Deductibles and Co-pays

Health care costs have gone up for the sixth year in a row, increasing at rate higher than inflation. Those who can still afford health care are often finding that their benefits are being trimmed while their co-pays and deductibles are increasing. With these growing costs is the growing importance of getting the most out of your health care coverage. Unfortunately, health care policies are often complicated and confusing, filled with jargon that can confuse anyone without a law degree.

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Many health benefits are being trimmed while
co-pays and deductibles are increasing.

So let's start with a few basic terms: a co-payment and a deductible. Once we decipher what they mean, we will attempt to explain how they are used in different types of health insurance plans. Perhaps a little bit of knowledge will save you some health care cash.

A co-payment, or co-pay, is the flat amount you pay at the time of a medical service or to receive a medication. Each health insurance plan establishes these fees up front -- they are often printed on your health insurance card. Insurance companies use these co-pays in part to share expenses with you. In addition to cutting a small portion of the costs, the co-pay is also used to prevent people from seeking care for every trivial medical condition they might encounter.

In this way, co-pays can save an insurance company a substantial amount of money. However, while the co-pay has been found to lower costs by making people think twice before running to the doctor over a case of the sniffles, they might also prevent people from seeking necessary medical attention. For example, a person with a chronic condition may need to see four doctors over the course of a month, all of which require a $25 co-pay. However, if that patient cannot afford $100 each month, he or she will most likely skip one, if not all, of those appointments. Co-pays can often total hundreds of dollars each month if you have several health ailments. In these cases, many patients begin to pick and choose which medications they deem necessary, making for a potentially dangerous situation. But most would say that the alternative -- no health insurance -- would be worse.

Don't Confuse Co-Payment and Coinsurance
Coinsurance and co-payments are not the same thing. A co-payment is a specific amount that you pay at the doctor's office before you meet your deductible. Coinsurance is a percentage of a provider's charge that you may be required to pay after you've met the deductible.

When you've met your deductible, you'll have to pay coinsurance (usually 20 percent of the provider's charge) until you reach your out-of-pocket maximum. After that, the insurance company will pay for all covered services to the policy maximum for the remainder of the year

Now that we've defined co-pay, let's move on to the deductible. ­



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Agency: Dreamstime
You have to meet a new
deductible for each year of
your insurance policy.

A deductible is a fixed amount of money you have to pay before most, if not all, of the policy's benefits can be enjoyed. However, in many health insurance policies, you can use some services, like a visit to the emergency room or a routine doctor's visit, without meeting the deductible first. These services will vary with each type of plan.

A deductible amount is calculated yearly, so you have to meet a new deductible for each year of the policy. Before you meet this amount, you are required to pay for health care. Once you meet this deductible, however, the health insurance benefits kick in, and you're then responsible only for paying monthly premiums and coinsurance if applicable. Deductible amounts vary by plan and can be separated into individual or family deductibles. In general, a family deductible is double an individual deductible, but it can include several members of a family.

A plan with a high deductible will have a low monthly premium, and vice versa. If you are relatively healthy, a smart rule of thumb when buying a policy is to pick a high deductible to lower your monthly premium costs. If all goes well for your health that year, you won't spend much money on health care expenses, and your monthly premium costs will be very low.

But if something catastrophic occurs, your initial expenses will be high. This is because your entire deductible has to be met before your insurance company will cover many of the services you will likely need, including hospital stays.

A deductible is also considered an out-of-pocket expense and can help you meet your out-of-pocket expense maximum. An out-of-pocket expense maximum, or cap, is the amount you need to meet for the insurance company to pay 100 percent of your health expenses. Normally, your deductible, coinsurance and co-payments can be applied toward this maximum amount. Your monthly insurance premiums are not included in this cap.

Now that both the co-payment and the deductible have been defined, let's find out how they vary with different plans.


Deductible and Co-pay Types

Health care services and fees can vary greatly. There are many plans out there, but we'll narrow them down to two main types: fee-for-service plans and managed health care plans.

piggy bank
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Agency: Dreamstime
If you know health insurance
lingo, your piggy bank might
not take a beating.
A fee-for-service plan is what most Americans think of as traditional health insurance. The deductibles and co-pays for this type of plan are generally higher than those of a managed health care provider. These fees can add up over the course of a year, but they also buy more options. Under a fee-for-service plan, you're free to choose your own doctors, usually don't need a referral to see a specialist, and can choose your hospital.

These types of plans usually have out-of-pocket expense caps. Once you reach the cap, a basic plan will cover doctor's visits and hospital stays, along with all the attendant expenses, like X-rays, medications, treatments and surgery. Major plans pick up where basic plans leave off -- they are usually best for those with yearly medical bills exceeding $250,000.

If you receive health insurance through your employer, it's most likely a managed health care plan. Managed care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service plans (POS). A managed health care plan is the best way for insurance providers to control their costs, so they can offer much lower co-pays and deductibles­.

Of the three main types of managed health care plans, HMOs are by far the cheapest and most restrictive. An HMO arranges a provider network by gathering contractual agreements with specialists, general practitioners, hospitals and other health care professionals -- you can receive treatment from this network alone. You have to choose a primary care physician (PCP) who authorizes and coordinates your health care needs by working within the network. As long as you stay within this network, co-payments and deductibles are kept to a bare minimum.

A PPO operates under the same guidelines as an HMO, but it casts a much wider net, and you don't have a PCP acting as an intermediary for your health care. With a PPO, you can choose from within the network of providers for smaller co-pays and deductibles, or pick an out-of-network provider for a substantially higher price.

A POS plan is a fusion of these two managed health care models. It is sometimes referred to as an "open-ended HMO" because you can choose either the HMO or PPO model whenever you need health care. Because of this, your co-pays and deductibles can vary from treatment to treatment, doctor to doctor and month to month.


For more information about co-pays and deductibles, check out the links on the next page.



Lots More Information

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More Great Links


  • JAMA: Health Insurance, The Basics.
  • AHRQ: Check Up On Health Insurance Choices.
  • The Seattle Times: "Health-insurance costs up 78 percent in 6 years".
  • American Heart Association: Managed Health Care Plans.
  • Insurance Information Institute.