Health Insurance Basics

The four numbers that actually determine what a health plan costs you: premium, deductible, copay, and out-of-pocket maximum.

Health insurance is often the most complex insurance product most people deal with, largely because of how many separate cost-sharing terms are packed into a single plan. Four numbers do almost all the work.

The four numbers that define a plan

Premium - the regular amount paid to keep the plan active, whether or not it’s used, covered in the previous lesson’s general framework.
Deductible - the amount you pay out of pocket for covered care before the insurance plan starts paying its share.
Copay - a fixed dollar amount paid for a specific service, like $30 for a doctor’s visit, regardless of the total cost of that visit.
Coinsurance - a percentage of a cost you continue paying after the deductible is met, rather than a flat fee - a plan with 20% coinsurance means you pay 20% of the (already-negotiated) cost, and the insurer pays 80%.

Walking a claim through these four numbers

Someone with a $1,500 deductible and 20% coinsurance who needs a $5,000 procedure pays the first $1,500 entirely out of pocket. Of the remaining $3,500, they pay 20% ($700) and the insurer pays the other 80% ($2,800) - for a total out-of-pocket cost of $2,200, on top of whatever premiums were already paid that year.

The out-of-pocket maximum: the real safety net

The out-of-pocket maximum is the most you’ll pay in a single year for covered care, combining deductible, copays, and coinsurance - once you hit it, the insurance plan covers 100% of additional covered costs for the rest of that year. This number, not the premium, is usually the best measure of how much financial protection a plan actually provides in a worst-case scenario.

Choosing a plan based on premium alone

A plan with a low premium often has a high deductible and a high out-of-pocket maximum - the savings on the monthly premium can be quickly erased by a single significant medical event. The right comparison weighs premium against deductible, coinsurance, and out-of-pocket maximum together, ideally against your own realistic expectation of how much care you'll need.

Why this connects to the rest of this module

The deductible-premium tradeoff introduced here - lower premium, higher deductible, or the reverse - shows up again, in a more general form, in the dedicated lesson on deductibles and premiums later in this module.

Key takeaways

Premium, deductible, copay, and coinsurance together determine what a health plan actually costs.
Coinsurance is a percentage of cost, unlike a copay's flat fee.
The out-of-pocket maximum caps your total yearly cost for covered care, once reached.
Comparing plans on premium alone misses the bigger picture of total realistic cost.

Health Insurance Basics

The four numbers that define a plan

The out-of-pocket maximum: the real safety net

Why this connects to the rest of this module

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