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Health insurance basics

How health insurance works: premiums, deductibles, copays and coinsurance

A plain-English guide to how health insurance works: what premiums, deductibles, copays, coinsurance and the out-of-pocket maximum mean for your bills.

By Updated 5 min read
A doctor in a white coat talking with a patient across her desk

The short answer

You pay a monthly premium to keep your health plan. When you get care, you pay your deductible first, then share costs with the plan through copays and coinsurance, until you hit your out-of-pocket maximum, after which the plan pays 100% of covered in-network care for the rest of the year.

Key takeaways

  • The premium keeps your coverage active; it doesn't count toward your deductible or out-of-pocket maximum.
  • Preventive care is covered at no cost in-network on ACA-compliant plans, even before you meet your deductible.
  • Copays are flat amounts; coinsurance is a percentage of the bill.
  • The out-of-pocket maximum is the most you'll pay for covered in-network care in a year.
  • Every plan must give you a Summary of Benefits and Coverage (SBC) that lists these numbers in a standard format.

Health insurance has its own vocabulary, and it decides how much you pay every time you see a doctor or fill a prescription. Once you know five terms, you can read any plan.

The five numbers that decide what you pay

Premium

The premium is your monthly payment to keep the plan, whether or not you use any care. If your employer offers coverage, it's usually taken from your paycheck (and if you leave that job, see COBRA vs. a Marketplace plan). If you buy your own plan, a premium tax credit may lower it: see ACA open enrollment.

Deductible

The deductible is what you pay for covered care each plan year before the plan starts sharing costs. With a $2,500 deductible, you pay the first $2,500 of covered bills yourself. Some high-deductible plans let you save for those costs tax-free in a health savings account.

Two important exceptions: ACA-compliant plans cover preventive care (annual checkups, many screenings and vaccines) at no cost in-network, even before you meet your deductible (HealthCare.gov: preventive care benefits), and many plans let you pay a simple copay for office visits or generic drugs before the deductible is met.

Copay

A copay is a flat amount for a specific service, such as $30 for a primary care visit or $15 for a generic prescription.

Coinsurance

Coinsurance is your percentage of the bill after the deductible. With 20% coinsurance, on a $1,000 covered bill you pay $200 and the plan pays $800.

Out-of-pocket maximum

The out-of-pocket maximum is your safety net: the most you'll pay in a plan year for covered, in-network care. Deductibles, copays and coinsurance all count toward it. Premiums don't. If reaching it would strain your budget, it's worth understanding what supplemental health insurance does and doesn't pay.

Following one bill from start to finish

Diagram of three cost-sharing stages for an example plan. First $2,500 of care: you pay 100% (the deductible). From $2,500 to $30,000 of care: you pay 20% and the plan pays 80% (coinsurance). Above $30,000: once your share reaches the $8,000 out-of-pocket maximum, the plan pays 100% for the rest of the year.

Say your plan has a $2,500 deductible, 20% coinsurance and an $8,000 out-of-pocket maximum. In March you have outpatient surgery with an allowed amount of $10,000, and you haven't paid anything toward your deductible yet.

Step You pay Plan pays
First $2,500 (deductible) $2,500 $0
Remaining $7,500 at 20% coinsurance $1,500 $6,000
Total $4,000 $6,000

You've now paid $4,000 toward your $8,000 out-of-pocket maximum. If you need more care later in the year, once your share reaches $8,000, the plan covers the rest at 100%.

Networks change everything

These numbers usually apply only to in-network providers, the doctors and hospitals that have contracts with your plan. Out-of-network care may cost much more or not be covered at all, depending on whether you have an HMO, PPO or EPO. See HMO vs. PPO vs. EPO. One important safety net: the No Surprises Act protects you from most surprise out-of-network bills for emergency care and for some care at in-network hospitals (CMS: your rights against surprise medical bills).

Where to find your plan's numbers

Insurance companies and job-based plans must give you a Summary of Benefits and Coverage (SBC), a short, plain-language document that lists the deductible, out-of-pocket limit, copays and coinsurance, so you can make apples-to-apples comparisons (HealthCare.gov: the SBC). When comparing plans, put their SBCs side by side.

What to do next

Frequently asked questions

Do copays count toward my deductible?

It depends on the plan. On many plans copays don't count toward the deductible, but they almost always count toward the out-of-pocket maximum. Your Summary of Benefits and Coverage spells this out.

Is a high-deductible plan a bad idea?

Not necessarily. A high-deductible plan has lower premiums and can pair with an HSA. It tends to suit people who use little care and can afford the deductible if something happens. If you have ongoing prescriptions or treatment, compare your total yearly cost, not just the premium.

What happens after I reach my out-of-pocket maximum?

Your plan pays 100% of covered, in-network care for the rest of the plan year. You still pay your monthly premiums, and out-of-network or non-covered services may still cost you.

This article is general education, not advice for your situation. Coverage depends on your state, your plan or policy, and the plan year. When in doubt, check your plan or policy documents or ask a licensed agent. Full disclaimer.

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