• Marcus P. Miller, CFP®

Navigating your health insurance like a pro (Deductible vs. Co-pay vs. Out-of-pocket maximum)

Health insurance can seem confusing at first glance. However, the truth is that there are just a few concepts that you need to know to approach health insurance costs like a pro.


Annual cost

The costs for health insurance are typically quoted as a monthly or annual rate. This is the amount that you are expected to pay, at minimum, no matter how much health service you use. However, this is only the surface of what health insurance may cost for a year.


Deductible

A deductible is an amount you are expected to pay up-front the first time you use medical care each year. It is typically quoted at a single and family rate (ex. $1000/2000). The co-pay (more on this later) does not kick in each year until the deductible amount is met.


For example:

A family of three (two adults, one child) has a deductible of $1000/2000. The child visits the ER and the bill is $1200. The family is asked to pay $1000 for the deductible and the remaining $200 is paid by insurance. This is because the individual deductible was met for the child. Note that we have a balance of $1000 going toward the family deductible as well. Later in the same year, one of the adults visits the doctor and the bill is $600. The family is asked to pay $600 as it does not meet the $1000 individual deductible or the family's $2000 deductible (now amounting to $1600). Finally, late in the same year, the other adult visits the doctor and the bill is $600. Although less than that individual’s $1000 deductible, the family has met the family deductible of $2000. They are asked to pay only $400 and the remaining $200 is paid by the insurance. Note that at the end of that year the deductible is reset.


Co-pays

A co-pay is the amount that a family is asked to pay each time they use medical care after the deductible has been met. Co-pays are typically only available for in-network services. Many plans provide competitive co-pay rates that make going to urgent care or seeing a doctor extremely affordable. However, co-pay rates vary depending on the plan and should be monitored closely. Co-pays for some services and specialists may be uncharacteristically high.


Note: Health plans typically create networks of agreements to keep costs down for families and going outside of these networks can be very expensive. These are labeled as “in-network” and verifying both a doctor and facility are in-network PRIOR to receiving service is very important.


Out-of-pocket maximum (“Catastrophic cap”)

The maximum your family will be expected to pay each year, in the worst-case scenario, is called the “Catastrophic cap” or Out-of-pocket maximum. This amount is after a deductible is met and co-pays have been paid up until the cap. These maximum amounts can range from $2,000 to $10,000. The total amount paid into the deductible and co-pays is added to reach the out-of-pocket maximum. The annual cost of health insurance does not contribute toward the out-of-pocket maximum.


Continuing the example from the deductible section:

A family that has met their $2,000 deductible will begin to pay only co-pays for each time they use medical care. For instance, an additional doctor visit (that once cost the family $600, then $400) may have a co-pay of just $75. This $75 is paid for every additional visit in the same year. This can add up quickly, and some families will end up paying up to their out-of-pocket maximum in a given year.


Below is a pyramid that illustrates the different charges that a family may have for health insurance in a given year.



Starting at the bottom, your monthly/annual health insurance cost is always paid. Then, if you need medical care in a given year you will pay the deductible first. Once the deductible is met you are responsible for co-pays until you reach the out-of-pocket maximum. When that amount is met, through the total amount the family has paid for deductible + co-pays, the insurance will cover any additional costs in that year.


Each year this process resets and you get a new pyramid.


If you have questions about your health insurance, please reach out to me for a free introductory call.