How do Deductibles and Copays Work?

Your health insurance out-of-pocket costs

The difference between "traditional" and "consumer-driven" plans is how you pay out-of-pocket costs - including deductibles, copays, and more.

  • Traditional plans - like Preferred Provider Organizations (PPOs) - usually have copays and coinsurance.
  • Consumer-driven plans - like High Deductible Health Plans (HDHPs) - usually have a higher deductible, but they come with a spending account or allowance to help you pay healthcare costs.

While deductibles and copays are simple-enough concepts, they're influenced by many factors -all of which are discussed in the following sections:

What's included in your out-of-pocket costs
The influence of network on your costs
Spending accounts help pay for your healthcare
Compare health plans
How your insurer determines your share of the cost
Tips on reducing your healthcare costs

What's included in your out-of-pocket costs

Depending on what type of health plan you have, your out-of-pocket costs may include:

  • Coinsurance - The percentage of costs you pay after you've met your deductible. The plan always pays a higher percentage when you use in-network providers.
  • Copayment or Copay - A fixed fee you pay when you see a doctor, have a prescription filled, or are admitted to the hospital. Copays are generally lower for services from primary care doctors than for specialists. PPOs have copayments. HDHPs have no copayments; when you have medical and prescription costs, you pay them upfront and they apply to your deductible. Your copay amount generally appears on your health insurance ID card. [Find out more about PPOs and HDHPs below.]
  • Deductible - The amount you pay toward certain medical expenses before your plan starts paying a share of the costs. PPO plans generally have separate deductibles and out-of-pocket limits for in-network and out-of-network providers. As specified in its name, an HDHP deductible is generally a lot higher than a PPO deductible. However, there are still advantages that make an HDHP an attractive choice, including the availability of a spending account to help pay down the deductible. Also, with HDHPs, many preventive services are covered 100 percent before you meet the deductible.
  • Premium - The amount taken out of your paycheck to pay for health insurance. HDHPs usually have lower premiums than other kinds of health plans - but higher deductibles.
  • Preventive care - Annual exams and recommended screenings. In most cases, there's no copayment with preventive care - meaning your insurance pays 100 percent of the cost as an incentive to stay healthy.

The maximum amount you'll pay

An annual out-of-pocket limit - called a maximum out-of-pocket - provides you peace of mind. PPO and HDHP plans both limit the amount of money you'll spend within the plan year. If you reach this limit - called the out-of-pocket maximum - your plan pays 100 percent of covered expenses for the rest of the plan year. With a PPO, you continue to pay copayments.

With a lifetime maximum, your insurance will continue to pay for your healthcare until the amount paid reaches an agreed upon number. This number varies from policy to policy.

The influence of network on your costs

Your plan was designed to offer you choices - including the option to see any doctor and go to any hospital you want. However, these choices have cost implications for you:

  • A Preferred Provider Organization (PPO) plan provides coverage when you go to out-of-network providers, but you'll pay lots more out of your pocket.
  • A Health Maintenance Organization (HMO) won't cover an out-of-network provider except for emergencies or when your insurer has given prior authorization.
  • With some plans - called "traditional indemnity plans" or "fee-for-service plans," there's no network so you can choose any provider.

Advantages of in-network providers

A network is a group of healthcare providers who have agreed to provide medical services to members of plans administered by your insurance company at a discounted rate. This includes doctors, hospitals, and other healthcare professionals and facilities. Using in-network providers leads to cost savings for everyone, including you. You benefit in two ways:

  • Reduced out-of-pocket costs: In-network providers have agreed with your insurance company to discount or reduce their fees for you as a plan member. An out-of-network provider doesn't have an agreement with the insurance company - and so you may be responsible for a portion of the out-of-network doctor's or hospital's billed charges, which may be a significantly higher amount.
  • No balance billing: An out-of-network provider may bill you - called "balance billing" - for the difference between the provider's billed charge and the amount paid by the insurance company to the out-of-network provider, called the "maximum allowable fee."

Know your network

If you're not sure which providers are considered in-network for your plan, look on your insurance card for an indication of which network is associated with your plan.

Choosing an in-network doctor is easy

Before visiting a doctor or other healthcare provider, visit your insurance company's Website to find which networks your doctor participates in.

Spending accounts help pay for your healthcare

You often have the opportunity to open a spending account to pay some of your healthcare expenses. Healthcare spending accounts are all designed to pay for healthcare costs your plan doesn't cover. Each one each works in a different way.

Flexible Spending Accounts (FSAs) - An account that allows you to set aside pre-tax dollars for qualified healthcare expenses. An FSA is available only with certain health plans.

Health Savings Accounts (HSAs) - A tax-free, interest-bearing account for qualified healthcare expenses now and in the future. HSAs are available to employees only if their employer chooses to offer one. To contribute to your HSA, you need to have a qualified High Deductible Health Plan and meet other eligibility rules.

Health Reimbursement Arrangement (HRA) - Also called a Personal Care Account (PCA), this account is an employer-funded account to help you pay for healthcare expenses. It's usually available with a PPO plan with a high deductible.

Compare health plans

Use this side-by-side chart to compare the various kinds of health plans.

  Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) High Deductible Health Plan (HDHP)
What is it? With an HMO, you select a personal doctor - sometimes called a Primary Care Physician, or "PCP" - who's in the plan's network. Your personal doctor tends to most of your health needs and refers you to a specialist in the network if necessary. With this plan, you get coverage for doctors in AND out of your plan's network. You pay less when you go to doctors, hospitals, and other providers in your plan's network. This specially designed plan has one deductible that combines healthcare and prescription drug expenses. An HDHP is usually a Preferred Provider Organization (PPO) plan, but it could also be a HMO or Point of Service plan.
Do I have copayments? Yes It depends It depends
  Copayments depend on the plan you choose and the type of service you receive. For example, you may pay in the range of $10 to $25 for a primary care doctor, $20 to $50 for a specialist, and $100 to $300 per day for hospitalization. Some PPO plans have copayments, others require you to pay a percentage of your costs, and some have both. For plans with copayments, the amount usually ranges from $10 to $25 for a primary care doctor, $20 to $50 for a specialist, and $100 to $300 per day for hospitalization. Generally you pay all expenses until you meet the deductible, so you don't have copayments. However, some plans cover certain preventive services - at 100% or for a copayment - even before you meet your deductible.
Is there a deductible? It depends Usually Yes
  Some HMO plans don't have a deductible - you pay a copayment, and your plan takes care of the rest. But others have a deductible for certain expenses, like hospital stays, outpatient surgeries, and other similar services. The deductible for in-network providers can range from $250 to $5,000 per person ... or $500 to $10,000 for a family. The minimum deductible and maximum out-of-pocket expense amounts are set by the IRS and can change every year. In 2009, the minimum deductibles are $1,150 for single coverage and $2,300 for family coverage. In 2010, the minimum deductible goes up to $1,200 for single coverage and $2,400 for family coverage. The 2009 maximum out-of-pocket expense amounts are $5,800 for single coverage and $11,600 for family coverage. In 2010, those numbers go up to $5,950 single coverage and $11,900 for family coverage.
Can I get a healthcare spending account? FSA FSA and PCA HSA and limited FSA
  In limited cases, your employer may offer a Flexible Spending Account (FSA). An FSA allows you to set aside tax-free dollars for copayments, prescription drug costs, and other items on your employer's approved list.

FSAs aren't offered with individual or Medicare plans.
Your employer may offer a Flexible Spending Account (FSA) that you put money into, a Personal Care Account (PCA) your employer puts money into, or both.

FSAs and PCAs aren't offered with individual or Medicare plans.
With an HDHP plan, you can put money in a Health Savings Account (HSA). Employees with an HDHP and HSA also may have the option of putting money in a "limited" Flexible Spending Account (FSA) - an account that's just for dental, vision, and preventive care expenses.

FSAs aren't offered with individual or Medicare plans.
Any drawbacks? Limited provider choices Out-of-network charges Higher, integrated deductible
  HMO plans usually cover only doctors, hospitals, and other providers in the plan's network - unless it's an emergency. And your PCP handles most of your care, so you'll need a referral to see a specialist. PPO plans allow you to go to any provider, but you'll pay a larger share of the costs if you choose a doctor, hospital, or facility that isn't in the plan's network ... plus those costs typically don't count toward your in-network deductible. This kind of plan tends to have a higher deductible than a traditional PPO plan and you could have higher out-of-pocket costs.

How your insurer determines your share of the cost

How your bill is submitted

After your healthcare visit, the provider - doctor or hospital - usually sends a bill directly to your insurance company. With some plan types, you pay up front and then send a reimbursement request to the insurance company.

The provider's bill includes itemized codes for each type of service you received. Codes are standard for every service at every provider in the United States. The doctor's charges are based on these codes - and so is the amount your insurance pays.

Determining your share of the cost

After the charges are submitted, the bill becomes a claim - a request for payment from your insurance company. Claim processing is basically a series of questions:

  • Is the provider in the network? If you went to a doctor in your plan's network - also known as a participating provider - your share of the costs is based on the amount the provider agreed to charge plan members. If the provider isn't in the network, the claim is still calculated according to what an in-network provider would charge. An out-of-network provider - also known as a nonparticipating provider - can bill you for the amount over what your insurance company pays to in-network providers.
  • Is the service covered? The insurance company looks at the services you received - the codes the provider submitted - and determines whether your plan provides benefits for the service. For a covered service, your plan specifies a certain payment level. If it isn't covered, you're responsible for the charges.
  • Have you met your deductible? Generally, you have to pay for a certain amount of healthcare on your own before your plan pays. If you haven't reached that pre-set amount - your deductible - the insurance company asks the provider to bill you for the charges - minus your copayment - if you paid one. If you've met your deductible, your plan pays coinsurance - a percentage of the remaining charges - and you pay the rest.

Explanation of Benefits

To show how these questions were answered, your insurer provides an Explanation of Benefits (EOB). This document summarizes what your plan paid and what part of the charges, if any, you will need to pay. You may receive this in the mail, or it may be on your secure page of your insurer's Website.

Tips on reducing your healthcare costs

The best way to reduce your healthcare costs is to take care of yourself. Here are suggestions for doing just that:

Develop a good relationship with your doctor - You can work together to keep an eye on your health. With proper screenings, you can catch problems before they get worse.

Stop smoking - If you smoke, quit. Don't fool yourself into thinking you'll be the one to escape its dangers. Also, remember that your habits affect your loved ones. With passive smoke, your family's chances for lung cancer, heart disease, stroke, and obstructive lung disease increase by multiples when compared to the general - nonsmoking - population. It's as if they were smokers themselves.

Improve your nutrition - Good nutrition helps you live longer and enjoy life more. You're bombarded by ads for soda pop loaded with sugar, plus processed foods and meals filled with dangerous trans fatty acids - all of which dramatically increase your chances of getting heart disease, kidney disease, high blood pressure, stroke, and diabetes. A poor diet speeds up the aging process - it shows in your skin and appearance.

Combine exercise with a good diet - You don't have to run a marathon to get the health benefits of exercise - you can simply walk downhill three times a day for just ten minutes and see a significant improvement in your health. Exercise decreases your chances of many health problems and helps keep your mind functioning at top capacity as you age.

Be an active healthcare consumer - The only way to make healthcare decisions with confidence is to know everything you can about every available option. The Internet is a great place to learn more about medications, diseases, and procedures. Remember, it's your body, your money, your life. So the most important decision-maker is you! Don't be shy. Speak up! Ask questions! If the answers don't feel right, look elsewhere. Your doctor knows a lot, but nobody knows your body better than you.

Watch Healthcare Video: How do deductibles and copays work?