximums play a role when you need care. Consider the deductible to see what you would have to pay before the health insurance company begins to help pay for care. Look at the coinsurance amount to see the percentage you would have to pay after reaching your deductible and also find out the plan’s out-of-pocket maximum.

That information will let you move on to the next step of weighing those costs.

Weigh the premiums and deductibles

Health insurance premiums are what you pay to have coverage, while out-of-pocket costs like deductibles are what you pay when you need care.

• Lower premiums are generally tied to a higher deductible.
• Higher premiums usually mean you have a lower deductible.

A high-deductible health plan might be a good fit for you if you would rather pay less for health insurance and more when you need health care. Someone in good health who doesn’t expect to need much health care over the next year may benefit from a high-deductible plan.

But some people would prefer to pay higher premiums with the understanding that they won’t pay as much when they need care. Or they may expect higher health costs in the coming year, such as having a child or expecting a surgery. In those cases, a higher premium with lower deductible would likely be a better fit.

Figure out which you would prefer and that will help you narrow your choices.

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Which health insurance plan is better for you?

Deductible vs. Out-of-Pocket Maximum FAQ

Why is an out-of-pocket max higher than a deductible?

An out-of-pocket maximum is higher than a health insurance deductible because it’s the most you’ll pay for in-network health care services in a year. A deductible is your portion of health care costs before a health insurance company kicks in money for care.

What happens after you meet your out-of-pocket maximum?

Your health insurance company picks up the costs of in-network health care services when you reach your out-of-pocket maximum. Your plan may not handle costs you accrue out of network, so you want to try to stay in network when you can.

What happens after you meet your deductible?

You generally pay coinsurance for health care services after you reach your deductible. Coinsurance is when you split costs with your health insurance plan.

Coinsurance is typically a percentage. You may have to pay 20% for in-network health care services while your plan picks up the other 80%. Coinsurance continues until you reach your plan’s out-of-pocket maximum.

Is it better to have a higher deductible or out-of-pocket maximum?

A health insurance deductible is more likely to play a role in your health care costs than an out-of-pocket maximum unless you need many health care services in a year.

An out-of-pocket maximum is a safety net to save you from paying endless health care bills. But there’s a much better chance that the deductible will affect you than the out-of-pocket maximum.

What is the difference between a health insurance deductible vs. premium?

A health insurance premium is what you pay to have health insurance, while a deductible is what you spend on health care services before your health plan chips in money.

Both play a role in how much you pay for health insurance. A lower deductible typically comes with a higher premium and vice-versa. If you want to pay less for health insurance, choosing a high-deductible health plan (HDHP), which generally has lower premiums, is a way to save money upfront.

Is a $0 deductible the best option?

Whether a health insurance plan with no deductible is best depends on the premiums.

If the no-deductible plan also has low premiums, that could be an excellent affordable health insurance plan. Check the out-of-pocket costs and coinsurance to see how much you would have to pay when you need health care services.

You should also review the plan’s provider network to make sure your providers are part of the plan’s network and that the insurance company has many specialists in your area.

Do you still pay copays after you meet your deductible?

You typically still pay a copayment to see doctors after reaching your health insurance deductible, but it depends on your specific health insurance plan.

One thing that does change when you reach your deductible is that your health insurance company begins to pay for health care services. This is usually through coinsurance, which is when the plan pays a percentage of the health care costs and you pay the rest. This could be the health plan paying 80% and you paying 20% until you reach your plan’s out-of-pocket maximum.

What is the difference between out of pocket and copay?

Is it better to have lower deductible or out of pocket?

Do you still pay copay after out of pocket maximum?

Is deductible part of out of pocket?