Deductibles, premiums, caps and co-pays all describe different types of payments associated with healthcare insurance. Most insurance policies will involve all of these different concepts, although the average policy holder may not encounter all of them. Even so, it is important to understand all four because they will determine how much a health insurance policy costs as well as what benefits a person can expect to receive from it.
Premiums
A premium is the amount of money that must be paid up-front for the policy, usually on a monthly basis. All insurance policies charge premiums, although in some cases these may be paid partly or wholly by an employer rather than by the person who actually benefits from the policy. Typically, the level of coverage guaranteed by a health insurance provider will be reflected in the level of the monthly premium. More comprehensive insurance policies usually come with higher premiums. Premiums must be paid whether or not a person gets sick or injured. If premiums are not paid, the insurance company may cancel the policy completely.
In the United States, the National Conference of State Legislatures recently reported the average premiums for employer-sponsored family health insurance now exceeds $15,000 per year. However, it also states that the average employee pays only $4,300 out of pocket for this coverage, or a little over one-quarter of the total cost.
Deductibles
In many cases, a health maintenance organization (HMO) will not begin compensating an insured person as soon as they begin incurring costs for doctor’s visits, hospital stays, or prescription drugs. Instead, insurance policies will often require that a person or a family pay a certain amount out of pocket before the insurance kicks in and cover the rest. This amount is known as a deductible.
Not every insurance plan comes with a deductible, but they are very common. Deductibles and premiums may also be inversely related. This means that in exchange for a higher deductible, an insurance company may offer a lower premium, and vice versa. This is done because a person with a higher deductible is indicating they are willing to pay more out of their own pocket before turning to the insurance company for help.
Co-pays
A co-pay, or copayment, refers to a fixed amount that people may be required to pay every time they access medical services, or buy prescription drugs. Co-payments may apply at all times, or the amount of the co-pay may be applied toward the deductible, above. In general, under a co-pay agreement, the insurance provider requires the insured person to pay some amount of the cost themselves, and will then kick in to pay the rest.
Consumers and organizations often use “co-pay” to refer to two separate types of insurance limitations. The first, a true co-pay, sets a fixed amount of money which the insured person must pay, beyond which the insurance company covers the remainder. The second type, which is technically called coinsurance, sets a percentage of the total bill which the insurance company will pay.
Depending upon the policy, co-pay terms may apply equally to all healthcare services and medications, or they may vary depending on what sort of service is being accessed and who is providing it.
Caps
Finally, many insurance policies will set an absolute limit beyond which the insurance company provides no compensation for healthcare expenses. This is known as a cap. Once an insured person or family reaches the cap, they are responsible for paying all additional healthcare expenses themselves. Sometimes, an insurance policy will have a maximum amount a person has to pay through co-pays and the deductible, after which the company covers 100 percent of all costs. This limit may also be referred to as a cap.
Usually, however, the cap refers to the maximum compensation limits established by the health insurance provider. A single insurance policy may contain many caps: For instance, there may be a cap on the amount paid out for a specific type of service or a single prescription, a cap on the amount paid out annually and a final cap on the amount paid over the lifetime of the insured person. When buying insurance, it is important to ensure the maximum amounts are high enough to cover costs associated with catastrophic injuries or life-threatening diseases.
Deductibles, premiums, caps and co-pays are sometimes spelled out in very confusing ways within a health insurance policy. In addition, different jurisdictions may have regulations specifying what sorts of deductibles, premiums, co-pays and caps can be charged. However, when shopping for new insurance, it is extremely important that people understand what each of these terms means in the context of their own health insurance. Ultimately, these numbers will determine how much health insurance costs, as well as what people can expect from the insurance company in return.