Health insurance expenses are shared by two parties: the health insurance provider (Blue Cross Blue Shield of Alabama, for example) and the person who is insured (the policy holder). Under each policy, there are different costs the policy holder pays. Those are known as “out-of-pocket” expenses, and include deductibles, premiums, copays and coinsurance. Here, we’ll explain what those different terms mean. We’ll also detail what it means to reach your out-of-pocket maximum.

What is a deductible?

A deductible is a set amount of money that a policy holder must pay for eligible health services before the insurance policy pays for a portion of eligible expenses. One exception: many health insurance plans will pay for certain services, including check-ups, screenings and immunizations before the deductible is met. Different insurance plans have different deductibles, so it’s important to find out what your deductible is.

Covered services usually include:

  • Doctor and hospital visits
  • Wellness and preventive care
  • Eligible medical and surgical procedures
  • Certain prescription drugs
  • Certain medical devices

Here’s an example of how a deductible works: Brandon has a $1,000 deductible. That means that Brandon must pay $1,000 for in-plan medical services, such as doctor visits, surgical procedures and tests, before his plan covers a portion of his in-plan services. If Brandon undergoes a $5,000 surgical procedure, he will pay the deductible of $1,000. His insurance plan will pay the remaining $4,000. After Brandon pays the deductible, his plan will cover a portion future health-care expenses, while Brandon also pays a percentage through something called coinsurance (see explanation below).

What are other out-of-pocket costs?

There are a number of others costs that policy holders must pay out-of-pocket. Those include:

  • Premium: A premium is the monthly fee that a policy holder pays the health insurance company for their health insurance policy.
  • Copay: A copayment, or copay, is a set amount of money that the policy holder pays for a covered medical service. The copay changes depending on the type of service. For example, a primary office copay may be $40, while a specialist copay may be $60 and an emergency room copay  may be $200. Prescription drugs also have copays. Each policy will lay out the different copays. Some plans will not require a copay for certain preventive services, such as an annual physical.
  • Coinsurance: Coinsurance is payment for a set percentage of the cost of a health care service that a policy holder pays after meeting their deductible (like the example of Brandon, above). For example, say a policy has a 20 percent coinsurance rate. That plan allows $100 for a doctor’s office visit. The policy holder pays 20 percent for that visit, or $20, while the insurance policy covers the remaining 80 percent, or $80.

It’s important to know that a number of out-of-pocket costs don’t apply to the deductible. Take Brandon as an example again. Brandon pays a monthly $250 premium for his plan. That amount doesn’t apply to his $1,000 deductible. In addition, out-of-network costs may not apply to his deductible. So if he goes to see a doctor who is not covered by his plan, the amount he pays that doctor will not apply to his deductible.

What is an out-of-pocket maximum?

All health insurance policies that meet the standards of the Affordable Care Act (ACA) have out-of-pocket maximums. An out-of-pocket maximum defines the most a person will pay under that year’s plan before insurance covers all of their eligible health-care costs. It differs from a deductible in that the policy holder will no longer have to make payments towards eligible health care services, aside from paying the premium. 

If the out-of-pocket maximum is $6,000, then after an individual has paid $6,000 for qualified health-care services under that policy the plan will pay for 100 percent of the costs incurred for the remaining plan year. Health insurance policies that cover more than one person will have an individual out-of-pocket maximum as well as a family out-of-pocket maximum.

Here is an example of how the out-of-pocket maximum works:

Laura’s insurance policy has a $3,000 deductible and a $6,000 out-of-pocket maximum. She has a health challenge that requires two surgical procedures ($15,000 each). She meets her deductible for the first procedure ($3,000). For the second procedure, Laura must pay coinsurance, which is 20 percent for her plan. That comes out to $3,000, as well. Between paying the deductible and paying the co-insurance, Laura has now reached her out-of-pocket maximum, and her plan will fully cover allowable medical expenses for the rest of the plan year. Laura will no longer have to pay coinsurance or copays.

Insurance terms are complicated. But when you start to familiarize yourself with these words, they begin to make sense. For more help understanding different vocabulary words related to your policy, watch our videos on health insurance basics